Discover How to Profit from the Next Much You are Worth

your cloud simplified
Discover How to Profit from the Next
Bounce of the Ball in Cloud Services
And How Value Migration will Increase How
Much You are Worth
Contents
I. Introduction ................................................................................................................................................................................... 1
II.
The Bouncing Ball .......................................................................................................................................................................... 1
III. Some Relevant Bounces of the Ball ......................................................................................................................................... 2
Consumption of Computing Resources.................................................................................................................. 3
The Business Response to Cloud Computing ...................................................................................................... 3
IV. Three Phases of Value Migration ............................................................................................................................................. 5
V. Competitive Battles ..................................................................................................................................................................... 6
VI. The Service Provider Response .................................................................................................................................................. 6
VII. Conclusion ...................................................................................................................................................................................... 7
How Flexiant Helps .................................................................................................................................................................... 7
About Flexiant ............................................................................................................................................................................... 8
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I.
Introduction
This paper explains why the current cloud services
market is in a transitory phase and why the real value
in the market is destined to land squarely in the goal
mouth of the hosting and service providers that are
As Ronald Cohen, the founder of Apax partners, the
largest global private equity firm based in Europe,
states in his book The Second Bounce of the Ball:
Turning Risk into Opportunity, “Fortunately, the
future has its origins in the present. That is why I
use the analogy of the bouncing ball. We can all see
prepared to catch it.
where the ball is bouncing today; we know it has to
Using the concepts of the bouncing ball and value
anticipate where tomorrow’s bounce will be, and
migration, this paper provides a framework that
bounce somewhere tomorrow. But few of us try to
even fewer will attempt to take advantage of it”.
helps those interested in cloud services understand
where the real rising tide of revenue and profit
opportunity is and how to capture it.
II. The Bouncing Ball
A commonly held misperception is that
entrepreneurial leaders, intent on creating higher
than average growth businesses, thrive on taking
risks. While it is natural to think that many of
the investments and strategies initiated by
entrepreneurial business leaders are a result of
a behavioural appetite for risk, nothing could be
“...the future has
its origins in the
present...We can all
see where the ball
is bouncing today;
we know it has to
bounce somewhere
tomorrow.”
further from the truth.
Ronald Cohen
With few exceptions, every entrepreneurial leader
Author, The Second Bounce of the Ball:
of a high growth business is acutely aware of the
Turning Risk into Opportunity
need to preserve existing value and minimise risk.
However, they are also aware of one other important
dimension: if you want to build a thriving business
you have to see beyond today’s certainties and
examine what is currently tomorrow’s uncertainties.
You have to look at what is going to happen next in
your field, make educated decisions and put yourself
in a position to take advantage of it. Uncertainty and
We see this in many sectors where whole industries
have been wiped out, almost overnight, by the next
bounce of the ball. You do not even need to look as
far back as the replacement of the horse and cart by
the automobile to find examples of this.
opportunity go together.
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Consumption of music
1948
Record
1979
Cassette
1984
CD
Let’s look at an example that I am sure all of us are
familiar with; the consumption of music in the last 40
years. It used to be common to speak about the ‘record
industry’, meaning the industry for large, black plastic
discs. The next and short lived bounce of the ball was the
cassette player where one of the incremental consumer
values was portability using a Sony Walkman. This
was then superseded by the CD, a smaller, shiny disc
with higher quality output and a prolonged lifespan.
This paved the way for distribution of digital music
and fuelled the adoption of digital music players. The
dominant winner of this phase was the Apple iPod.
Each time the ball bounced the value proposition of the
preceding phase was dramatically diminished. Earlier
solutions either disappeared or clung on to a niche
market. Mainstream always moved to the next bounce
of the ball as did revenue and profit.
So is there another bounce of the ball in progress
around the consumption of music? The story does not
end there. Essentially Apple is destroying its own iPod
market by eliminating the need for a dedicated digital
music device by combining it with a much wider range of
capabilities in the shape of the iPhone. Of course other
manufacturers have followed suit.
2006
iPod
Present Day
So what has all of this got to do with cloud services?
Using the same concept of the bouncing ball, it is
informative to examine the consumption market for
cloud services, where the ball currently is and where
it is likely to bounce to next.
