THINK IT Services

Dimension Data’s acquisition of OpSource marks the end of an era and illustrates how the Cloud Computing competitive landscape is expanding to encompass every type of tech vendor and service provider.

Although it is only a fraction of the size and has only a fraction of the brand equity of Salesforce.com, OpSource has had a disproportionate impact on the growth of the Software-as-a-Service (SaaS) market and broader Cloud movement.

The company’s CEO, Treb Ryan, has been a tireless evangelist for the business value of SaaS and now the Cloud. He and his staff have invested heavily in educating and facilitating the industry’s growth through an endless stream of webcasts and whitepapers, and founding the industry’s most important annual gathering, the SaaS Summit, now known as “All About the Cloud” and managed by the SIIA.

Rather than simply offer a set of hosting services, OpSource put together the first federated SaaS enablement model and associated ecosystem to help established independent software vendors (ISVs) and start-ups migrate to a SaaS delivery capability. It also acquired one of the pioneers in the SaaS billing and provisioning business, LeCayla Systems.

Despite all of its work to promote SaaS, the company struggled to make a living in this segment of the market because there is only a finite number of aspiring SaaS vendors that could appreciate and afford its services. It was given new life when it broadened its attention on the infinite opportunities in the rapidly expanding Cloud Computing market. It also won a strategic investment and established an alliance with NTT which appeared to have the inside track for an eventual acquisition.

It has long been speculated that Opsource was an acquisitioin candidate for larger service providers, including Verizon and AT&T. IBM, HP and Dell were also considered potential acquirers. This speculation gained even greater intensity with the recent acquisitions of Terremark, Savvis, NaviSite and other Cloud/hosting companies.

Dimension Data is a global value-added reseller and services company that probably wasn’t on many people’s radar screen as a potential acquirer. It has ascended from the price sensitive hardware sales business by offering a widening array of managed services. It recognizes that it now must extend those services to the Cloud level. It will be interesting to see how far and fast OpSource will move them in this direction.

OpSource will retain its brand and become the centerpiece of Dimension Data’s broader Cloud portfolio of products and services. Retaining OpSource’s executive team will be essential to optimizing its value because few companies are as dependent on the brand equity of their executives as OpSource.

However, OpSource also began promoting its ’secret sauce’ recently. It is a Cloud orchestration software suite which accelerates the deployment of Cloud services by traditional service providers and relative start-ups. This solution was recently at the heart of a new alliance with VCE, the joint venture of VMware, Cisco Systems and EMC.

Dimension Data is a key reseller of VCE solutions and integrator of VMware, Cisco and EMC products. So, it will probably try to leverage OpSource’s Cloud enablement functionality to not only support its own Cloud services, but as an additional asset to support its service provider customers.

Regardless of OpSource’s future direction, everyone in the SaaS and Cloud Computing industry owes Treb Ryan and his team considerable thanks for their significant work in building this exciting and rewarding marketplace. Knowing how hard surviving this type of acquisition can be, I wish them well and am hoping for the best from this transaction.

Plenty of has been written about last week’s disruption of Amazon’s Web Services (AWS) which took hundreds of organizations offline, including many rapidly growing start-ups and evolving aspects of enterprise operations.

(The best I’ve read summarizing the questions raised and lessons to be learned as a result of the AWS outage was by my friend Phil Wainewright.)

After suggesting at the beginning of last week that recent issues surrounding Google could derail the rapid growth of Cloud Computing services, it is obvious that Amazon’s problems must be added to the list of sobering events which will certainly cause many entrepreneurs and enterprise decision-makers alike to re-think their Cloud strategies and deployment tactics.

Google’s support issues, combined with Amazon’s service availability problems, clearly make real two of the three greatest fears which IT and business decision-makers face when considering the widening array of Cloud alternatives. The third primal fear regarding Cloud services is the potential for a serious security infraction. To date, Cloud providers have outperformed many organizations in fending off security threats. But, a well-publicized violation would raise serious concerns about the short-term viability of Cloud services for mission-critical, core applications and business processes.

I say ’short-term’ because we all have short memories, or maybe it is fairer to say higher tolerance levels than we realize when it comes to our fears regarding web-based services. For instance, Salesforce.com has only seen greater growth since it suffered a series of serious service disruptions in 2006, and has not seen any appreciable service abandonment as a result of subsequent outages more recently. Another example is NaviSite which suffered a outage that lasted nearly a week in 2007 and was recently acquired by Time Warner Cable for $230 million.

