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New Product in a Fast Growing Industry: Verizon in Cloud Computing

Verizon Communications recently announced that it was entering the market for cloud computing. Cloud computing is a service that allows a business to increase its computing power by using the internet, network bandwidth, on demand, from facilities operated by companies like Verizon. This market is fast-growing because it allows businesses to save the costs of building and managing their own computer facilities. Let’s use the Customer Buying Hierarchy to evaluate the prospect for Verizon’s success.

The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.

Verizon offers a valuable Function advantage. Cloud computing is a service that today is targeted at large corporations. These corporations use several different types of computers and software applications. Verizon has made a Function innovation leap by offering customers options in setting up their cloud service that would include being able to use various types of computer servers, depending on the software applications the business needed to use. But this is early in the game, so many Function innovations have yet to be introduced.

Verizon, along with its telecom competitor AT&T, does have some real Reliability advantages. These companies have spent years managing network services, data infrastructure and transfer. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) This gives them real credibility with corporate customers. Verizon and AT&T also have a significant Convenience advantage in their global reach. (See the Perspective, “Convenience: Much Tougher Than it Looks” on StrategyStreet.com.) These two phone companies are able to offer cloud services to overseas divisions of companies.

Pricing is the great unknown. Low prices can move a lot of share in a fast-growing market. Neither Verizon nor AT&T are what you would consider sharp pricing companies in their other businesses. It is unlikely, then, that they will be aggressive price competitors. On the other hand, Amazon also plans to enter this marketplace. Amazon has learned to compete aggressively on Price and may be the eventually price-setter in the market.

This is very early in the development of the cloud computing market. Unique Function advantages may emerge and remain unique due to legal barriers. The early Reliability and Convenience advantages strongly favor Verizon and AT&T with their technical competence, corporate reputations, and global reach. One, or both of them, should be very successful in cloud computing, assuming that they don’t get tripped up with high prices.

Posted 6/22/09

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