III. Some Relevant
Bounces of the Ball
When thinking about the consumption of computing
resources and cloud services in particular - it is
informative to remind ourselves of the bounces that
led us to this point.
In 1961, in a speech to MIT, John McCarthy gave
insight into the future when he stated “If computers
of the kind I have advocated become the computers
of the future, then computing may someday be
organized as a public utility just as the telephone
system is a public utility... The computer utility could
become the basis of a new and important industry.”
However, once again, the ball has not stopped bouncing.
In Europe, the personalised digital music service, Spotify,
is replacing the way individuals find, purchase, store
and consume music in a significantly simplified and
personalised consumption model. (In North America,
Pandora is causing the same disruption).
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Consumption of Computing Resources
Four large bounces that led to the point we are at now.
Mainframe
Client Server
PC/Web
Cloud
This is an extremely simplified view of the journey of access to computing resources in the last 50 years. It is
sobering to think that this entire journey, the information age, is both recognisable and for some of us, within
living memory.
The 1960’s and 1970’s were periods dominated by
mainframe computing where businesses and others
with computing needs gained access to mainframes
on a time shared metered and billed basis. Does this
We are witnessing the weakening of the argument
sound slightly familiar?
turn to cloud based utility services to get a job done.
With the emergence of the microprocessor from
The Business Response to Cloud Computing
notables such as Intel and AMD, we saw the
emergence of the minicomputer which made it
that states that individuals or companies need to
own and manage their own computing resources.
Increasingly, these individuals and companies will
possible for businesses to buy and own their own
dedicated computing resources. We also saw the rise
It has always been the case that the mainstream
of the client-server model.
business market lags behind what is possible and
is generally slow to fully and quickly embrace new
At the latter stages of the 1990’s and from 2000
models of computing as they appear. The move from
onward, we have witnessed the convergence of
mainframe to client-server involved a long period
several technologies such as pervasive PC and
of education and persuasion and even today we see
personal computing usage, the emergence of the
many large organisations still running mixed models
internet and associated web browsers, increasing
of dedicated mainframe, client-server, PC and Web
bandwidth, and access to web based applications.
based topologies and application suites.
This created a rising demand for PC/web based
computing.
It is no surprise that businesses have not yet fully
embraced the cloud computing paradigm despite
At the beginning of 2010, we saw mainstream
the opportunity to reap the economic and other
public cloud services start to emerge in shapes such
benefits it can deliver. One of the biggest barriers
as Amazon EC2 services, but also in the shape of a
of course is that cloud computing, at the enterprise
plethora of cloud based applications.
level, amounts to a technology refresh. Since most
enterprises have significant investment in existing
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Four Business Responses to Cloud Computing
?
Curiosity
Backdoor niche
adoption
Private cloud
creation
Public cloud
experimentation
computing resources, it is an understandable desire to
of cloud computing, typically through the back door
want to fully sweat the existing assets before moving
of functional departments using cloud applications
to a new model. However, not making the move to
and resources to support day to day operations. Typical
adopt cloud computing early may result in significant
instigators of this back door adoption are use cases
repercussions as companies become less efficient,
in software development and testing, and in various
more costly, less agile and less responsive than
aspects of marketing.
competitors.
Many other organisations have either created internal
What we do see is many companies and large
private clouds or are planning to do so. Typically, these
enterprises using cloud applications and compute
organisations do this in an attempt to gain control
services for specific tasks such as customer
over back door cloud adoption while starting to realise
relationship management (CRM), expense tracking,
the benefits of cloud computing. For many reasons
software testing after or rather than before data
this is unlikely to let organisations fully benefit from
storage for example. We also see significant
the economic and organisation benefits of cloud
investments in the construction of in-company private
computing. As a result, the logical next bounce of
clouds where infrastructure is still wholly owned by
the ball will be towards fuller adoption of externally
the enterprise. However, this is viewed by many as a
provided cloud based services by enterprises and
transitory step towards full adoption of a public cloud
less reliance on internally owned and maintained
services model.
computing infrastructure.
As the preceding graphic shows, there are typically
There is a body of emerging evidence to support this
four responses to cloud computing, the next bounce
view. Notably, the predictions of the major industry
of the ball will be a more mainstream consumption of
analysts and commentators (as well as increasing,
external cloud computing resources.
quantifiable enterprise spend on public cloud
computing).
