Wednesday, July 25, 2012

Why it's a bad idea for SP to compete with Amazon? (*)

(*) SP is a connection service provider who provides managed services to it's customers.

Following Amazon sucess with EC2 everyone wants to jump on Cloud bandwagon and repeat that success. SP's are no different. They suffer from declining margins and are looking for new opportunities to secure the revenue. Unfortunatley  "EC2 type" of cloud  (called later on "commodity cloud") is a bad idea to pursue. This does not mean that there's no opportunity in a cloud for SP's. Of course there is but in a bit different type of cloud.
Why it's a bad idea for SP's  to compete in "commodity cloud" space?
First we need to define who's SP regular customer. In most of the cases it's enterprise or SMB customer who's already subscribing number of services for their businesses. It's used to quality service support and willing to pay the premium for good SLA it guarantees business continuity. If we look on Amazon regular customer - in most of the cases it's a software developper in a form of startup or well established software house. It's not hard to imagine that those two types of customers have very different expectations and demands. Developpers are hardly willing to pay the premium. They will figure out hundreds of ways to customize their applications in order to avoid the premium.  Having said that commodity cloud consumer is looking for relatively simple and not expensive service.
Second thing is commodity cloud compatibility with enterprise class customer demands. In most of the cases enterprise customers are running "legacy applications" which very often are only vertically scalable. Those kind of workloads are hardly portable to commodity cloud due to it's lack of compatibility with cloud architecture.
Going further we need to look on scale. Commodity clouds are leveraging on scale effect.  Amazon is lowering it's prices few times a year - but they really can afford it. The reached critical mass  and their runrate business is reaching $1B.  Quite a lot - but let's see how many servers are needed to run this cloud. Amazon is not sharing this data but according to some analysts they manage over 500k physical servers and over 1.5M IP addresses. No wonder they are leveraging on scale effect. 
Last but not least: innovation rate. Amazon is introducing couple of  new features per month. This is something which is bit odd for SP's who are providing Managed Services.  Usually their processes are constructed to introduce new feature once per few months.
As we can see, there's number of incompatibilities between commodity cloud and SP. But where's "the beef" for SP's ?
I see an opportunity in selling VDC's (Virtualized Data Centers) - where enterprise customers can leverage on the new consumption & operational model that cloud is providing to them (cloud is operational model and technology is only enabler). Enterprise customers can request by themselves chunk of infrastructure - I'll call it container - which is compatibile with container in their datacenter. Such container shall contain elements that are currenlty used in enterprise datacenter like: multiple L2 segments (to host multitier applicaitons), firewalls & loadbalancers. Some of them can be virtualzied but some of them must remain physical (for security & audit reasons). We shouldn't forget that container must be stand up on fully redundant infrastructure (something missing in commodity cloud). As we can see there's whole lot of infrastructure automation - as cloud is all about automation.
Why this is needed? Because cloud is a journey. Sooner or later all will migrate to commodity cloud - but before that happens - enterprises must rewrite their applications to be "cloud compatibile". This will not happen overnight. Therefore I see an opportuinty for SP's to help enterprises transition into that space.
Will SP's make millions on it? I really doubt it. But we need to take into account that for SP's very important is customer loyalty and stickiness. Very often reffered as "churn". The more good services you provide to customer - the less likely customer is willing to move to another SP. This is something that we shouldn't underestimate.

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