Given the popularity of the virtual network operator model in communications services overall, it's no surprise that the model is at least as popular in the cloud space. Despite this, two factors have made it difficult to assess just where the "virtual cloud operator" opportunity is. First, the notion of a virtual cloud operator isn't nearly as well-defined as that of a virtual network operator, and second, the virtual cloud operator role itself is evolving rapidly with changes in perceptions of where the cloud opportunities lie.
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In the very first days of the cloud, cloud providers recognized that the best prospects for cloud services would likely be the firms with the least technical resources available to support cloud adoption. Companies like Amazon created relationships with integrators and software developers, and this generated an almost-disconnected virtual cloud operator (VCO) space -- some VCOs simply wholesaled Amazon's Infrastructure as a Service (IaaS) offering and then bundled it with integration support, while others installed their software using Amazon's IaaS offering, Elastic Compute Cloud, and sold the combination as Software as a Service (SaaS).
Challenges to both these business models developed quickly as the market matured. Price pressure on cloud services -- Amazon has lowered its prices two dozen times -- has affected integrators that resell IaaS both by limiting the markup they can apply and by shrinking the base price to which they apply their markup percentage. In the SaaS space, many developers with strong SaaS offerings simply can't market their service on a national basis, nor support the result. Even well-known firms struggle with the question of whether a SaaS version of their software might cannibalize their normal software licensing business without generating enough new revenue to offset the loss.
Three trends driving changes in VCO model
Service providers are redefining the virtual cloud operator opportunity by redefining the business model of the cloud. This shift is the first of three forces of evolution in the VCO market. Most providers are focusing on SaaS as the service of choice. All cloud services are justified by comparing the cost of the cloud service to the cost of the on-premises technology and support that cloud service displaces. It follows that SaaS, which displaces all of the premises-based application and infrastructure components as well as their support, offers the best opportunity for profit. Additionally, service providers are increasingly using their own brand and marketing to position SaaS offerings to buyers. For the small to medium-sized business (SMB) market, this means that a cloud offering may be backed by a trusted name in networking, not a legion of unknown developers.
The second force of evolution is the increased focus on hybrid cloud applications as the path to selling cloud services to the enterprise. These customers are primarily interested in using hybrid cloud services to provide elastic public resources that can boost capacity during periods of peak load or that can back up internal resources in the event of failure. The hybrid model not only gets better traction and faster decisions from buyers, but also addresses the competition service providers face from major IT players like Microsoft, HP and IBM, which sell both cloud platforms and cloud services.
A common technical thread in both these evolutionary business model drivers -- and the third evolutionary driver for the virtual cloud operator model -- is an increased interest in the middle ground of cloud services: Platform as a Service (PaaS). Unlike IaaS, PaaS is sold not as barebones virtual machines to which buyers provide all operating system, middleware and applications. Rather, it's sold as a combination of hardware and software that creates what's effectively a complete platform for application execution. PaaS displaces on-premises costs for all hardware and for the operating system and middleware, so it has greater operational cost savings for customers than IaaS. As a platform for SaaS or for hybrid cloud deployment, PaaS also unifies the operations and support model for the provider because the system software is the same across all users.
The role of virtual cloud operators in PaaS
One development that is stimulating considerable interest in PaaS is Microsoft's change of attitude on sale of Azure-like services. Microsoft had originally restricted third-party sale of services compatible with its Azure cloud platform, but reversed that position in mid-2012 by offering Azure application programming interfaces (APIs) on all Windows Server products, which was immediately hailed as supporting "white-label Azure." The move was no doubt intended to fend off competitors, like VMware's vCloud and OpenStack, but it also advanced PaaS, because Microsoft Server is the most common software platform in the SMB space.
Because PaaS adds value to both hybrid cloud positioning and SMB opportunities, platforms services have become of much greater interest to cloud providers and VCOs alike.
For cloud users or partners, PaaS is a collection of APIs to which applications are written. It follows that cloud operators or even third parties could deploy custom middleware on a provider's IaaS offerings and create their own platforms. One very aggressive example of this is Telefónica Digital's TuCore model, which proposes to create and offer a complete unified communications and collaboration feature set as a platform to which developers can write applications. This could create customized collaboration-aware applications or even specialized collaboration products for various vertical markets. Amazon continues to add features to its cloud that are effectively platform APIs. Redshift, Amazon's data warehouse service, is such a feature, and third parties can write it into applications they develop and offer it as a SaaS tool.
Because PaaS adds value to both hybrid cloud positioning and SMB opportunities, platform services have become of much greater interest to cloud providers and VCOs alike. But to address this higher level of interest, both the cloud operators and VCO partners will have to refine their service planning and marketing.
Optimal PaaS positioning requires that cloud providers build and maintain an active developer-partner program to encourage VCOs to commit to them. The program's success will depend on a combination of the right technology choices for the PaaS product and the right marketing and support strategies. In the SMB market, virtual cloud operators will depend at least in part on the cloud provider for lead generation, and how this is done will have to be spelled out. For enterprise hybrid cloud support, only the largest VCO will have the credibility to work directly with enterprises. The VCO program will thus have to make the cloud provider the senior partner and manage both the sales and support relationships as such. The virtual cloud operator will then provide support to the cloud provider. For enterprise-targeted VCO relationships, this will dominate the future of the cloud.
Because the evolution of virtual cloud operators depends on cloud provider business models, VCO business models and the cloud market overall, it's always going to be complicated and subject to rapid changes. All the parties will need to be agile in terms of business and technology commitments to keep pace with the exploding market opportunity that VCOs and their cloud provider partners can address.
About the author:
Tom Nolle is president of CIMI Corp., a strategic consulting firm specializing in telecom and data communications since 1982. He is the publisher of Netwatcher, a journal addressing advanced telecom strategy issues.