As I said back in December 2007, “Failure Doesn’t Matter”.

However, if these problems persist not only will Amazon’s credibility and competitive position be compromised, but the commodity-services oriented aspects of the Cloud Computing business will also be set back significantly.

In the meantime, the winners as a consequence of last week’s outage and Google’s support issues are the established players who may not be offering bleeding edge services at the lowest available costs, but are promising more reliable services at reasonable prices. For instance, folks at IBM timed things perfectly with their new SmartCloud services. And, Verizon completed the acquisition of Terremark just in time to capitalize on Amazon’s problems.

There are also lots of smaller players who can win greater attention as a result of Amazon’s outage. I spoke to SmartBear in the midst of the AWS issues last week to learn more about its acquisition of AlertSite and they were eager to discuss how their combined capabilities could help organizations mitigate the risks associated with Cloud availability and performance issues.

Hopefully, Amazon and other Cloud service providers will learn important lessons from last week’s outage which will lead to improved service quality going forward. In the meantime, this event will make corporate decision-makers more aware of the tough questions they must ask the Cloud providers about their services and the standards they should set for their performance.

As I suggested a year ago, I also expect last week’s outage to reset the competitive landscape and the criteria for success, moving the advantage from the price leaders to the quality service providers.

(Disclosure: I have done consulting work with Salesforce.com, NaviSite, IBM and Verizon.)

Time Warner Cable’s planned acquisition of NaviSite not only intensifies the M&A activity in the managed hosting arena that was ignited last week by Verizon’s purchase of Terremark, it also shows how the corporate and consumer web services markets are converging.

As Glenn Britt, Time Warner Cable’s Chairman and CEO, stated in the company announcement, “Our commercial services business is a key growth driver for the company and one in which we continue to see great opportunity.”

Thirty years ago, I was wrapping up a full-time MBA program at Boston College and was fascinated by an article in Data Communications Magazine about the impending diversiture of AT&T and the prospect of new players entering the enterprise data services market. In particular, the article suggested that the rapidly evolving cable companies of that time could capitalize on this opportunity. I pitched a Boston-based cable company on the idea of surveying major corporations in its operating area to see if they would be interested in the company’s “institutional services”. My research project found that the local corporations would be willing to learn about the cable company’s services, but were unlikely to abandon their existing service provider, New England Telephone.

Fast forward thirty years and we see an entirely different competitive landscape. Cable companies are increasingly offering Internet and communications services to small- and mid-size businesses (SMBs). They have generally penetrated SMBs via the small-office/home-office (SOHO) market with services that are not much different from their consumer services.

In retaliation, Verizon (in place of long-gone NE Telephone) is now pushing its Fios residential service to steal away the bread-and-butter home entertainment services provided by cable companies.

As consumers and corporations become fixated on web-based (“Cloud”) services, the opportunity to bridge the gap between these two markets has never been greater.

For instance, Amazon has leveraged its extensive consumer experience and the strength of its consumer brand to create its powerful Amazon Web Services (AWS) capabilities and generate unprecedented success in the corporate world.

The consumerization of IT began as the unauthorized acquisition of personal computers and handheld devices, and has evolved to include sanctioned procurement of Software-as-a-Service (SaaS) applications to meet a widening array of corporate needs. The success of the SaaS movement has spawned the larger Cloud Computing phenomenon. Both have been driven by corporate ‘consumers’.

The Time Warner Cable acquisition of NaviSite is the latest response to this trend. I’m betting that Comcast will make a similar move soon, unless its NBC Universal acquisition proves to be too much of a distraction.

Verizon’s acquisition of Terremark, announced last night, clearly indicates that the company is committed to becoming a major player in the rapidly evolving and expanding Cloud Computing marketplace. It will also trigger a new round of similar acquisitions in the Infrastructure-as-a-Service (IaaS) segment of the Cloud Computing arena.