Very few organisations are unaware of, or are
ignoring, cloud computing. Most are at least curious.
Furthermore, many large enterprises are already users
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Some examples of evidence and predictions being
made include:
•
Gartner predicts that public cloud services will
grow from £109bn in 2012 to £206bn by 2016.
In Adrian Slywotzky’s book ‘Value Migration: How to
This is a compound annual growth rate of over
Think Several Moves Ahead of the Competition’, he
42% over a period where overall IT spend is
describes three phases of value migration;
predicted to remain relatively flat.
•
1
IDC predicts that spend on public cloud services
1. Value can be flowing in
will grow at a rate five times greater than the
2. Value can be stable
average increase in IT spend.
•
2
3. Value can be flowing out
Citigroup analysed their own growth predictions
with that of IBM, Cisco, Forrester, Bain and IDC
These seem rather intuitive and correspond to the life
which resulted in growth predictions of over
cycle maturity of a business design.
17% per annum for public cloud services.
•
IV. Three Phases of Value Migration
3
Only 86% of respondents to a 451 Group survey
Given this simple framework for thinking, coupled with
said that they had either started investigating,
the preceding predictions, we can see clear evidence
4
or were already using, public cloud services.
that where previously value flowed into the creation of
internal IT infrastructure, this has not only peaked, but
These predictions point to a rising tide of demand for
is in decline as a percentage of overall IT spend. Equally
cloud service providers. They provide strong indicators
these predictions show that value will flow out of the
that the next bounce of the ball is underway and
traditional model of enterprise IT and will increasingly
that value is migrating from internal IT spend to
flow into the business models that make use of
external cloud services spend. While percentage of
external cloud services. This is amply demonstrated by
spend as a proportion of the overall IT budget will
the predictions made by analysts and indeed by the
remain in single figures over the next four years, these
investments that Flexiant customers are making as
predictions represent a relative explosion in demand
they create and launch public cloud services.
for cloud services and a market opportunity measured
in hundreds of billions of dollars.
“...companies that secure
and build early momentum
in the cloud services market
will be rewarded with an
above average increase in the
valuation of their companies.”
There is one very important consideration. Since
Slywotsky first published his work on value migration
over 15 years ago, one of his predictions has proven
robust. He predicted that one indicator of where
value was flowing in, would be that companies in that
space would see their overall market value increase
at a greater level than their revenue. What this
means is that companies that secure and build early
momentum in the cloud services market will
1. Public Cloud Services Market Growing Faster Than Expected: Gartner, eWeek, 9 Sep 2012, http://www.eweek.com/c/a/Cloud-Computing/Public-Cloud-Services-Market-Growing-Faster-Than-Expected-Gartner-632878/
2. Worldwide and Regional Public IT Cloud Services 2012-2016 Forecast, IDC, Aug 2012 https://www.idc.com/getdoc.jsp?containerId=236552
3. Cloud Computing Every Silver Lining Has a Cloud, Citigroup, Sep 2012
4. Cloud Adoption : Great Expectations, Cloudscape, 451 Group, Sep 2012
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be rewarded with an above average increase in the
achieve the levels of buying power and discounting
valuation of their companies.
that very large operations achieve and therefore will
always operate with a higher cost base. This will
Hosting companies, service providers, telcos and
severely restrict the ability of federated services to
new entrants, have an opportunity to delight their
compete in a market that will quickly move towards
shareholders by increasing the market valuation of
commoditisation.
their companies through entering the cloud service
market early and securing a share of the predicted
Smaller service providers do not need to federate,
growth in demand. Furthermore, for most of these
they need to differentiate, and there are a plethora of
companies this is likely to be the best strategic option
opportunities to secure defensible, growth positions in
available to increase company value over a relatively
localised markets, typically starting from the existing
short period.
client base.
V. Competitive Battles
The time to act is now. As value migrates and an
Organisations of all sizes need to understand how they
can compete to win a share of the predicted growth.
Certainly one area of competition is to compete
against Amazon-like services. This requires scale,
low cost operations and international coverage in a
single organisation. Telcos and larger managed service
increasing number of new entrants identify the cloud
service opportunity, the market will become crowded
and differentiation will become harder.
