Franchising Business Model for Cloud Computing

In a previous post, I said that cloud service business model is very much like that of office renting business. Just as big companies want to own their major offices, they want to own their major datacenters as well. That explains why private cloud will not only be there forever but also represent a major chuck of overall market in the future.

Cloud Commoditization

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Let’s get back to the cloud service business, or so called public cloud. When the cloud technology getting mature, the cloud related services will increasingly become commoditized. This is especially true for virtual machine based IaaS services.

From customers’ perspective, the virtual machines they get from any provider are pretty similar in functionality. Performance wise, they may be different while running performance demanding applications. But mostly they are good enough for most customers.

The commoditization puts intense pressure on the service providers to differentiate their services or die. An obvious strategy is to compete on price. This is however not a good strategy because your margin hurts and there is a limit to which you can lower the price and remain profitable. A better strategy is to move up the software stack to PaaS. Because of the variety of the platforms, service providers have much more freedom to differentiate. Still, the mainstream platforms are limited despite their big total number.

Is Time for Consolidation?

All the above are technical solutions. The industry needs to look at the business side as well. The bare metal of a business is for profit by increasing revenue and reducing cost. There are many ways for helping these for example launching new marketing campaigns, improving operation efficiencies, etc.

As history shows, when a product or service becomes commodity, it’s inevitable for an industry wise consolidation which leaves several big players. The consolidation will not only reduce operation cost, but also improve marketing effectiveness with stronger brands. For the customers, they will no longer deal with so many vendors/providers, and have unified user experiences. This is particular true for developers who have to learn different set of APIs to achieve pretty much same or similar thing for different providers.

M&A or Franchising

When discussing consolidation, we probably first think of M&A. This of course works for cloud business. In fact, it already started to happen with Verizon’s buying Terremark for $1.4 billion last month. As businessweek predicted, it may spur cloud acquisitions.

I think there is a different approach that may better suit cloud service business. It’s is the franchise model. Again, let’s pick a traditional business as example. In hotel business, there are several major hotel management companies who own brand, do marketing & training, run reservation center, and etc. They don’t normally own individual hotels, but help to run the hotels. For some customers, they don’t even know about this, and they don’t care as long as they trust the brand.

To apply this to cloud services, we will have several cloud franchisers who know how to build a cloud, and run a centralized website and call center as the single point of contact for the customers. A datacenter owner can choose to be a franchisee who hooks up her datacenter(s) to the bigger cloud managed by the franchiser.

Now the tricky part is how a franchiser allocates business to a particular franchisee. Unlike a traditional franchising business like a hotel whose customer chooses a particular location/hotel, it’s not the case for a cloud customer to choose a particular datacenter because it should really be transparent to the customer. Essentially a customer shouldn’t care where to run the cloud except being required by law which could demand certain data like patient data be not stored out of a state. Having said that, I think there are still certain advantages to be close to your customers especially enterprise customers.

If the franchise business model works, technologies like automation can play a significant role in optimizing data center management and reducing operation cost. Business wise, more money can go to a single brand, and attract more customers for more revenue. Good for the businesses and industry. With lower entry level of running a cloud datacenter, it can also create more opportunities for areas with low real-estate and utility prices, therefore good for local economies as well.

Will it work? I don’t know for sure but I can see a big potential as well as risk there. A big challenge as I see there is people who know datacenter business don’t know franchising, and vice versa. To be successful, two groups of people have to work together. If successful the gain will be huge.

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