Changing Competitive Dynamics for IaaS Providers

The Basic Reseller Model

Reselling has been part of the hosting industry for a long time. It offers a relatively easy way for new market entrants to begin selling hosting services without needing extensive technical expertise, and without taking on the responsibility of maintaining a data center. Reselling also eliminates the need for large capital investments in data center infrastructure and hardware, such as servers and networking equipment.

The classic reseller model involves purchasing wholesale hosting services, branding them, and then selling to customers at a higher retail price. Because resellers make their profit on the difference between the wholesale price and the retail price, reselling is often a relatively low-margin business. To improve their margins, resellers often take a “value-add” approach by offering additional services, features or support in exchange for higher retail prices.

The same basic reseller model exists for cloud services. For example, wholesale cloud providers, including companies like Faction – formerly known as Peak – and OrionVM, take a channel-centric approach by exclusively selling their services through retailers.

Breaking the Mold

While the traditional reseller model appears to be alive and well in the cloud era, some cloud providers are adopting interesting, surprising and even unusual new reseller models. One curious approach is for established public cloud providers to resell competing services.

Consider these examples:

  1. Rackspace, a former top-three cloud service provider, has taken a radical stance by announcing support for Microsoft’s Azure cloud platform alongside its OpenStack-powered offerings in all of its U.S. data centers. Rackspace has also joined the Microsoft Cloud OS Network, a group of service providers focused on offering hybrid cloud and Azure-enabled solutions.

This isn’t the first time Rackspace has decided to sell services based on a competitor’s platform. Rackspace is a longtime provider of VMware cloud services, and on January 21st it unveiled new private cloud services built on the VMware cloud platform, emphasizing its commitment to providing customers with multiple cloud solutions from multiple providers.

  1. VMware announced a similar agreement with Google on January 29th. The two companies will partner to deliver integrated Google Cloud Platform (GCP) and VMware vCloud Air services. vCloud Air customers will soon have access to GCP services including Google Cloud Storage, BigQuery, Cloud Datastore, and Cloud DNS. VMware is also exploring ways to include GCP management support as part of the vRealize Cloud Management Suite.

Unlike Rackspace – where customers choose a single platform – the VMware / Google collaboration allows customers to combine services from both platforms at the same time. For example, customers that use vCloud Air compute instances can add Google Cloud Storage to take advantage of both services from the same application. This will require some API and networking tricks by the partners to deliver low latency, but appears quite feasible.

One software vendor in particular is also making some related – and innovative – moves that enable service providers to sell competing services:

Flexiant, a company specializing in cloud orchestration, recently launched its multi-cloud management solution, “Concerto.” The software enables providers to sell Flexiant-based cloud services in addition to services from major cloud providers, such as AWS, Rackspace, and Digital Ocean. Flexiant believes that cloud service providers will be more successful if they offer services from multiple providers.

Finally, there are some industry relationships that demonstrate collaboration between competing providers:

  1. Providers with existing public cloud services are starting to sell managed services for competing offerings as well. Take Datapipe, for example, which recently acquired the big data solutions company GoGrid. Datapipe offers a proprietary cloud platform called Stratosphere Elastic Cloud. But at the same time, it offers Managed Cloud for AWS and Managed Cloud for Microsoft that layer managed services and premium support on AWS and Azure cloud services. What does it say when a provider presents its own cloud services at the same level as managed services for AWS and Microsoft Azure?
  2. The walls between major cloud providers are starting to come down as more begin to announce partnerships and support for competing technologies within their data centers. In October 2014, IBM and Microsoft made an agreement to offer each other’s software and middleware in their respective cloud environments.

The competitive dynamics in the cloud industry are certainly becoming more complex.

Why Are Cloud Providers Selling The Competition?

A single, practical explanation for these events would be nice. But it looks like these changes are actually being driven by a variety of factors.

