Published on : 17th June 2016
The data center and IT services industry is currently in the throes of the great Cloud upheaval. Across the globe, OEMs and technology companies are all scrambling to deal with the mass exodus of their traditional product customers into the “digital only subscription based” way of consuming IT operations. The Rent vs. Buy Cloud phenomenon is greatly impacting the OEMs and technology companies as they endure steep global declines in traditional hardware and software purchases. Profits are shrinking, and the OEMs are all trying to offset the losses by offering either SaaS, or IaaS/PaaS alternatives, to stay relevant in the global Cloud transition. So, who’s actually winning the new Rent vs. Buy turf war? At this point, it’s pretty clear that HP, IBM and Dell are losing the hardware battle to subscription based SaaS solutions and low cost IaaS/PaaS providers like Amazon, Google and Azure.
It’s predicted that over the next 3-5 years you will see a precipitous drop in hardware purchases as CXOs theorize that maintaining physical infrastructure is not really a company’s core business. Their core business is typically their end customers, end users, enterprise applications, IP, and of course, employee access to said applications and IP. Data center IT infrastructure was truly only a way to enable their core business. In theory, this all sounds great. By offloading all the headaches associated with head count, data center space, power and cooling, cabling, hardware installation, maintenance, feature code licensing, patching/updates, etc., you end up getting back to what really matters. That’s of course, your core business. It’s this critical CXO thinking is exactly what the big three providers; Amazon, Google and Azure want you to believe in, and also buy into.
The true goal of the big three Cloud providers is to bring as much of your company’s core business under their managed roof as possible. They do this by “currently” providing ultra-low cost infrastructure and SaaS services to organizations globally. They have been truly effective and successful at moving CXO thought leadership into this direction. However, here’s the catch – right now it is ultra-low cost, effective and solves many of today’s burdensome issues without ongoing infrastructure management. The previous statement is so important, that I feel obligated to repeat it: right now it is ultra-low cost. Now, let me explain my healthy skepticism.
First, like any traditional cable company, their eventual market saturation leads to directly competing for the same client opportunities, and thus turf wars will begin to ensue. The number of available client markets will also start to run out as territories and geographies are being consumed by the Cloud providers. Secondly, no current Cloud provider actually has that much data center space for onboarding hundreds of thousands of companies at will. All the Cloud providers will eventually have to add resources, or say ‘no’ to adding more client business. The amount of available hardware resources is never unlimited. All three will all have to invest and buy more infrastructure to accommodate all the new client additions. It’s at this point, the “Cloud Providers” will begin the transition into the ominous “Cloud Cable Company.” They will start executing price hikes in the monthly run rates to offset the large scale deployments of new infrastructure to meet the ongoing resource demands. The overall management problem will eventually become something similar to a typical funded program. The Cloud provider starts to get addicted to the ever increasing amount of base recurring revenue, and as typical, will start to demand more. If the number of new client opportunities drops, expect the price hikes to begin as a way to enable the Cloud provider to reach their quarterly sales targets and investor demands. You can also expect to see the typical marketing statements such as; the price hikes are for “improving and expanding our services,” and “improving our speed and reliability,” or “we are expanding our support coverages,” all in the name of offsetting investments and expenditure outlays. We, as customers, always end up paying more for a provider’s expansion of said services.
The cost went up, so what should the CXO do now? Your company has fully migrated into the Cloud, and now locked into the decision. The Cloud Cable Company controls your company’s entire core business, and also its accessibility! Don’t pay your bill, and the business could be cut off, or heavily penalized for being late. You will have no choice but to pay the bill to keep the company moving forward. And, like all cable companies before, don’t expect a flat rate for the rest of the life of that contract. Currency inflation and rate hikes will be an ongoing killer. Oh sure, the CXO will probably contemplate switching providers as a way of saving money, but don’t expect your incumbent Cloud provider to provide assistance in doing so. Even if they did switch, given enough time, they may well end up right back where they started spending wise.
It’s at this point (possibly 5-7 years from now), when CXOs will start having the “Local Data center Epiphany.” Organizationally, we must pay a monthly recurring fee to our Cloud Cable Company, or risk hurting the business. Conversely, we once had greater flexibility and budgetary spending control by owning our own IT infrastructure and staff. We could add and remove as needed, spend only as required, and planned our budgetary spend for periods of weak sales or company hardship. Also, since the cost of new hardware is dropping due to all the subsequent Cloud migrations, the new hardware purchase price is extremely attractive again. Ta Da! Wow, we will have come full circle once again.
I predict, and expect that given time, your companies monthly recurring spend with your “Cloud Cable provider” will eventually get to the breakeven point. e.g. Where owning is potentially better than renting. Skeptical? Just look at the typical housing markets maturations, ebbs and flows. Sometimes it’s cheaper to buy, and sometimes it cheaper to rent all depending upon year and locality. So too, will it be also with the ‘Rise of the Cloud Cable Company’. Still Skeptical? Look at the historical trending of cable bills for last 10 years. Customers are actively ditching their cable boxes and moving towards on-demand streaming, Internet enabled TVs, Roku, and Apple TV devices as lower cost pay-as-you-go alternatives. The steep cable losses have forced the cable providers back to heavy sales campaigns, gimmicks and bundling TV/Phone/Internet services to help reduce their mass exodus.
The Spanish-American philosopher George Santayana observed that, “Those who cannot remember the past, are condemned to repeat it.” Which raises the question, whether or not, those who can remember are not doomed to be swept along by the majority who cannot remember.
About Author
Patrick Bourke
Global MVS Practice Manager
Zensar Technologies, Infrastructure Management Services
p.bourke@zensar.com