Sunday, 11 October 2015

Implications of Pay As You Go model

What is common between taxi hailing app - Uber and cloud computing provider- Amazon Web Services (AWS)? The answer is simple, both of them are the proponents of Pay As You Go (PAYG) model. While Uber thrives to become "Everyone's Private Driver" thus removing the necessity of owning a car, AWS on the other hand removes the necessity of owning computing hardware infrastructure. In sum, PAYG model helps in reducing initial investments and the recurring cost of maintaining it and ultimately helping the end users. 

The other implication of it is that the resources - cars in the case of Uber and computing hardware in the case of AWS - will be getting concentrated with handful of players. This can make lives challenging for the upstream suppliers who makes supplies in the respective industries of these companies.

Let us take the example of the AWS. The most important computer hardware is the processor and Intel is a major vendor in that segment. What could the growth of the AWS and similar cloud computing providers mean to Intel? Instead of supplying processors to numerous small customers, Intel have to supply to handful of big customers like AWS. This can make a dent on bargaining power of the Intel. It is based on a simple business logic that bargaining power is inversely proportional to the number of customers you have. With fewer customers, losing a single customer might have more impact on a company's top and bottom lines.

The car manufacturers are a worried lot with advent of Uber and other ride hailing apps. Recently Anand Mahindra, Chairman of Mahindra & Mahindra(M&M), a car manufacturer based out of India warned that ride hailing apps can eat in to the sales of auto manufacturers. Although Uber or other taxi hailing apps has not reached to that scale and in India most of the people see owning a car more as a status symbol rather than a utility, Mahindra's concerns are not unfounded. If I have a car and I use it to commute to office, then the car will be idle during my work hours - which is not efficient use of a resource. It is this critical gap that companies like Uber trying to fill. More the efficient use of resources, lesser the number of resources you need. That means lesser cars and lesser sales for auto makers. 

Ultimately PAYG model will push companies in the upstream to the wall. One way to take on this challenge for the upstream supplier companies is to become vertically integrated. This could mean Intel themselves starting cloud computing services and M&M starting their own taxi hailing app.

Change before you have to - Jack Welch

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