Commoditizing Your Complements in the Cloud Era

Sep 24, 2021

Microsoft wanted to make hardware the commodity in the PC Era to sell its operating system. Now, it seems like we're in the other half of the cycle: hardware is commoditizing software.

One of the blog posts I always come back to is Strategy Letter V by Joel Spolsky, one of the co-founders of StackOverflow.

Joel lays out a microeconomics principle that explains tech companies' more puzzling strategies – What is one reason companies release open source projects like Chrome, Android, and more? An idea that I think explains much of the cloud business today.

He explains the idea:

... demand for a product increases when the price of its complements decreases. In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So: Smart companies try to commoditize their products' complements.

This idea is more important than ever in the cloud era. Companies are choosing to open-source their projects to get a go-to-market headstart but face headwinds later on when AWS or another cloud provider copy their offering (directly or indirectly).

The real question is: what is the commodity? It seems like code is the commodity – if AWS and everyone else can offer the same service as your open-source company (see ElasticSearch), it is a commodity. In fact, in conspicuous form, when Elastic made its license less permissive, AWS came out as the hero for forking and committing to a completely open ecosystem.

AWS is trying to sell more compute. Google is just trying to drive more web traffic to Search. Facebook is just trying to land more impressions across its applications. Flywheels that create that much consumer surplus are hard to stop (and maybe that's OK?).

Of course, the risk every product faces is becoming a commodity itself. Maybe that's why clouds are so quick to dismiss multi-cloud. Are the core offerings that different? Of course, there's an intentional lock-in-like identity, but I wonder if that will ever change.