Thinking Out Cloud

Yahoo-Xoopit Acquisition: A Missed Opportunity?

Earlier today I published a blog post on GigaOm about the Yahoo-Xoopit acquisition and what I think is an overlooked aspect of the deal, especially as it related to Xoopit's CloudQuery service. Check it out: Will Yahoo Use Xoopit's CloudQuery to Help Usher in the Real-Time Web?

Innovator's Dilemma and the Cloud

In his seminal book The Innovator's Dilemma Clayton Christensen lays out the dynamics that allow start-ups to succeed. In short (and without doing justice to the depth of Prof. Christensen's ideas), the idea is that technological innovations initially represent too small of a market for large, established companies, which need to continue demonstrating a significant growth in percentages relative to their current revenues.

This, of course, creates an opportunities for new entrants, who often start with zero or very little revenues and therefore the emerging market represents a significant opportunity to demonstrate growth. One of the interesting concepts in Christensen's book -- and his later works that further develop the concept: The Innovator's Solution and Seeing What's Next -- is that in many cases the large incumbent vendors are well aware of what the technological future holds, but are unable to act appropriately because the dynamics of the business.

Cloud computing is now in that classic stage -- and the symptoms are everywhere. There seems to be little doubt in most observers' minds that cloud computing is a revolution and represents the future of IT, but turning this realization into a profitable business -- for both start-ups and established vendors -- is a different proposition altogether.

Low Visibility

One of the problems is that there is so little visibility as to the actual rate of cloud adoption. The hype is undeniable, but how significant are the revenues, and more importantly, how fast are they growing? Amazon, whose cloud services are perhaps the most significant indicators of cloud adoption, is intentionally -- and quite effectively -- hiding the finances behind AWS. The same goes for Google App Engine, Microsoft Azure and other cloud operations within larger vendors. And there's little to be learned from leading start-ups such as RightScale, who are of course privately held and keep their cards close to the vest.

One interesting case is Rackspace, the only company in the space that I know of that actually discloses its revenues from cloud operations separately. For example, in its Q1 2009 financials, Rackspace reported revenues of $134 million from its traditional managed hosting business and about $11 million from its cloud business. This comes out to a 16.5% growth rate from Q1 2008 for the managed hosting business compared to 145% growth for the cloud business (and note that part of the cloud business growth was due to the acquisitions of Slicehost and JungleDisk).

We can see The Innovator's Dilemma in numbers. While cloud is clearly rapidly growing for Rackspace, the absolute numbers are still small, and the company faces a dilemma of what part of the business to invest in.

And we can see this dilemma with other large vendors. In a recent interview with TechTarget, Mike Repass, product manager for Google App Engine said:

...rather than one big enterprise poster child, we'd rather have a hundred small web poster children, the kid in Brazil or China that wants to build apps on the web. It's very hard to build the pipeline to extract money from the big guys.

And we all know that in the long run, the real money is the enterprise, not the hundred kids in Brazil and China, and even Santa Clara County.

But then again, the future of IT is in the cloud. So what's a company to do?

Different Perspectives

Depending on the size and business of the organization we can see different approaches to the dilemma.

Established Vendors

The largest of vendors, such as Amazon, Google and Microsoft, have sufficient resources to invest strongly in cloud computing without compromising in any way their existing high revenue and profitability businesses targeting consumers and enterprises. Oracle is a different animal because of Ellison's declared disdain for cloud computing. But now many believe that Oracle's play in the cloud will be mostly through its recent acquisition of Sun Microsystems, which has been investing heavily in the cloud.

IBM and HP also both seem to be making noises in the cloud, the former more significantly than the latter. But much of their marketing and investment seems to be in a way that somehow tries to mitigate the Innovator's Dilemma, also known as internal and hybrid clouds.

But as we go down the food chain, we see that different vendors are responding differently. Yahoo has been mostly silent about its cloud strategy, despite some rumors and public job postings, which indicate that they are seriously considering it.

Today, I'm speaking at an event by Tibco about their new cloud offering, Tibco Silver. Tibco is introducing many of its existing middleware products as a hosted cloud service (btw, you can follow the event in real time on Twitter with the hashtag #NOWCloud).

But for many of the mid- to small-sized vendors strategies are all over the map and mostly amount to marketing. At most, they may have created AMIs, and some even back that up with pay-per-use pricing (such as RedHat/JBoss). Others such as SpringSource have remained fairly silent about cloud (although I hear insider rumors that there is something in the works).

For many of these vendors the solution seems to amount to trying to take advantage of the cloud buzz through symbolic marketing-oriented efforts, without having to make significant investments in a true cloud offering, and without disrupting existing business models.

