The cloud is a simple concept: one company rents out its hardware to other companies as software that is delivered over the internet. At the base level, cloud infrastructure virtualizes (represents hardware as software) building blocks of computing like compute power, storage, and networking. On top of that, cloud companies provide increasing levels of management of that software. Cloud SaaS offers the most managed service where a company only needs to configure settings for that software and use the tool. We can visualize the value chain like this:
Hi folks, today we're discussing the fundamentals of the cloud including: history, technology, and market dynamics. This is part of a series of posts breaking down the fundamentals of technology. You can find long-form versions of these posts on the Public Comps blog. If interested, you can also find my writings on Substack here.
1. An Intro to the Cloud and Why it Was So Important
The cloud is a simple concept: one company rents out its hardware to other companies as software that is delivered over the internet. At the base level, cloud infrastructure virtualizes (represents hardware as software) building blocks of computing like compute power, storage, and networking. On top of that, cloud companies provide increasing levels of management of that software. Cloud SaaS offers the most managed service where a company only needs to configure settings for that software and use the tool. We can visualize the value chain like this:
The business model is simple, so I want to start by describing why the cloud was so impactful. If you’re a fan of Clayton Christensen’s work, the cloud is a perfect example of disruption. A key idea of disruption is that it’s not based on new technologies, it’s based on old technologies delivered in a cheaper way, targeted at a new set of customers. The cloud took an existing industry (enterprise-level hardware and software), created a new business model that lowered the barrier of entry to that technology, and sold it to a new market of companies (mostly technology startups).
The cloud's importance came from the lowering of the barrier to entry. Prior to the cloud, companies had high upfront costs for computing power and lower maintenance costs over time. Lowering this upfront cost significantly expanded the market for computing power. This was most evident in startups, who could much more efficiently access computing power and build software. Those startups then delivered a funnel effect to the cloud providers. As cloud software generated billions of dollars in revenue, the hyperscalers collected a large % of that revenue. Over time, enterprises moved to the cloud as well. We’re still seeing the long tail of cloud migrations nearly 20 years after AWS’ launch.