Cloud: A tricky space to play in

Cloud: A tricky space to play in

Industry experts have underscored how the pricing strategy of Cloud vendors has a huge impact as it affects both end-customers and smaller vendors

Dealing within the Cloud space is like walking on a bed of egg shells – businesses have got to make measured and calculated moves if they wish to succeed.

Just when you thought is was safe to assume everything is a bed of roses in the Cloud, industry experts have underscored how the pricing strategy of Cloud vendors has a huge impact in this space as it affects both end-customers and smaller vendors.

Their comments follow news that Microsoft will soon make some price adjustments for Azure in Australia. According to an official email it sent to all existing Azure customers, the local pricing for Azure and Azure Marketplace will increase by 26 per cent as of August 1.

The annnouncement had an immediate impact with some partners taking to Microsoft’s developer network page to express their anger. And while the Cloud seems the be-all and end-all of solutions in 2015, there is continued confusion within the sector. What does it all spell out? Our experts have differing views.

Cloud Plus founder and CEO, Jules Rumsey, said there are two distinct types of Cloud player in the market. The first is companies such as Amazon and Microsoft that sell Cloud as a hosting solution with a few value-added offerings on top. The other is businesses like Cloud Plus that have more integrated offerings.

“Once you start to put network, security, hosting, and a whole suite of other products together, pricing does become more elastic and it becomes part of a complete solution. If you’re selling a point product that is directly comparable to another vendor’s point product with nothing further to drive the value proposition, outside of service and quality, you’re going to struggle with pricing,” he said.

On the other hand, Channel Dynamics director, Cam Wayland, said the move doesn’t make a lot of difference as the bigger players (such as Amazon, Microsoft, and IBM) are fluctuating prices in a bid to fight for market share between themselves.

“The channel has now started to realise that it can’t build and offer Infrastructure-as-a-Service [IaaS] competitively against those big players. If you’re a channel partner, don’t try and compete against them because you’ll never win.

“The big guys are slugging it out and they will continue to slug it out; where that ends, no one knows. But it’s following the normal maturity cycle in the industry where when the industry starts to get competitive, Cloud prices are altered and you’ll end up with only a small number of players dominating a large amount of the market,” he said.

According to rhipe market research vice-president, Stephen Parker, vendors are coming away from the price race to the bottom by charging for value. He said if a partner’s whole profitability is based on the underlying cost of the vendor, it means they don’t have a viable business model.

“If all you’re doing is reselling a product, you don’t have a viable business model anyway. If you’re totally destroyed by a 10 or 20 per cent increase in prices, then the offer to your client is simply the sale of a product rather than the sale of a service.

“And we know right now, a value-added reseller in the market is going to have significant challenges in the Cloud space as compared to a managed services provider. So if a price change of 10 or 20 per cent is affecting you, it means you’re not adding enough value in the overall model,” Parker said.

Inabox Group CEO and managing director, Damian Kay, hasn’t seen a major decrease in the price of Cloud-based deployments.

“When you look at the price to Cloud, people are starting to realise the cost of running Cisco or Microsoft environments is fairly high in the hardware environment. So we haven’t seen a massive decrease in the price of Cloud-based deployments over the last two years.

“It’s concern for me because as a smaller Tier two player in the market, competing against some of these big guys becomes more and more difficult.”

But Kay indicated that what it does do is speed up people moving tin into the Cloud.

“So when you do a direct cost for cost comparison, between the cost of tin and the cost of Cloud over a three- to five-year period, it’s not significantly different. But you get some other benefits such as more flexibility in terms of the compute or storage you require at any one time,” he said.

Channel opportunity

So, in all of this, where are the opportunities for the channel?

Wayland said smaller Cloud companies have to partner with larger Cloud providers and resell their base offerings with some added value.

“If a channel partner is only running up one or two VMs then that’s fine but if you start working around a whole range of things like production workloads, security, management, storage, and so on, that’s where they have an advantage,” he said.

He said it opens up opportunities for distributors, as well, as they will be able to offer a range of those solutions through their aggregation portals.

For example, companies such as  Distribution Central, Westcon, Dicker Data and Ingram Micro, have all announced Cloud plays where the channel can purchase those Cloud providers’ products and then add value to it.

Kay said, strategically, smaller Cloud vendors should offer a bundled total solution that includes an integrated Cloud, IT and telco environment. “You can cost subsidise and gain your efficiencies through a holistic solution rather than having a standalone Cloud solution, which Microsoft and AWS tend to do. A bundled solution across IT will include support, virtual-desktop, voice, data, compute, storage, back-up, telecommunications, real-time applications and Cloud applications.”

Amazon Web Services Asia-Pacific head of technology, Glenn Gore, said public Cloud puts a lot of price and pressure on projects both for partners and customers in the industry.

He said partners need to move away from having a cost-based reseller model to one that is value-driven and outcome based for customers.

“Value comes through a number of different forms – experience in leveraging certified architects, doing projects multiple times for a variety of customers, subject matter specialisation in things like mobile applications in the Cloud, Big Data in the Cloud, or infrastructure migration services.

“If you focus on cost, that doesn’t always get the best return. If you look at the breadth of the Cloud platform, as a partner, it is a great opportunity to work with the customer, for example, by migrating a single application workload to the Cloud. But, over time, that one project can turn into a full migration project,” he said.

Gore added, it’s something service providers can benefit from too. With Cloud, they won’t have to worry about the procurement and sourcing of infrastructure, shipping it out, or any other logistics issues associated with it.

“The second benefit it has for partners is that they can start building up different areas of expertise around applications. There are different functional outcomes partners can specialise in as well when moving from a traditional CAPEX model to an OPEX one,” he said.

Cloud pricing

Rumsey indicated all Cloud players have their own views on what they can achieve out of their pricing strategies based on how they’re operating, which markets they are addressing, what their buy rates are on certain products, cost of datacentres, and cost of power.

“The cost of certain things, like hard disk space, is still dropping and will continue to go down. Have we dipped to a level that’s unsustainable in the short-term? That’s a question vendors will need to answer for themselves but there are some silly, hard-to-justify rates kicking around in the market and that needs to change,” he said.

Read more: Centrify appoints Lachlan McKenzie as country manager A/NZ

Parker said vendors that aren’t in the Cloud market right now will soon have to do something aggressive in comparison to their existing models. Partners already in the Cloud will have to look hard at their current pricing models because they have been aggressively driving volume instead of driving value over the past 12 months.

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