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Will Service Providers Dominate? A Business Outlook of Cloud EcoSystem

April 12th, 2010 Leave a comment Go to comments

When talking about cloud computing, people normally refer it as services provided by service providers over the Internet. These services are normally, at least in theory, elastic and with no limits on resource usage.

To differentiate the levels of services, the cloud computing is categorized into three different types of services: IaaS (Infrastructure As A Service), PaaS(Platform As A Service), and SaaS(Software As A Service).

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Why is it layered as such? Simple. These three layers correspond to the traditional computing stack: machine, OS/Middleware platform, application. In light of this mapping, shouldn’t we call SaaS as AaaS?  I think that’s a right change technically. But which service providers would like to be called AaaS?

When more people and more companies use cloud computing as services, we will see a rapid growth of service provider sector. In my previous blog, I made an analog between the cloud services and office rental business, and predict the growth pattern of cloud computing would be similar to the office rental. Size matters when it comes to the scale of economy. The bigger the enterprises, the more likely own their offices and their cloud datacenters.

Let’s dig down a little bit more here with the analogy. With the growth of office rental business, office rental companies bought more from steel/brick/glass companies, architects, and construction companies. This changed the original ecosystem in which all the companies built their offices and had to buy by themselves.

Same thing will happen in the IT industry as the cloud computing gets adopted. The service providers will buy more from the vendors like IBM, Cisco, HP, EMC, NetApp for hardware, and from VMware, Oracle, IBM, etc. for software. To save cost, quite some  cloud providers will use open source software. That doesn’t mean for free though. For SLA, the service providers need paid supports from the open source software vendors. But for sure, the capital expenditure is no longer needed.

With the increased volumes, the big service providers will have stronger bargain power in buying the products. At certain points, the big players might bypass the hardware vendors and build their own hardware systems, in part because of the cost saving and in part because of unique technical requirements for example power consumption. Have we seen Costco branded products like bottled water, detergent? Same rationale in different ways.

The lower the service level, the less differentiation possible there. The IaaS service providers will eventually experience consolidation after fast growth, and they will get into higher level services as well. Given different requirements in both PaaS and SaaS, there will be enough room for both big players and small players.

Should the hardware/software vendors get into the cloud services? It’s highly possible and maybe something they have to do to fend off competitions. Microsoft has created Azure services. Its success remains to be seen because its product expertise may not translate easily to operation excellence. But that seems the direction to go for the product vendors. The question is really not if but when.

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