You come at the king, you best not miss.Omar Little, The Wire
So in war, the way is to avoid what is strong, and strike at what is weak.Sun Tzu, The Art of War
Almost two years ago, Capital Flywheels added Cloudflare to the Paper Portfolio shortly after Cloudflare’s IPO. For a while, the market overlooked Cloudflare and largely assumed Cloudflare to be fairly undifferentiated vs other CDN companies like Fastly and Akamai.
This was the primary reason Capital Flywheels wrote Cloudflare (+Fastly), Computing, and the Future of the Internet (as well as to explain why Fastly shouldn’t have, at the time, a similar market cap as Cloudflare).
Capital Flywheels believed and continues to believe that Cloudflare’s long-term potential remains misunderstood.
The true potential of Cloudflare is not just as a network security company or as a low-value CDN, but as one of the cloud computing titans:
But what makes Cloudflare interesting is not only all of the other stuff they do beyond security and CDN / caching like on the reliability side, but rather the single scalable development platform that it all runs on top of:
For Cloudflare, not only are all of their internal products built on top of this platform with demonstrated ability to deliver industry leading performance and security, this platform is being opened up to external developers, which will allow 3rd party code to run anywhere in the world, at the edge, with unparalleled performance in a way that has never been possible before.
The right way to think about this is not just another cloud platform…what Cloudflare is enabling is a new way of running and distributing code.
The right comparison is with operating systems like iOS and Android and Windows.
Windows allows a developer to run and execute code across 1 billion PCs across the world. iOS allows a developer to run and execute code across 1 billion iOS devices across the world. Android allows a developer to run and execute code across 3 billion Android devices across the world.
And what Cloudflare is enabling is not just another cloud development platform, but the ability for developers to run and execute code anywhere around the world, at the edge, from the servers that make up Cloudflare’s globally distributed network.
Cloudflare certainly has a mountain to climb ahead of it with the largest challenge coming from AWS, but if successful, Cloudflare has the potential to become one of the giants.Source: Cloudflare (+Fastly), Computing, and the Future of the Internet
While many investors were already highly excited about edge computing, Capital Flywheels’ view on Cloudflare’s future was not edge computing. Edge computing is a part of it, but Capital Flywheels was arguing that Cloudflare was pioneering a new form of cloud computing…a very important nuance that I believed investors were missing.
Last time, I used a lot of words…in hindsight I could have been much more direct by saying this:
Cloudflare is aiming for AWS.
Earlier this week, Cloudflare effectively validated this view:
Cloudflare Announces R2 Storage; Rapid and Reliable S3-Compatible Object Storage Designed for the Edge
Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced Cloudflare R2 Storage, a better way for developers to store everything they need with automatic migration of data from S3-compatible services to make switching easy. Cloudflare R2 Storage, designed for the edge, will offer the ability to store large amounts of data, expanding what’s possible with Cloudflare while slashing the egress bandwidth fees associated with cloud provider storage to zero.
“Since AWS launched S3, cloud storage has attracted, and then locked in, developers with exorbitant egress fees,” said Matthew Prince, co-founder and CEO of Cloudflare. “We want developers to keep developing, not worrying about their storage bill. Our aim is to make R2 Storage the least expensive, most reliable option for storing data, with no egress charges. I’m constantly amazed by what developers are building on our platform, and look forward to continued innovation as we expand the tools they have access to.”Source: Cloudflare
And if that wasn’t clear enough, here’s Cloudflare’s co-founder / CEO in his own words:
We are aiming to be the fourth major public cloud.Source: Protocol
With R2, not only does Cloudflare now directly attack the compute use cases for AWS (addressed through Cloudflare Workers, Cloudflare’s serverless / edge code deployment solution), Cloudflare will now attack the original use case that launched AWS on its path to cloud computing dominance 15 years ago – storage.
What’s beautiful about this strategy is that Cloudflare is employing Bezos’ / Amazon’s own philosophy against it – “Your margin is my opportunity”.
While Amazon runs almost all of its businesses extremely aggressively by constantly improving efficiency and passing on the cost improvements to customers in order to attack competitors’ profit margins, Cloudflare is now attacking AWS the same way.
AWS’ profit margin is going to be Cloudflare’s opportunity.
Amazon relies on AWS as the profit engine (and, oh my, does it have a lot of profits!) to fund the aggressive growth of its e-commerce and logistics operations (as well as experiments in hardware, etc).
Any disruption here could severely dampen Amazon’s flywheel.
To be absolutely fair, AWS still has very significant advantages because AWS is a much more mature service compared to what Cloudflare is offering. AWS has a lot more tools and features that Cloudflare simply does not offer, yet.
But focusing too narrowly on the current feature set runs the risk of missing the forest for the trees.
Ben Thompson over at Stratechery – as brilliant as ever – clearly explains (in a free article!) why Cloudflare’s approach is both disruptive and asymmetric and hard for AWS to respond to:
Again, though, Cloudflare’s distributed nature is the entire reason the company’s cloud ambitions are so intriguing: R2 may be a direct competitor for S3, but that doesn’t mean that anything else about Cloudflare’s cloud ambitions have to be the same.
This is where zero egress costs could be an even bigger deal strategically than they are economically. S3 was the foundation of AWS’s integrated cloud offering, and remains the linchpin of the company’s lock-in; what if R2, thanks to its explicit rejection of data lock-in, becomes the foundation of an entirely new ecosystem of cloud services that compete with the big three by being modular? If you can always get access to your data for free, it becomes a lot more plausible to connect that data to best-of-breed compute options built by companies focused on doing one thing well, instead of simply waiting for Amazon to offer up their pale imitation that doesn’t require companies to pay out the nose to access.
Moreover, like any true disruption, it will be very difficult for Amazon to respond: sure, R2 may lead Amazon to reduce its egress fees, but given the importance of those fees to both AWS’s margins and its lock-in, it’s hard to see them going away completely. More importantly, AWS itself is locked-in to its integrated approach: the entire service is architected both technically and economically to be an all-encompassing offering; to modularize itself in response to Cloudflare would be suicidal.Source: Stratechery
For over two years, Capital Flywheels understood that Cloudflare’s long-term destiny was always to draw the bowstrings and aim for the king.
And if Cloudflare succeeds, it would be worth far, far more than the $6 billion market cap it commanded two years ago. And if Cloudflare succeeds, it will be worth far, far more than the $35 billion market cap it commands now (and could catch up to or overtake Sea as the best investment to ever make it into the Paper Portfolio despite Sea’s monstrous run over the last 3 years).
The only difference between then and now is that Cloudflare has made its intentions clear.
Cloudflare is aiming for the king…and when you aim for the king, you best not miss.
But the good thing is that Cloudflare is not attacking AWS where it is strong. It is attacking AWS where it is weak. It is attacking AWS’ margins. And it is attacking AWS via a distributed edge strategy with the potential to modularize the cloud environment in a highly compelling manner.
As Shakespeare once wrote in Twelfth Night, “Some are born great, some achieve greatness, and some have greatness thrust upon ’em.”
For Cloudflare, I think there’s a little bit of each.
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