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Technology

Thorsten Claus, Martin Jeske

The Heavens Open


Divided markets and differentiated business models:
How cloud computing is growing up

Lufthansa Magazine, Spiegel, Stern: the attention currently enjoyed by cloud compu-
ting in the media is comparable to that usually reserved for celebrities. Yet nothing is
more urgently needed than a demystification because the value of services presently
offered is just barely enough for a “one-hit wonder.” A divided market and debundled
business models beyond “fast and cheap” are in the offing so that cloud computing will
find broad acceptance in complex IT environments as well.

52 Detecon Management Report s 2 / 2010


The Heavens Open

T he power of the imagery is remarkable: the universal meta-


phor of the cloud, free of technocratic jargon, is inspiring the
evolutionary stage of “application service provisioning” and
“utility computing”, but with better genetic material thanks to
better popular magazines to elucidate a groundbreaking IT con- advanced technology. Virtualization, high network bandwidths,
cept to their lifestyle-conscious readers. And while the experts and Web applications bursting with functional power are the
have been struggling for months to come up with generally steroids which enable cloud computing to take the technologi-
accepted definitions, sellers are exploiting the hype to market cal hurdles effortlessly.
virtually any and every kind of product: cloud and social net-
works, cloud and brand management, cloud and hyperlocal Is cloud computing nothing more than a lever to lower cost?
content aggregation – do you have an IT problem? You will find
the solution in the cloud! Providers have seized upon a simplified description of the nature
of cloud computing services – “pay as you go” and “shared
Everything that can be said today with any degree of universal resources” – to create a stereotype claim for benefits: cloud
acceptance about cloud computing can be expressed in two con- computing reduces costs and accelerates the provision of ser-
cise statements. First: cloud computing is not a technology; it is vices. There can be no doubt that these characteristics are the
a business model for the provision of IT services. And since grea- embodiment of every IT director’s goals. However, this narrow
ter precision regarding functionality of cloud computing services focus on cost and time advantages is also the greatest weakness.
is not possible, the only hope for at least some clarity is offered The larger a company and the more complex the application
by the three segments: infrastructure, platforms, and software. landscape, the lower the priority played by the advantages of
Second: cloud computing services are adequately characterized “fast and cheap” in the overall picture. The cloud computing
by billing based on usage and the performance on operating services offered today still do not have an answer to many of the
equipment used jointly by all users. So cloud computing is an challenges facing IT:

53 Detecon Management Report s 2 / 2010


Technology

t )PXDBOUIFEFQFOEFODZPOTVQQMJFSTCFFMJNJOBUFE acts as a bracket to hold together the undivided cloud compu-


t )PXDBOUIFDPNQMFYJUZPGUIFJOUFSGBDFTCFSFEVDFE ting market will no longer be able to withstand the opposing
t )PXDBO*5QSFQBSFUIFXBZGPSOFXCVTJOFTTJEFBT forces of scaling effects on the one side and diversification on
t )PXDBOUIFTFSWJDFRVBMJUZPGUIFBQQMJDBUJPOTCFJNQSPWFE the other.
t )PXDBOUIFSBUFPGJOOPWBUJPOCFBDDFMFSBUFE 
t )PXQSFDJTFMZDBODBQBDJUJFTCFQMBOOFE The result will be a rip tearing across the models for develop-
ment, marketing, and sale of cloud computing services which
The questions raised above cannot be weighted by a uniform will, for all practical purposes, establish two new markets: a
ranking because the IT strategy and orientation must be designed provider market for IT infrastructure and a universal software
in accordance with the specific business requirements for every market. The two markets – referred to in the following as in-
single company1 / 2. However, an analysis of the cloud computing frastructure utility and software universe, respectively – can be
services being offered today leads to the conclusion that some of characterized according to their dynamics (see Figure 1).
the issues are being influenced in the wrong direction. Just one
example: an extensive use of applications as cloud computing The infrastructure utility market will undergo a major industria-
services (software as a service, SaaS) increases the complexity lization of system technology and standard middleware. The
of the interfaces. After all, the software systems being used here provision of services, administration, pricing, and billing on
are highly standardized and permit only a loose, asynchronous this market will be completely automated. Advantages of scale
coupling via the Internet. The utilization of an infrastructure as competitive instruments will lead to a decline in prices and
cloud (infrastructure as a service, IaaS) is concomitant with an margins, precipitating a consolidation of the provider landscape.
undesirable bond to the particular service provider as well as Providing service to small and midsize customers with special
a step back in terms of the quality of service. The innovative requirements, in contrast, will open wide the door to resellers
strength of the IT is also put to the test when large companies without their own infrastructure.
attempt to amortize the high investments of a global cloud com-
puting service by means of a closed architecture. The infrastructure utility market is comparable with other utility
markets such as energy or telecommunications, where the deve-
So will cloud computing be denied the lucrative entry into lopment described above has already taken place.
the IT of corporations and companies? Indeed, will the lack of
adaptability cause the business model as a whole to fail? The software universe market is subject to exactly the opposite
laws. Applications and frameworks will diverge from one other,
Since the existing restrictions do not have their origin in the in the direction of industries and in the direction of techno-
technologies, cloud computing will not suffer the same fate as logies. As the modularization and combination of software
application service provisioning or utility computing. Instead, components into new platform and application architectures
there will be a process of differentiation which will break up the proceeds apace, the number of alternative solutions for an IT
integrated cloud computing market of today and transform it in system will grow. The consequence will be the establishment of
two orthogonal directions of development. integration and orchestration services as an independent busi-
ness model analogous to the “mashup” concepts found in Web
Splitting into two markets: 2.0. This decoupling of value generation in combination with
infrastructure utility versus software universe the trend to open interfaces will offer providers ranging from
one-man companies to large corporations access to a global soft-
In the first line of evolution, providers will be pressured more ware market.
and more to orient their services to either mass production or
specialization. The “as a service” paradigm which momentarily Debundling of business models

