"Public cloud is a pyramid scheme"

The head of channel analysis firm Canalys said that public cloud is akin to a pyramid or Ponzi scheme and predicted the public cloud bubble will burst within the next year.

“The economics of infrastructure-as-a-service model represent a pyramid scheme or a Ponzi scheme,” said Canalys’ chief executive Steve Brazier, addressing a crowd of Asia-Pacific distributors and resellers at the Canalys Channels Forum in Shanghai.

“You need to sign up customers and you build a data centre. But then those customers need to do more and more, expect more performance and higher SLAs, and you have competitors pushing you down that direction too. So you have to build more and more infrastructure to keep the customers happy.”

Brazier said that the model only works if enough new customers sign on to keep up the revenue growth at the same rate as capital expenditure. “[AWS’] expenditure on capital is growing faster than their revenues – that’s not a good place to be.”

Public cloud prices had fallen around 50 percent in the second quarter of this year alone, according to Canalys.

“If you have to cut prices faster than you can sign up new customers and your revenue flat-lines, you suddenly find your capital expenditure still exploding – to chase the SLAs you’ve already committed to.”

Canalys estimated that Amazon Web Services had lost US$2.8 billion over the last four quarters. “It’s a catastrophic business model, from a profitability point of view,” said Brazier.

“Amazon only has US$5 billion in the bank. It’s a totally different business to Google – which has around US$60 billion – and Microsoft – which has close to US$90 billion. We don’t think this business model is sustainable for much longer.”

An Amazon spokesperson disagreed with Canalys' findings and said that the firm is "well positioned to continue to invest in AWS". 

"AWS continues to grow at a dramatic rate, close to 90 percent year-over-year on a very large base, and is a successful business," the spokesperson said. "We have a high level of confidence that it will generate significant free-cash flow and returns on invested capital over time."

Brazier predicted that by the time next year’s Canalys conference is held “we would expect something serious to have happened” and that the current infrastructure-as-a-service model would have “burst”.

“Then we’ll have a shake-out, which is good news for all of you because we will be pricing things to make a profit, not a loss,” said Brazier. “And we’ll have more choice about which path to go down, based on a fair pricing model.”

Brazier warned the channel audience to exercise “financial due diligence” in selecting a cloud provider.

“If your customer is deploying cloud, you need to say to them ‘Look at the P&L and the balance sheet’. Can you be sure your cloud provider will be around in 12 months or two years’ time?”

“And if they won’t show you the financial data, I would suggest that that’s a warning sign. I would be very very careful. You have been warned.”

CRN is a media partner of the 2014 Canalys Channels Forum APAC in Shanghai on 4-6 November.