Verizon’s decision to acquire Terremark was a “classic make/buy” choice, according to the company’s executives during their telebriefing this morning. The acquisition accelerates Verizon’s move to the Cloud by leveraging Terremark’s proven capabilities. Terremark offers enterprise-class IaaS solutions which fit well into Verizon’s portfolio and target market. Terremark also has excess hosting capacity in its Miami and Culpepper facilities, and now has the additional financial resources and channels to market to fuel more rapid growth.

Verizon will allow Terremark to retain its brand and independent operations. In fact, Verizon executives suggested that they may move many of its own data centers under to the Terremark team over time to accelerate their conversion into more efficient Cloud environments.

You can bet that boardrooms throughout the telco and other segments of the tech industry are abuzz this morning with more urgent discussions about how they should cement their positions in the Cloud Computing marketplace to respond to Verizon’s move. And, I’m sure the phones at Rackspace, Opsource, Savvis, Joyent and other prominent IaaS players are also ringing with calls from M&A folks representing AT&T, IBM, HP, Dell, etc. seeking to keep pace with the intensifying activity in the IaaS market.

Two announcements on the same day this week vividly illustrated the scalability and ubiquity of today’s Cloud Computing phenomenon. They also showed the diversity of users seeking to take advantage of Cloud Computing services.

The first was Amazon’s announcement that it is offering a free usage tier of its Amazon S3, Amazon Elastic Block Store, Amazon Elastic Load Balancing, and AWS data transfer services for new users for a full year. 

Amazon Web Services’ (AWS)  innovative and groundbreaking approach to packaging, pricing and delivering computing power has been the primary impetus and standard bearer of the Cloud Computing movement. Its commodity and even spot-pricing techniques have captured the attention of entrepreneurs and enterprises alike.

UBS Securities estimates that Amazon will generate $500 million in 2010 and $750 million in 2011, making it the largest Cloud vendor by far with minimal marketing effort. Yet, this still only represents less than 3% of Amazon’s total revenues. But, Jeff Bezos is suggesting that AWS could generate as much revenue (and maybe more profits) than its e-commerce business. This is a major reason why Amazon has tripled its capital spending on infrastructure, and why it is attempting to eliminate any economic barriers to user adoption of its AWS capabilities by offering its services for free to encourage even greater growth of its Cloud Computing service business.

Verizon also announced on the same day that it had won a portion of a major new contract issued by the General Services Administration (GSA) of the U.S. federal government aimed at migrating its operations to a private cloud environment.

Under this agreement, Verizon will provide cloud computing services – including server, network and storage capacity – to federal government agencies. The company will provide Infrastructure-as-a-Service (IaaS) capabilities and will help federal agencies meet their virtualization and data center consolidation requirements. The IaaS platform will consist of virtual and physical servers, storage services, backup services, and application support services to create a more responsive and cost-effective, on-demand computing environment.

Verizon was among eleven (11) awardees selected by the GSA to negotiate with government agencies and provide services under a blanket purchase agreement valued at $76.5 million over five years.

These announcements exemplify how rapidly the Cloud Computing movement is expanding.

Verizon unveiled a new cloud computing offering yesterday, the latest in its series of “Computing as a Service” (CaaS) packages, aimed at small and mid-sized businesses (SMBs).

The real target of the announcement is Amazon Web Services (AWS), which has pioneered the Infrastructure-as-a-Service (IaaS) frontier that has redefined the way computing power is packaged and delivered to the marketplace.

Although AWS hasn’t threatened to enter the telecom business, like Google, its success in the cloud computing market has raised the bar for telcos who have been laboring in the hosting business for many years.

AWS’s claim to fame in the cloud computing arena has been the hyper-elasticity and minuscule price-points of its IaaS solutions, which are bolstered by a myriad of third-party tools vendors. These services have primarily appealed to tech-savvy users, large and small, willing to cobble together these on-demand, online resources to meet their situational computing needs.

Verizon is countering with a bundled program which promises greater ease-of-deployment and more management control for SMBs with less hard-core technology skills and more comfortable doing business with service providers they know.

Amazon continues to challenge the tech industry’s computing norms by offering increasingly frictionless service delivery and spot-pricing for its cloud computing capabilities. The most recent example is its new EC2 Micro Instances low cost option for low throughput applications.

Unable to match AWS on price, Verizon (and other major players such as IBM, AT&T, etc.) is betting on the greater comfort levels which mainstream businesses feel toward established brand-name companies who can serve as strategic sources boasting better support.

