Cloud Computing: An Opportunity for the Hosting Industry

I’m continually surprised by how often I’m asked this set of questions:

  • Won’t cloud computing kill the hosting industry?
  • Don’t Amazon Web Services, Google and Microsoft Azure pose a huge threat to hosters?

The dreaded word “commoditization” often gets inserted, in an apparent attempt to convey impending doom. And most people go on to ask if the adoption of SaaS delivery models for application software will cause customers to “bypass” co-location and hosting altogether as they subscribe to all their IT needs via SaaS providers (such as Google and Microsoft, for example).

These questions are not particularly bad. In fact, it’s plausible (but not likely) that the IT infrastructure world could evolve in this way. What’s surprising to me is the degree to which people are naturally inclined to buy into this view of the future, versus the contrarian and much more likely position that the onset of cloud computing will bolster the growth and good fortune of the hosting industry.

OK, I understand it won’t be a bed of roses for hosters, particularly during the more turbulent phases of this transition. And I know the road to cloud computing riches will be a rugged trail, likely littered with at least a few casualties. But the idea that we will quickly shift into a winner-take-all scenario with only a few large providers of cloud computing infrastructure, and no room for anyone else to survive and thrive, overlooks a number of considerations that will play a prominent role in the next phase of growth in the hosting industry.

Will Amazon EC2 and S3, and Rackspace Cloudsites and Cloudfiles, take business away from traditional hosters? Sure. But this is not a zero-sum game.

Few people focus on the prospect that the overall hosting pie might grow faster than the rate of cannibalization. I think it will. Hosting is simply the future of IT infrastructure outsourcing, and cloud computing is the future of hosting.

How big is the IT outsourcing industry? Gartner and IDC measure the industry in the hundreds of billions of dollars. How big is the hosting industry? Tier 1 Research measures it in the single-digit billions, orders of magnitude smaller than traditional outsourcing. This means that, even in 2009, the vast majority of businesses are managing their IT infrastructure as they have in the past: on premise, in aging data centers (or, even worse, the server closet), with non-scalable non-automated support models, and without benefit of the economies of scale that a hosting provider can offer. So before we assume Amazon will snuff out the hosting industry, shouldn’t we first assume that a materially greater percentage of the business market will elect to move IT infrastructure “into the cloud” in the first place? If so, then we must assume the hosting pie will continue growing at the expense of traditional IT infrastructure outsourcing. And there is a lot of room to grow.

Regarding SaaS, clearly the SaaS model is here to stay. But this doesn’t mean hosting and co-location will be bypassed. To the contrary, regardless of where application software runs (on the customer premise or in the service provider’s data center), it has to run on IT infrastructure. Managing IT infrastructure is complex and challenging, particularly in a multi-tenant service provider model. Some SaaS companies will choose to take on this challenge themselves, and some of those SaaS companies might be successful with this strategy. But it will be more common for SaaS providers to outsource the management of the IT infrastructure so that they can focus on their application software and customer service. Companies like Google who bring both large-scale IT infrastructure as well as leading application software to the party will be the exception, not the rule.

As for cloud computing … cloud processing solutions like Amazon EC2 and cloud storage solutions like Amazon S3 have kick-started the next generation of products that will be delivered by IT service providers, much in the same way Exodus and Digex gave birth to the co-location and managed hosting industries more than a decade ago. The fact that Amazon was the first entrant to the cloud computing service provider market doesn’t suggest everyone else should go home. There will be abundant opportunities for service providers – especially hosters – to differentiate their offerings. This industry is far from commoditized.

For example, one of the most compelling applications for cloud computing infrastructure is in the field of disaster recovery. As Forrester’s Stephanie Balaouras correctly states in Cloud DR Services are Real, a service provider that understands how to sell and deliver service to business customers (as hosters do today) can displace traditional disaster recovery solutions with better, cheaper and faster-to-provision DR services.

There are many more examples in addition to DR. The point is, classic product management is needed:

  • What do business customers want?
  • How can we meet customer needs in the most scalable and cost-effective way?
  • At what price?
  • Who makes the purchase decision?
  • Does the product require a consultative sale, or can it be purchased by anyone with a Web browser and a credit card?

Hosters are accustomed to doing product management for business customers. Amazon and Google may develop these skills too, but so far Amazon Web Services is basically raw infrastructure. That appeals to some market segments, particularly developers, but not all segments.

There is a large window of opportunity for all progressive hosting companies – and many other types of managed services providers – to enter the cloud computing market. Rackspace has already done it and is demonstrating success. SoftLayer has recently launched their cloud computing and cloud storage products. Other hosting providers that target large enterprise customers are deploying cloud computing and virtualization technologies in ways that meet the needs of their customers.

This is only the beginning.

Amazon and Google are great companies, but they will not prevent the wave of hosting companies and MSPs from playing a major role in the movement of IT infrastructure from the corporate closet to the Cloud.

 

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