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Cloud Hosting Reaches an Inflection Point

By July 12, 2011Article

OpSource was recently acquired by Dimension Data following closely on the heels of other high-profile acquisitions of Terremark, Savvis, NaviSite and other cloud/hosting companies.
This is an indication that the cloud hosting model is reaching an inflection point. The trend is unmistakable: traditional server-based hosting models are evolving into self-service-based cloud models. Two main factors are driving this trend:

  • Cloud-based hosting results in higher operational efficiencies and lowered TCO for the vendor which results in competitive price positioning
  • Customers want more flexible services-centric services including self-service options

While traditional hosting services (think dedicated physical server environments) – including co-location services – are not about to get replaced, it’s clear that a market for a self-services pay-by-the-drink cloud model (as exemplified by Amazon Web Services) is about to take off in a big way.
“Cloud is eating hosting’s lunch,” says Treb Ryan, CEO of OpSource. “Once you go to the cloud and get a server online in a few minutes for a few cents an hour, you would never go back to hosting again.” In the traditional hosting environment, you spend a lot of time negotiating with your vendor, then signing a multi-year contract, and then waiting for several weeks for your resources. Why would anyone want to use this outdated model?
Even in the cloud infrastructure world, the reality will probably be somewhere between managed service and self-service: OpSource, for example, provides managed services on top of their cloud hosting including performance, location, database, and security management required in complex customized environments. Traditional dedicated server-based environments are great for hosting legacy client-server applications, but they don’t provide the scalability and elasticity that rapidly growing SaaS companies and large ISVs need.
Enterprise cloud adoption falls into three major buckets:

  • “Under the radar” use of external SaaS and IaaS services. Business users and developers often bypass corporate IT and financial guidelines to get the cloud services they need.Referred to as “rogue” IT projects, I have anecdotal evidence that this accounts for 60 percent of cloud adoption out there!
  • Transforming legacy applications into cloud-based applications
  • Large software development and testing projects

Large-scale software migration and development projects, particularly for the Fortune 500 companies, are typically led by the big system integrators and telcos. This dev/test use case typically evolves into the application being deployed to the cloud in production.
However, in some cases, the application is tested temporarily in production in the cloud and then brought back on-premise for the final production deployment. In either case, this presents a huge opportunity for hosting providers and system integrators to partner and help enterprises begin their large-scale development and migration into the cloud.
Telcos are the common factor in recent cloud acquisitions: Verizon acquired Terremark, Century Link acquired Savvis, and now Dimension Data (which is a wholly owned subsidiary of Japan’s NTT Holdings) acquired OpSource.
Despite some obvious strengths such as large-scale network resources, extensive global reach, deep wireless experience, strong IP backbone, and co-location services, telcos have lagged behind the leading cloud players such as Amazon, Rackspace, and OpSource and thus have not been able to leverage the cloud to drive new revenues. Now they are tackling this challenge with acquisitions of leading cloud vendors to combine their traditional strengths with new cloud models.
Telcos realize that Layers 1 and 2 are commodity and they need to drive differentiation and value by offering:

  • High-quality networks (IP + wireless both)
  • Seamless content/app availability to mobile devices
  • Massively scalable utility cloud services

And this in turn will drive bandwidth and data usage. Enabling this plays directly to telco advantages and strengths.
Cloud infrastructure hosting is a major market opportunity in the next couple of years with a market cycle that could last well into the next decade.
Kamesh Pemmaraju heads cloud computing research for Sand Hill Group. Follow him on Twitter @kpemmaraju.