VI. The Service Provider Response
providers have an opportunity to compete in this
By and large it is true to say that hosting companies
market due to sunk costs in existing infrastructure,
and service providers typically respond to market
existing customer relationships, comparable expertise
demand rather than create market demand. There
in deploying standardised service level agreements
is reluctance by some to allocate significant initial
(SLAs) across multiple geographies and timezones, not
investment and resources until the uncertainty in
to mention deep expertise in metering and billing as
market adoption is extremely small.
well as economies of scale.
Smaller service providers and hosting companies need
to actively seek opportunity to mine their existing
markets and to build differentiated services that do
not quickly become commoditised. One strategy that
is being proposed for smaller operations is that they
federate their services to create the opportunity to
compete against larger organisations such as Amazon.
This is a fundamentally flawed approach. It will be
almost impossible to achieve a federation that offers
a consistent level of product and service. Furthermore,
participants in a federated model are unlikely to
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This brings us full circle to the starting point of this
paper. Companies who experience higher than average
growth in revenue and company valuation need to
invest in areas where some uncertainty still exists. This
need not be guesswork. As Ronald Cohen says, “the
vast majority of companies do not spend the time to
understand where the next bounce of the ball is going
and where value will migrate towards. Companies that
make a concerted effort to do so, and invest early, are
likely to be the ones who build extraordinary value and
defensible positions.”
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VII. Conclusion
How Flexiant Helps
There is a rising tide of opportunity in the cloud
Flexiant can help you create a cloud services business
services market. Companies that secure an early,
that customers love. We provide the only cloud
defensible foothold on this rising tide will experience
orchestration and management software you will ever
increases in both revenue growth and company
need to:
valuation. For medium and small companies, the
logical strategy is to go to market with differentiated
services instead of the fundamentally flawed concept
of a small company federation of cloud services.
It is foolhardy to wait until uncertainty in the market
is dispelled since the ability to capture abnormal
profits will have disappeared by that point. Clayton
•
Build differentiated products and services
•
Launch them in the market
•
Secure customers
•
Accurately meter and bill (even across
multiple currencies)
•
experience of your operational teams and
Christensen in his book Seeing What’s Next: Using
your customers to drive efficiencies
Theories of Innovation to Predict Industry Change
hits the nail on the head when he states “Forward
Build reseller channels and customise the
•
Eliminate common pain points
thinking firms move to solve tomorrow’s hard
problems, because solving tomorrow’s hard problems
We also allow you to make use of commoditised
creates tomorrow’s profits. They unwittingly follow
infrastructure. Our software licensing allows you
the advice of hockey legend Wayne Gretzky who,
to increase scale of deployment and add advanced
when asked what made him so great, replied that he
functionality as your cloud services business grows. In
always tried to skate to where the puck was going to
this way, we help you minimise your initial investment,
be, not where it was.”
secure your first customers, and then invest further as
your business grows.
Companies who are not mining their existing
customer base and who are not developing and
Flexiant started life as a hosting company and
implementing a cloud services strategy today
launched the first public cloud service business in
are almost certainly going to miss the growth
Europe. We are now focused on helping companies
opportunity of the decade and as a result may well
across the world by providing them with the software
be consigning themselves to history.
solutions they need to launch commercial cloud
service businesses that customers love. If you are
interested in building a cloud services business at any
scale and have not already done so, may we invite you
to get to know Flexiant.
? Do you agree or disagree? Click here now to join the debate
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About Flexiant
Contact
Flexiant is a leading international provider of
cloud orchestration software for on-demand, fully
automated provisioning of cloud services. Flexiant’s
software gives cloud service providers’ business
agility, freedom and flexibility to scale, deploy
and configure cloud services, simply and costeffectively. Vendor agnostic and supporting multiple
hypervisors, Flexiant Cloud Orchestrator is a software
suite that is service provider ready, enabling cloud
service provisioning through to granular metering,
billing and reseller management. Used by over
one hundred organisations worldwide, from small
hosters to large Managed Service Providers (MSPs)
and Enterprises, Flexiant Cloud Orchestrator is
simple to understand, simple to deploy and simple
to use. Flexiant customers include NetGroup, FP7
Consortium, ITEX, TransEnt, Fast2host and Boston
Group. Visit www.flexiant.com.
Flexiant Limited, Avanta Devonshire Square,
Tel 0870 050 0080 or +44 1506 606 000 www.flexiant.com
9 Devonshire Square, London, EC2M 4YF
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