Thinking Out Cloud

Podcast: Cloud Computing and Open Source

On Friday, James Urquhart and I recorded another episode of our podcast, Overcast, with Matt Asay on the topic of the relationship between cloud computing and open source. To me it was  fascinating topic to discuss.

Matt is VP Business Development at open source CMS company Alfresco and authors the blog The Open Road on CNET.

It was a fascinating conversation. As cloud computing emerges there are many lessons to be learned from the open source movement. I also completely agree with Matt that perhaps finally cloud computing offers a way for many open source companies to monetize their technology.

You can listen to it here.

Marketing Cloud Computing: Uncharted Territories

One of the aspects of cloud computing that receives too little attention is the massive change it brings to how software and IT infrastructure are marketed, sold, purchased and serviced. Through my work at GigaSpaces, and now advising start-ups and large companies with various cloud offerings, I have come to realize how much marketing cloud computing is still uncharted territory  -- and especially when it comes to the enterprise.

Many of the value propositions cloud brings to the table have been commonplace in the consumer Internet for more than a decade: self-service, ease-of-use, pay-by-the-drink pricing and so on. The same is true from the vendor's point-of-view: a low-touch, low-value, high-volume and short sales cycle. It's no surprise then that consumer-oriented companies, such as Amazon and Google, are the ones leading the charge in what is essentially a B2B market.

As I mention in a recent podcast with Matt Asay and James Urquhart, pioneers such as Amazon and Salesforce.com  -- and not to mention many of the cloud start-ups out there -- are learning what open source software companies have learned before them: software and IT infrastructure sales have changed forever. New products are adopted through daily decisions by the rank-and-file programmers, business users and system administrators; not through strategic decisions by the CIO or a central architecture committee. It also means that gone are the big upfront paydays, which placed the burden of the product actually delivering on its promise on the customer and not the vendor. In return, however, products that delight the customer will become fat cash cows.

I remember a few years ago reading about Salesforce.com's first enterprise sale: 500 seats to a small wealth management department in a large Wall Street bank. Yes, that same product of which the skeptics said enterprises would never trust to keep their sensitive sales information "on the Internet". I knew then that in the long run -- it's game over.

To be sure, there are many challenges to be overcome. What is the optimal pricing model and how to alleviate customer fears about how much they will end up paying? How to best utilize social media and automated marketing while addressing the processes and decision-making structures of larger companies? How to create an ecosystem of ancillary services and add-ons around the cloud product? How to provide cost-effective support without compromising quality? How to structure and compensate the sales and marketing organizations? These are all tricky questions, but some of us are working hard on figuring them out.

I hope to write some more posts on this topic because there are many lessons learned. Check out Hubs, Spokes and Islands in the Cloud for a start.

Hubs, Spokes and Islands in the Cloud

Many of the cloud start-ups I've been working and talking to during the past few months are facing some of the same go-to-market challenges. Larger companies are also facing these issues (see podcast with Intuit, for example). My intent is to write a series of posts discussing these issues and some of the considerations around them.

This first post in the series has to do with the cloud offering's role in its ecosystem. Before I jump into it, I acknowledge the fact that there is a very large body of work about this topic. Please see my footnote on this.

We can think about as the hub-spoke-island dilemma: cloud providers (IaaS, PaaS, SaaS) and cloud services need to make a strategic decision about their role within the ecosystem.

Some are the sun of their solar system (hub) and others play the role of the planets (spoke). But things can get a bit more complex than that and the decision on what role to play is not trivial.

The Hub

What characterizes a hub is that an entire ecosystem of products and services evolves around it. In addition, the hub typically "owns" the customer relationship. Some examples of cloud-related hubs are:

Amazon EC2 - A plethora of ancillary services and tools have been created to support Amazon's compute infrastructure-as-a-service. Examples of these satellite services include RightScale's EC2 management and deployment offerings and Hyperic's EC2 monitoring support. In addition, many vendors -- including IBM and Red Hat -- have made their software products available within the Amazon ecosystem, including pay-per-use hourly pricing (billed by Amazon) and packaged Amazon Machine Images (AMIs).

Another example is Salesforce.com/Force.com, with its AppExchange. AppExchange allows third-party providers to offer various applications that extend and enhance Salesforce.com's core CRM capabilities -- and many have.

Spokes

Spoke services are ones that complement and enhance a hub, but are not viewed as the central service in the eyes of the customer. In fact, spoke cloud services often have no value unless they are working in the context of a hub service.

There are many examples of spokes.The popular VerticalResponse email campaign service is a classic example. It has zero value without access to a customer database, and so it is most often used as an extension to a CRM application such as Salesforce.com. I have already mentioned RightScale and Hyperic, both of which make classic spokes. And there are many others, just check out Salesforce's AppExchange or Intuit's Marketplace.

Should Everyone Strive to be a Hub?

The answer is simply no. While the hub has the great advantage of owning the core relationship with the customer, one can only be a hub after having that customer base. And to attract many satellite services, it has to be large customer base, something that takes both time and money. Many spoke services don't have a large enough addressable market, or the wherewithal to make that investment worthwhile. Attaching yourself to an existing large customer base can be a very lucrative strategy.

