A number of industry experts have been predicting that the cloud business model will fail in a fashion similar to the dot-com crash or storage service providers (SSPs). Enterprise Strategy Group's Stephen Duplessie postulates that the business model behind cloud computing is a flawed one, based on constructs rather than products in this blog post: "Why the Cloud Will Vaporize."
He says that businesses buy solutions, not constructs, and that inevitably the venture firms will begin to flee the cloud environment. He recalls SSPs as an example of overfunded companies that went belly-up because they couldn't provide a business model that met their customer's needs.
SSPs were indeed a victim of their own flawed business models, but they are not in the same category as cloud providers. While it is true that cloud providers often provide storage, they also provide a plethora of other things -- custom application hosting environments, desktop hosting environments, entire pre-built application stacks and more. Whereas SSPs provided storage services that were, at best, only marginally less expensive than big iron storage, cloud providers are too varied in their models to be lumped together.
Many cloud startups are going to fail, and fail spectacularly. In particular, expect purveyors of cloud desktops that aren't Windows to go the way of the dodo. But most of the other models will have some staying power because they meet the main criteria for staying in business -- providing a solution to a real-world and large-scale problem.
Fulfilling needs with cloud computing
The first of these needs is customer service, which is strikingly different from a decade ago. Today's Web-enabled world is one in which even small businesses of less than 20 people absolutely must have a Web presence, and beyond that, small-scale Web applications to deliver customer services. It is perfectly reasonable to expect a power company, cable company, or other service provider to have a customer service portal where you can look up your service ticket information, check on the bill, etc. Currently, it isn't reasonable to expect the local HVAC company that fixes your air conditioner and furnace to provide a similar function, but as those services become the expected norm, it soon will be.
For now, though, these small and mid-sized companies can't afford to add racks of servers. They can't afford to secure the services of more than a single part-time IT consultant. They can't afford to build data centers or data warehouses, but they will need to have the applications and services that those infrastructure technologies enable. This is where the cloud plays. This is the value proposition -- not in "enhancing" or "augmenting," but in keeping small and medium-sized businesses (SMBs) from closing their small shop in the face of larger, cheaper competition from the giant big-box stores. By leveraging the economies of scale proven out by Web hosting and colocation, as well as application service providers (ASPs), cloud companies can offer exactly that.
Another difference between cloud companies and SSPs is that the cloud is for everyone, not just big players. As applications mature, as open source Web-based projects grow in feature sets, and as capacity continues to cost less, every business will be able to add capacity and service versatility in a way that they couldn't before. They will do this in the cloud. Whereas SSPs focused on the enterprise, the cloud focuses on us all. Cloud providers take advantage of economies of scale, and in so doing can provide services that, for the SMB market, were heretofore impossible to acquire. According to SCORE.org, which uses numbers from the U.S. Small Business Administration, small businesses:
- Employ just over half of the country's private sector workforce
- Hire 40% of high-tech workers, such as scientists, engineers and computer workers
- Include 52% of home-based businesses and 2% [of] franchises
- Represent 97.3% of all the exporters of goods
- Represent 99.7% of all employer firms
This segment of the market also needs security, whatever solution they are pursuing. Any cloud provider that isn't secure is going to fail. The SMB market cannot afford the massive security budget associated with an in-house IT environment. This segment of the market needs their applications not just to work but to work quickly, work securely and work autonomously. Cloud providers that can meet the needs of their customers and demonstrate security in a real, measurable way will succeed.
The cloud offers variety
Then there is variety, the spice of life. The cloud does not provide a single type of solution, unlike SSPs. The cloud provides applications, it provides storage, it even provides entire virtual infrastructures. There are some small enterprises looking at traditional colocation in a whole new light -- they are looking to take every desktop, server, and storage system, virtualize them on a set of boxes and put those boxes in a colo, delivering the entire experience over the wire to a thin client; all from the cloud. There are other small companies out there looking at how to handle online ordering when they've grown too big for simple shopping carts and are too small to have fully-staffed data centers. These businesses need to increase during peak periods and scale back during lean periods. These are things the cloud provides in its nearly infinite variety.
Applications have soared. Small manufacturing firms can get a fully-functional, open source ERP package hosted in the cloud for an affordable price, without the underlying capital expense of servers and storage. And it doesn't stop there -- point-of-sale, customer relationship management, office productivity -- these are all available online, in the cloud. The market will weed out the players that don't make the grade, the large companies will acquire smaller ones to bolster their own offerings, and still many will remain, succeeding because they met a problem with a solution and did it in the cloud.
How cloud sets itself apart
There is another compelling financial reason to look at the cloud, aside from cost savings and return on investment (ROI). Although companies are reducing capital expenditures (CapEx), cloud is a service. It does not comprise hardware as far as the customer is concerned; it doesn't even really comprise software. There may be no need at all to capitalize a cloud investment. While it is also true that companies are reducing expenses in general, avoiding CapEx spending while reducing cost and proving ROI are a good way to pitch a solution to a real problem. When looking at the cloud in terms a financial analyst would appreciate, there is also no depreciation to factor in and few or none of the soft-costs that increase total cost of ownership.
For those SMB companies with an IT department, there are compelling reasons to go to the cloud for IT services. In the age of the SSP, connections to the Internet were far, far slower than they are today. It is possible today to purchase a 100+ MB connection as a consumer, or a small business, from the local cable company. Fiber connections have increased dramatically, and phone companies are hard pressed to sell T1 lines to educated companies. The business-class versions of these consumer products, complete with service-level agreements (SLAs) and other business-centric tools to ensure uptime and connectivity, are there. They weren't there in the age of the SSP; what was there was a shadow in terms of performance.
The cloud is a marketing moniker. Long ago, in 2002, a not-so-little company called Citrix put tools into Presentation Server 3.0 to measure resource use (CPU, memory, etc.), and linked chargeback rate entry to those monitors so that ASPs would use Citrix to deliver applications to customers. Those ASP products, because they lived on the Internet, were predecessors to cloud applications. What has happened in the market is not a revolution, but an evolution. During evolutionary processes, there will be extinctions like the SSP. There will also be highly adaptable companies that fit their customer's needs. Though it will keep evolving, the cloud is here to stay.
ABOUT THE AUTHOR:
Joseph Foran is the director of IT at FSW, a Bridgeport, Conn. nonprofit social-services agency. In his role as director, he is responsible for working with executive and line management to come up with cost-efficient uses of technology that will better enable client services, employee efficiency and increased grant revenue. Joseph serves on FSW's Leadership committee, where he advises and collaborates with company management on both technology and business decisions. FSW's services extend across Connecticut from six locations across the southwestern portion of the state.
Prior to FSW, Joseph was an IT manager at filtration manufacturer CUNO, Inc. and at sports league Major League Soccer, and he has been a systems admin with consumer goods giant Unilever, as well as a consultant for Connecticut's Departments of Corrections, Mental Health and Education.
This was first published in June 2010