As if the splitting into two markets were not enough change, the
1 J. Henderson, N. Venkatraman: Strategic Alignment:
Leveraging Information Technology for Transforming Organizations,
cloud computing business models are evolving orthogonally. IT
IBM Systems Journal 32, 1993 manufacturers and service providers on the still young cloud
computing market have so far developed all of the links in the
2 P. Coleman, P., R. Papp: Strategic alignment: analysis of perspectives, value chain themselves, but technical abstraction and falling in-
Proceedings of the 2006 Southern Association for Information
Systems Conference, 2006
teraction costs are now fueling segmentation. As providers con-

54 Detecon Management Report s 2 / 2010


The Heavens Open

centrate more and more on core competencies and processes, Sales companies represent the distribution channels for the ser-
they will compensate for the reduced performance depth by vices from the service companies. Account management and the
concluding partnerships and cooperation agreements. The re- industry or wide-area distribution of cloud computing services
sult will be that more and more market participants will work generate value. The strategic planning of the sales locations and
with debundled business models which can be classified in three the addressing of customers, the sustained care of customer
layers: assets, services, and sales. In accordance with this classi- relationships and loyalty, the increase in value of brands, and
fication, providers will be characterized in the following as asset low-cost procurement determines the earnings of the sales com-
companies, service companies, and sales companies. panies.

Asset companies are the production operations of IT. Their core Although the above categorization appears to draw distinct lines,
competence is found in the operation of their own IT infrastruc- providers will continue to cover several or even all of these layers
ture, optimized for costs, or in the production of high-quality in their business model. Especially large companies which are
software products. Scaling, cost controls, and complexity ma- already active on the market with cloud computing services will
nagement are the success factors for the asset companies. Since continue their vertically integrated value generation externally.
their fixed assets prohibit a radical change in business activities, Internally, however, a horizontalization will be observed during
their competitiveness is determined by the agility with which which product development, services, and sales will be located
they can integrate changed customer requirements into the in decoupled business units.
earnings model.
Differentiation will be the breakthrough
Service companies offer services related to the preproducts of
the asset companies. Operational and integration services, along The theses of separation and debundling of the cloud compu-
with the “finishing” of components, are at the core of the busi- ting market may appear logical. But can they satisfy the demand
ness model. The success of a service company is measured by its stated at the beginning that cloud computing services, if they
innovative strength, the ideal timing of its services, and flexible are to be successful on a broad scale, must offer additional value
reliance on the appropriate suppliers. Since service companies going beyond just “fast and cheap”?
operate without being restrained by long-term investments,
their competitive position is determined by short lead-in times Let us take a look at cloud computing at the end of the develop-
up to the launch of their services (“time to market”). ment described above. Two markets have appeared, and three

Figure 1: Cloud Computing will split into two Differentiated Markets

PaaS
SaaS
IaaS

Infrastructure Utility Software Universe


t *OEVTUSJBMJ[BUJPOPG*5JOGSBTUSVD- t %JĊFSFOUJBUJPOPGBQQMJDBUJPOTBOE
ture and standard middleware frameworks
t 'VMMBVUPNBUJPOPGTFSWJDFQSPWJ- t .PEVMBSJ[BUJPOPGQMBUGPSNBOE
sion, control, administration, and application architectures
offsetting t &TUBCMJTINFOUPGJOUFHSBUJPOBOE
t %FDMJOFJOQSJDFTBOENBSHJOTGSPN orchestration platforms
effects of scale t #SPBESBOHFPGQSPWJEFSTGSPN
t $POTPMJEBUJPOPGQSPWJEFST  one-man operations to large
establishment of resellers corporations

