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Cloudflare’s Disruption

 

Cloudflare’s Disruption

Courtesy of Ben Thompson, Stratechery

From Protocol:

Cloudflare is ready to launch a new cloud object storage service that promises to be cheaper than the established alternatives, a step the company believes will catapult it into direct competition with AWS and other cloud providers. The service will be called R2 — “one less than S3,” quipped Cloudflare CEO Matthew Prince in an interview with Protocol ahead of Cloudflare’s announcement Tuesday morning. Cloudflare will not charge data-egress fees for customers using R2, taking direct aim at the fees AWS charges developers to move data out of its widely popular S3 storage service.

R2 will run across Cloudflare’s global network, which is most known for providing anti-DDoS services to its customers by absorbing and dispersing the massive amounts of traffic that accompany denial-of-service attacks on websites. It will be compatible with S3’s API, which makes it much easier to move applications already written with S3 in mind, and Cloudflare said that beyond the elimination of egress fees, the new service will be 10% cheaper to operate than S3.

Cloudflare has always framed itself as a disruptor; R2 lives up to its reputation.

Cloudflare’s Evolution

I already wrote earlier this year about Cloudflare’s unique advantages in a world where the Internet is increasingly fragmented, thanks to the distributed nature of their service, and why that positioned the company to compete with the major cloud providers in the long run. What is worth referring to with this announcement, though, is this clip I posted of Prince’s initial launch of Cloudflare at TechCrunch Disrupt 2010, particularly this bit from the Q&A:

So from a competitive standpoint, obviously you’re intruding on some of the stuff that the bigger boys are doing, and they’ve been at this for a long time. What’s to stop them from coming in and replicating your model?

There are companies that are doing things at the high end of the market, and they make very fat margins doing it. I’m really a big fan of Clay Christensen, he was a business school professor of mine, and I like the idea of businesses that come in from below. The big incumbents have an Innovator’s Dilemma trying to come down and deal with a company like ours, but we welcome the competition. We think we make a really great product. It’s designed for a certain type of users that are very different than the users that a larger company might be trying to attract.

Prince was spot-on about the competitive response of incumbents to Cloudflare’s offering for the long-tail of websites: it never came, because Cloudflare was serving a new market. This is how Christensen defined new market disruption in The Innovator’s Solution:

The third dimension [is] new value networks. These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used — enabled by improvements in simplicity, portability, and product cost…We say that new-market disruptions compete with “nonconsumption” because new-market disruptive products are so much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting.

That’s not the end of the story, though: new market disruptors don’t stand still, but can leverage the huge runway provided by the new market to build up their product capabilities in a way that eventually threatens the incumbent. Christensen continued:

Although new-market disruptions initially compete against nonconsumption in their unique value network, as their performance improves they ultimately become good enough to pull customers out of the original value network into the new one, starting with the least-demanding tier. The disruptive innovation doesn’t invade the mainstream stream market; rather, it pulls customers out of the mainstream value network into the new one because these customers find it more convenient to use the new product.

This was Cloudflare Workers, edge compute functionality that was a great match for Cloudflare’s CDN offering, but certainly not a competitor for AWS’s core offerings. Back to Christensen:

Because new-market disruptions compete against nonconsumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages.

This is where R2 comes in.

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