The good news about the heightening competition in the cloud computing market is that the growth in demand is not likely to be satisfied or subside anytime soon.

After casting doubts about the durability of the cloud computing model for the past few years, the major market research firms now admit that interest and adoption of cloud computing by organizations of all sizes across every industry is exploding.

Therefore, today’s upstarts as well as the fast-following established players can both compete on their own terms and find success. However, no industry can survive a ‘cloud rush’ like today’s proliferation of players without a shakeout.

A few cloud vendors will survive trying to compete on price in a cost-sensitive marketplace. But, most of the long-term winners will be those cloud vendors who offer other value-propositions, such as greater ease-of-deployment and support, and win the confidence of customers despite their premium prices.

SMBs and large-scale enterprises will benefit from the escalating competition in the cloud which is producing faster innovation and accelerated maturation of service provider business models.

Years ago, I considered the week leading into Labor Day as the final hurrah of the Summer and tried to preserve it for an end of season vacation to cap off the warm weather months in New England. Then my kids became school age and schools started kicking off before the holiday weekend. (Don’t get me started on this silly practice.)

Now, the tech industry is also making a habit of getting back into stride for the new Fall season before the dog days of August are behind us. One of the important annual venues for kicking off the new season of activity is VMworld.

This year’s event is generating plenty of news, especially regarding cloud-oriented acquisitions and alliances. Here’s a quick sampling:

• VMware Acquires Integrien and TriCipher 
• Verizon and VMware to Launch Enterprise-Class Hybrid Cloud Solution 
• BlueLock Introduces VMware vCloud Datacenter Service with CloudConnector 
• EMC Transforms Management of the Private Cloud, Ionix Unified Infrastructure Manager 2.0 Now in Customer Beta
• Citrix Acquires Virtualisation Firm VMLogix 

Why all the buzz surrounding this event?

Virtualization is one of the critical building blocks for creating cloud computing environments and VMware has become a key player in the cloud computing marketplace. As a result, a widening array of tech companies, service providers and channel organizations are aligning themselves with VMware. At the same time, other virtualization vendors are trying to keep pace with VMware’s capabilities and strategies.

This week’s acquisitions, alliances and other announcements are just the latest illustrations about how this marketplace is evolving and the competitive landscape is shifting.

For instance, performance and access management are pivotal pieces in a public or private cloud computing environment. This is the reasoning behind VMware’s acquisition of Integrien and TriCipher, and part of the thinking that drove Citrix’s acquisiton of VMLogix.

So, while the Dell/HP bidding war over 3Par has captured plenty of attention, other industry players are staking their own claims on a share of the rapidly expanding cloud computing market opportunity.

Yesterday, Verizon Business introduced an on-demand, “cloud-based” Computing-as-a-Service (CaaS) solution that will be an important indicator of whether telcos can succeed in the cloud.

Anyone who has followed my writings knows that my roots are in the telecom industry, having helped to launch IDC’s Communications Industry Research program in 1983 at the time of the AT&T divestiture.

I’ve watched the telecommunications giants make many failed efforts to penetrate the data center. In the late 1980s and early 1990s, they tried their hand at systems integration and IT outsourcing.  In the late 1990s, they aggressively provisioned fiber optic cables and built out showcase network operations centers (NOCs) to exploit the Internet explosion and capitalize on the over-hyped demand for managed services which never fully materialized.

After the telecom industry shakeout at the beginning of this decade, the telcos bought their way into the Application Service Provider (ASP) market. Verizon acquired Digex and Totality via MCI, and AT&T picked up USinternetworking. These acquisitions have produced limited success because the telcos still couldn’t convince their prospective customers that they fully understood their data center and application support needs.

Now, the telcos are trying to redirect their assets and energies to capitalize on growing customer interest in cloud computing. AT&T announced its cloud computing capabilities, called AT&T Synaptic Hosting, in August 2008. At the time, AT&T described Synatic Hosting as a “next-generation utility computing service with managed networking, security and storage for businesses.” Last month, AT&T rolled out a Storage-as-a-Service ‘cloud’ solution.

Verizon Business’ CaaS announcement is noteworthy because the company has pulled together a number of its corporate assets to address prospective customers’ varying cloud computing preferences. In addition to its data center and application management resources from the Digex/Totality units, Verizon Business has also included its professional services teams who will provide front-end consulting and project management skills during the CaaS deployment process. It has also added the Cybertrust Security Management Program to alleviate customer concerns about security and privacy.