Source: Detecon

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Technology

debundled business models exist on each of them. Figure 2 gives It is obvious that these differentiation approaches do not fall in
these six segments a name defined by market dynamics and the the categories “fast” and “cheap”. On the contrary, they answer
performance depth of the business model. It is the concentra- exactly those questions which were identified at the beginning
tion on core competencies which forces providers to design their of the article as the shortcomings of current cloud computing
services and products to be competitive as appropriate for the services. Voilà, at the end of the day, the restructuring of market
degree of freedom in each of the segments. and business models generates the additional values necessary
for broad acceptance. So here are the prospects for the future
On the industrialized infrastructure utility market, an asset shape of cloud computing.
company attempts to differentiate itself on the basis of the pro-
vided service quality, while a service company is able to dissolve The new cloud computing – vision of the future or reality?
the dependency of its customers on an infrastructure provider.
A sales company focusing on distribution is concerned with its When cloud computing becomes usable as a component of com-
ability to cover its customers’ needs for equipment and capacity plex IT environments in companies, it will pose new questions
ideally. for the people in charge of IT. During what time frame will the
changes take place? How can the benefits of debundled services
On the differentiated software universe market, in contrast, an be realized?
asset company seeks to realize a high rate of innovations so that
it can acquire a large number of users for its products. A service Current developments give the answers to these questions and
company reduces the complexity of the many interfaces between an orientation aid about the time periods. The company Right-
cloud-based application modules as an approach to convince Scale3 can be taken as an example of the changes which are oc-
potential customers of its value. The distribution of cloud-based curring. The RightScale platform allows its users to initiate pro-
applications, whether horizontally as an “AppStore” or vertically ductive use and administration of applications across a number
as a customization for an industry, is more or less open to every of different clouds. By relying on various cloud providers,
company that wants to expand its core business by adding IT- RightScale supports the operation of IT systems on third-party
based services. infrastructures – corresponding to a service company on the in-
frastructure utility market.

Figure 2: Debundled Business Models generate Added Value

Cloud Resource Broker Cloud Service Distributor


Wholesale / Retail Channel, Horizontal App Store, Vertical Market
Greater precision Cloud Resource Exchange Sales Channel Preparing the
Sales in capacity wayfor business
planning

Lean Service Provider Application Integrator


Infrastructure Aggregation, Value Added Integration Platform Providing,Network
Elimination Operations Identity Repository Reduction
Services of provider of interface
dependency complexity

Infrastructure Factory Software Developer


Datacenter and Network Operations,
Cloud-aware Application and Middleware
Rise in quality Infrastructure Lifecycle Management, Increase in pace
of service Development of innovation
Hardware Manufacturing and Maintenance
Assets

Infrastructure Utility Software Universe

Source: Detecon

56 Detecon Management Report s 2 / 2010


The Heavens Open

The Deutsche Post DHL has also adapted cloud computing as


a complementary business model. The logistics corporation will
in the future offer its business customers a CRM system as a
cloud computing service4 and position itself as a distribution
channel in a limited industrial segment – or, in other words, as
a sales company on a software universe market.

Similar to these two examples, companies are already positio-


ning themselves today for all six of the future business models.
The examples are at this time still isolated cases, to be evalua-
ted in a wider sense as trends. But they strongly indicate that
a change in the market, its business models, and the provider
landscape is even today a genuine option and not just a vision
of a far-off time.

A highly promising scenario is being created for companies as


users of IT services. In addition to the reduction of costs and
provision times, the differentiation of the cloud computing
market is opening up a new class of added value: from the un-
restricted selection of the infrastructure to the outsourcing of
complex data and application integration to the expansion of
companies’ own value generation, cloud computing is proving
to be multi-talented – and is justifying the present euphoria.

3 http://www.rightscale.com
4 http://www.dp-dhl.com/de/presse/pressemitteilungen/2010/
microsoft_deutsche_post_crm_loesung.html

Thorsten Claus is a telco2.0 enthusiast, angel investor and advisor, creating


startups for cloud services and telecom enablers, and supporting community
and public healthcare projects. As a Managing Consultant at Deutsche Tele-
kom Group‘s technology and management consultancy Thorsten is helping his
international telecom and Internet clients to engineer product and service in-
novations and to create strategies for a flat and free world. He has over thirteen
years of telecom and information technology industry experience and was pre-
viously a senior network architect for T-Systems North America, responsible for
creating blueprints and evaluating emerging technologies and architectures for
telco-grade billing systems, next generation operation support systems, fixed-
mobile convered carrier infrastructures, and IPTV networks. He has a Masters
Degree in Information Technology and a Bachelor in Business and Accounting
and lives with his wife and two kids in Berkeley, CA.

Thorsten.Claus@detecon.com

Martin Jeske is Managing Consultant in the unit “Strategy & Marketing” at


Detecon. His consulting activities focus on the development and realization
of technology strategies and on ICT innovation management. He has had
many years of professional experience in the IT industry where he has held
various positions in consulting and marketing.Martin Jeske holds a degree in
engineering which he earned at the RWTH Aachen.

Martin.Jeske@detecon.com

57 Detecon Management Report s 2 / 2010