Opinion: Oz IaaS players make one huge bet

I met a new company today, a cloud start-up providing infrastructure-as-a-service. As I told them, they had a great shirt. The logo had no branding, just an abstract image designed by a big name media company. They talked the talk – about social media communities, on-demand consumption, and especially self-healing.

In fact the start-up presented itself to be much like the type of customers it was trying to attract; hipsters from advertising and media agencies.

They were impressive people who were full of the passion of delivering cutting-edge IT. But sitting there in the room listening to the pitch I got a decade-old dose of déjà vu. It feels like the dotcom bubble is back.

I don’t know whether this start-up will be one of the few that turns all its staff into millionaires or one of the many that flames out in a puff of venture-capital banknotes. One thing I’m sure of is that all players in the local IaaS space are making a massive gamble on one thing – jurisdiction.

There are two sides to the jurisdiction argument. In one corner you have multi-billion dollar global application vendors such as Microsoft, Google, Salesforce and so on who say that it doesn’t really matter where you keep your data, just trust us and our amazing technology to keep it safe for you.

In the other corner are local IaaS players who raise the spectre of private data being collected from American data centres by the US government under the Patriot Act, or the difficulty of dealing with a Singaporean court of law to recover data from servers hosted in that regional hub.

In the long run, local IaaS players are in a tough position. They need to keep warning their customers of the potential dangers they face in storing their data offshore to justify the premium they must charge for local delivery.

The truth is local providers will never be able to compete on cost – Australians are just paid too well compared to their Chinese, Indian and South East Asian counterparts. And then there’s the astronomical real estate rents to pay, rising electricity costs, sizeable corporate taxes, and so on. 

Unfortunately for the local players, the case for jurisdiction comes down to business sentiment. If the business community eventually decides that, you know what, let’s take our chances with the Patriot Act, there’s nothing to stop them moving their business offshore in an instant. Goodbye local IaaS industry.

Who’s my money on? There are two factors which I think are critical.

The first is that businesses may care enormously about jurisdiction, right up until they see how much it costs. Then they will take a sideways look at what their peers and larger companies are doing and how much they are paying. If CIOs they respect are happy to take the risk on jurisdiction, then why give up the competitive advantage of a cheaper supplier?

The second factor is that the big software vendors have literally hundreds of millions of dollars in marketing that they are about to wash over the business world to convince them that storing your data offshore somewhere (= cloud) is safe, simple and widespread.

Microsoft alone is rumoured to be spending US$150 million this year promoting the transition of its product line to the cloud. This will be an epic shift in the IT leader’s philosophy and for the industry as a whole.

I’d hate to be standing in the way of that one.