In addition, Verizon Business has spent more than two years architecting and implementing a ‘next-generation’ data center to support its CaaS offering powered by an assortment of leading technology providers including HP, VMware and Red Hat.

The net result is that Verizon Business has built a cloud computing engine which isn’t aimed at dislodging Amazon EC2 as a low-cost alternative. Instead, it is a more holistic set of services aimed at addressing the varying needs of a wide array of enterprise and mid-sized organizations who would prefer to rely on a service provider they know and trust.

Verizon Business must now deliver on its promises in a cost-effective fashion and hope there is a sufficient number of enterprise and mid-sized organizations who are comfortable turning to a telco to meet their cloud computing needs.

A friend at AT&T, Joe Weinman, continues to pump out thoughtful blog posts regarding the rapid evolution of the cloud computing industry. His latest post on GigaOm entitled, “6 Half-Truths About the Cloud”, includes a link to a previous post which offers “10 Reasons Why Telcos Will Dominate Enterprise Cloud Computing “.

I was drawn to his previous post because Joe added a link in today’s post for his definition of “CLOUD” – Common, Location-independent, Online Utility provisioned on-Demand.

But, I was also compelled to respond to Joe’s suggestion that the telcos are in the best position to capitalize on the growing demand among enterprises for cloud computing services.

I was originally attracted to the technology industry in 1982 not because I was a geeky engineer but because I was a MBA student looking for a hot new market opportunity and saw the impending divestiture of AT&T as my opportunity.  I joined IDC in 1983 to help launch its communications research program to track the transformation the telecommunications industry in particular, and the technology industry as a whole.

The AT&T divestiture produced a new generation of Regional Bell Operating Companies (RBOCs) promising a new era of competition and innovation. Over the subsequent years, they made numerous efforts to expand beyond communications into the data center with a variety of computer hardware sales and systems integration services initiatives with limited success.

Twenty years of infighting led to a new round of consolidation which has left only two major U.S. telecom giants still standing–AT&T and Verizon–along with Qwest and a wide array of seconday players. AT&T, Verizon and Qwest have succeeded in becoming important hosting companies, but they are by no means leading the market from a thought-leadership or innovation standpoint. Instead, they are delivering dependable ‘dialtone’ for companies seeking simple, straightforward hosting services.

While there is nothing wrong with delivering reliable services, in today’s rapidly evolving cloud computing environment reliability is quickly becoming table-stakes as businesses of all sizes seek cloud computing services which can give them greater agility, better economies and added functionality to reduce their operating costs and strengthen their competitive positions. These are not attributes which people associate with telcos.

In the past, we could attribute the failure of telcos to penetrate the data center as an outgrowth of the internal feuds between voice and data communications engineers within most mid- and large-scale organizations. Those internal battles have subsided as many organizations consolidated their inhouse staffs. But, the telcos continue to sell ‘dialtone’ and have been unable to demonstrate any real value-add in the data center.

In fact, even responding to new ideas and business models in their core communications business continues to be a struggle for the telcos. They watched landline revenues dry up as wireless services exploded. They watched traditional transport services give way to Internet services. Now, Skype is the largest international long-distance carrier.

Telcos are still struggling to figure out managed services, which have been around for over a decade, as a new wave of Software-as-a-Service (SaaS) and cloud computing services become mainstream.

I contributed a series of commentaries to the Web Hosting Industry Review (WHIR) from 2004-2007 that discussed the tremendous potential of the telcos in the hosting, SaaS and utility (now, ‘cloud’) computing arena which have yet to be fully realized.

Of course, telcos are not alone in their struggles with today’s disruptive technologies and rapidly changing customer preferences. Today’s issue of the Boston Globe includes a fascinating story about its own myopia which led to it missing a perfect opportunity over a decade ago to acquire a major share of Monster.com, which eventually became one of the major catalysts of the current decline of the newspaper industry.

As my friend Joe Weinman correctly states, the telcos are in a perfect position to dominate the enterprise cloud computing market. They have the technical resources, channels to market and brand equity. But, can they overcome their history, culture and other internal barriers to success?