Take for example TopTier, the company that made Shai Agassi rich and famous when it was acquired by SAP for $400 million in 2001. Agassi chose a "ride the elephant" strategy, developing a portal product for existing SAP application users. In a sense, become the spoke for a single large hub is a risky strategy. In fact, many companies have tried and failed in this strategy when they built apps for Microsoft Windows' hub or for other platforms. The risk is of course that the hub vendor itself will get into the business that the smaller company is in (instead of opting to acquire it as in the case of TopTier).

In the cloud, we saw this risk materialize for RightScale last year when Amazon announced it is releasing (or planning to release) several services that RightScale had provided as a value-add to Amazon, such as a web management console and auto-scaling.

Spoke to Many Hubs

Continuing with the RightScale story, the company realized they cannot be entirely dependent on Amazon as their sole hub, so they quickly introduced support for additional cloud providers, such as GoGrid and Flexiscale. In fact, many of the other spokes I have given here as an example, are in fact spokes to many hubs, like electrons shared by atoms in a covalent bond.

The "spoke to several hubs" approach has the advantage of both access to a much larger install base as well as significant reduction of the dependency on a single hub. It is almost an eventuality that any company with a spoke strategy will end up with.

Snowflake Patterns: Hub-Spoke-Hub-Spoke

Being a hub *and* a spoke is not mutually exclusive. CohesiveFT's Elastic Server is a good example for this. Elastic Server is a spoke to many cloud and virtualization platforms such as Amazon EC2, VMware and Parallels. But in turn it is also a hub for the many stack components that it supports - including many free open source and commercial software.

Don't Confuse Spokes with Customers

Not every service that is built on Amazon EC2, for example, is a spoke to it. Many services are simply customers of EC2 and so shouldn't be confused with being spokes, because as far as the customer is concerned it is not part of the hub's ecosystem.

A good example of this is Heroku, a Ruby platform-as-a-service. It is a cloud that allows Ruby developers to instantly deploy their applications. Users can easily fire up additional instances of the application to scale it. Heroku is built entirely on EC2 but that fact is transparent to the user. Heroku is taking advantage of the EC2 platform but does not play a role in its ecosystem. It does not benefit from EC2's install base, nor does it add value to direct EC2 users.

The Island of Doom

Perhaps the worse scenario is to be a completely independent island in the ecosystem. Neither a hub to many spokes, nor a spoke to one or many hubs. Very few companies other than Micorosoft, Google and a handful other mega-vendors can afford to quickly build both the product depth and breadth as well as the customer base to survive and thrive in this environment -- and even those large vendors are increasingly relying on the ecosystem.

The classic Silicon Valley island story is of course the early years of the Macintosh versus DOS/Windows. Apple famously insisted on tightly-coupling its hardware, OS and applications and all but shut out others from being able to develop to the platform. Microsoft, on the other hand (and this may sound strange to the younger folks reading this), took a more liberal approach and allowed others to develop apps to its DOS and later Windows operating systems. This allowed its operating system to have a much wider offering in terms of apps. Of course, eventually Microsoft crushed many of its own ecosystem partners by offering a competing application. Wordperfect anyone?

Building a Successful Hub

The key to becoming a successful hub -- besides having a great product/service and effective marketing -- is rapidly create an ecosystem around the service in question. This helps even small companies quickly offer a "whole product" because partners (spokes) develop complementary services the company cannot build itself fast enough.

Obviously, a hub with a large and growing customer base will attract many partners, but that's not enough. There are many ways to encourage additional spokes to support the hub, including:

• Open Platform/Open Source
• Open/Public APIs
• Offering a Software Development Kit (SDK) and other supporting tools that make developing for the platform easier
• Supporting standards which enable quickly integrating existing supporting products (such as Eucalyptus is doing with the Amazon API)
• Incentives and profit-sharing
• Helping partners monetize their solutions by providing marketing services and billing support
• Allowing easy self-service and support to partners

Note: as mentioned above, the topic discussed in this blog has been a core issue in the technology industry in general and specifically the software industry for decades. Much has been written and discussed about it, often with the terminology of platform versus application. Over the years experts have called it Value Networks (Clayton Christensen ), Value Constellation (Norman & Ramirez), Value Chain (Michael Porter">Michael Porter) and Whole Product (Geoffrey Moore ). This blog was a humble attempt to put this topic in the context of recent developments in cloud computing.

Enterprise Cloud Summit

I'll be speaking on a panel at the upcoming Enterprise Cloud Summit in Las Vegas (@Interop), May 18-19. The topic of the panel is "Where Can Things Go Wrong?" and should be anice conversation with the moderator Greg Ness and these panelists:

Peter Coffee, Director, Platform Research, salesforce.com
Randy Rowland, General Manager, Managed Hosting & Cloud Computing Services, Terremark Worldwide, Inc.
Geva Perry, Founder, Thinking Out Cloud
Bill McGee, Vice President, Products and Technology, Third Brigade

The rest of the agenda also looks very interesting. Check it out here. And there's also a CloudCamp event on Monday evening.

If you haven't signed up already, you can register here and get a 40% discount.

Hope to see you there.