We already know it is a multi-cloud world. In 2013, Neovise research showed that 33% of IT organizations were using two or more public clouds, and that number has grown since then. Given this dynamic, it makes sense that some providers will want to address a wider portion of the market. Companies like Flexiant and Rackspace have responded to this opportunity – Rackspace with its Azure and VMware-based cloud services, and Flexiant with its multi-cloud management platform for service providers. To clarify, the ability to successfully address a wider market assumes that selling competing services will produce greater revenue and/or profit than will be lost through the cannibalization of existing cloud services. [An additional rationale could be that offering competing services provides a nice hedge in case existing services do not succeed.]

In the case of Rackspace, there appears to be an additional dynamic at play. Rackspace used to compete strongly at the cloud infrastructure layer, but is now focused heavily on competing through value-added management services. When the primary value-add from a service provider is layered above the cloud infrastructure (managed services in this case) it makes sense to support multiple clouds. This more agnostic approach toward cloud infrastructure helps change the competitive dynamics. Rackspace will let others do more of the heavy lifting on infrastructure innovation while focusing its own resources on differentiating management services.

I expect more managed-cloud providers to emerge and for them to manage multiple competing clouds – whether or not they have their own public cloud in the race. On that point, Datapipe also offers managed services on competing clouds: AWS and Microsoft. However, Datapipe is not as focused on changing the competitive landscape as Rackspace. In fact Datapipe is strongly competing at the infrastructure level and continues to add differentiating services, such as those from GoGrid. It appears that Datapipe is more interested in expanding its addressable market at the managed services layer while continuing head-to-head competition at the infrastructure layer.

Microsoft and SoftLayer are taking a more conventional approach to partnering between competitors. By supporting each other’s software and middleware in their respective cloud environments, they offer greater flexibility to their own customers without giving too much of an advantage to their competitor. This is essentially a case of “coopetition,” where competitors seek mutual benefits by supporting each other’s offerings in some way.

Providers are also finding ways to deliver complementary value through competing offerings – the old “better together” proposition. Take VMware and Google – both have their individual strengths and weaknesses. By offering Google cloud services, VMware doesn’t have to spend resources developing similar “me too” data services – offerings with very little differentiation. VMware also lacks engineering heritage in developing the types of services that Google brings to the table. What VMware does have is a strong interest in protecting the value of the hypervisor, which it does by offering vCloud Air and making it more valuable and more widely used through integration with Google services. Google also gains by exposing more enterprise customers to its storage services. While this is another example of coopetition, it is a bit more strategic, additive and complementary than the prior example. Time will tell whether the relationship stays that way.

The Rise of the Multi-Provider, Cloud Provider

One of the outcomes of these changing competitive dynamics is the emergence of the multi-provider, cloud provider. In other words, we should expect many more IaaS providers to offer multiple competing services – and for a variety of reasons, as outlined above. A specific company that I can envision following this approach is HP. They already offer their own OpenStack public cloud. They also happen to be one of Microsoft’s largest partners, reselling gobs of Windows Server, Windows Desktop and other Microsoft software. With the HP cloud not growing like gangbusters, why not resell Azure cloud services?

We are likely to see other related developments and selling models as well:

  • Virtual providers will sell competing services while not operating their own cloud services (this is essentially a version of the brokerage model). OnApp already has a leading federated network that enables virtual providers to sell OnApp powered services… the ability to sell competing services is another possibility.
  • We may see a twist on current federated service models as well. The Microsoft relationship with Rackspace is done through the Microsoft Cloud OS Network. When a federated network of cloud providers gains traction (as is the case here), it only makes sense to also sell services through resellers.
  • Other hyper-scale cloud players are also ripe for pushing their services through partners and resellers that offer competing services. Look for AWS and/or Google to make moves here (keeping in mind that Google has already taken steps with VMware). 
  • The opportunity for VARs in general is also growing. Customers want to work with neutral partners such as VARs that will offer multiple cloud choices and that are cloud agnostic.

It will be exciting to watch this trend develop further and to see even more changes in the competitive dynamics of cloud providers.

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