Start-Ups

Theoretically, start-ups shouldn't have a dilemma. They should be going all out for the cloud with the hopes of either unseating existing vendors, or gaining enough traction quickly enough so that the large vendors will acquire them down the road. But in practice, things aren't that simple.

Some start-ups are pure-play cloud companies. In other words, the whole point about them is that they provide cloud offerings. For them it's of course a no-brainer. Examples of such companies include Twilio, Heroku and Rightscale.

But I am also talking to software start-ups that are having serious dilemmas about the cloud. Think of an application management software start-up that is ready to realease a next-generation product in the space, or think of Reductive Labs and OpsCode, the commercial efforts behind Puppet and Chef respectively. Clearly most of the business today is in traditional data centers -- but the future is in the cloud.

Transitions Are Hard

Now some have suggested that these companies should start selling to the traditional enterprise with the classic approach, and gradually make the transition to the cloud when the market is bigger. The problem is that such an approach is easier said then done. Several factors make it extremely difficult to make such a successful transition. Even if in some of these cases the actual products would require little investment to transition to a cloud-centric approach, these companies will have to battle market perceptions, company culture, customer concerns and re-forming the company's ecosystem of partners and channels. I will post a more detailed blog on this topic soon.

Bottom Line

At the end of the day, both large and small companies will have to make a gut feeling call. The considerations include what they believe the adoption lifecycle timeline of cloud is for their particular business and how much they have to lose (some companies' existing business is failing, so there's little risk in making s strategic transition -- but that's a very hard psychological pill to swallow). They also include company culture and ecosystem, and of course the level of ivestment required in the product. In some cases, the solution may be aquiring, merging or being acquired.

I'll discuss some of the topics raised in this blog in more detail in future posts.

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.

The Legendary Enterprise Sale: Goodbye and Thanks for All the Bluebirds

Selling to the enterprise is a mythical goal in the software industry. The million dollar deal is the stuff of legends, and throughout the '90s and early 2000s, the dream of every sales person. With 4% to 8% commissions (depending on stage of company and sales person stature), who can blame them.

But those days are over. Even before the current recession, the tides were turning. Unless you are Oracle, IBM, HP or a handful of other mega-vendors, you're not going to see 7-figure deals, well, except for the occasional bluebird.

We're now witnessing an increasing trend of bottom-up sales. A casual decision made by developers on a day-to-day basis, not a grand strategy laid out by the CIO. Try-and-buy is the norm, and so are subscription payments and other models that take off the financial burden from the customer and places it on the vendor. Long gone are the days that a large vendor can offload $50 million of upfront software licenses on its customer, add another $150 million in  professional services for customization and integration, and 3 years later (with ongoing maintenance and support fees, mind you), leaving the customer with what is essentially shelfware (at which point, to avoid embarrasment, the customer declares victory on the project). 

Charlie Federman, a VC I deeply respect from the days he was on the board of directors of GigaSpaces wrote an interesting post, entitled Firing Prospects, with some anecdotal evidence on the phenomenon:

I met today separately with two successful CEO's who, unprompted told me they were deemphasizing their marketing/sales efforts to Enterprise accounts; one company is in the application arena, and the other is in the infrastructure space.

Each told a similar story:

They don't have the 'patience or resources to go through the hoops' required in committee sales. Translation, is that they don't want to fund the direct salesforce/field engineers for the traditional 6 month sales cycle, where they have to commit the equivalent of hundreds of thousands of dollars upfront before a decision is made. Moreover, if the decision is positive, it's normal to wait a few more quarters for implementation to move forward.

Each stressed the opportunity cost is simply too high when many alternative channels are present that are open to a 'fast test/fast purchase' decision cycle. Today, their biggest issue is prioritizing their time/resources in an environment where they receive near-instant market feedback from traffic, trial and conversion statistics. Direct Enterprise sales (as opposed to Business Development) is being extracted from their company DNA.

The history of the trend away from the enterprise sale is easily traceable. It starts with free-trial CDs; it really picks up steam with downloadable enterprise software (salute to the WebLogic folks). It becomes downright mainstream with open source: Linux/RedHat, Jboss, MySQL and the rest. And now, we come to cloud computing: the final nail in the enterprise sale coffin.

Cloud computing, whether infrastructure-as-a-service, platform-as-a-service or software-as-a-service empowers developers, system admins and others in the rank & file to move quickly with their projects, select the easiest tools, and pay very little for them as they progress through the application lifecycle of development, testing, QA, staging, production and post production (on going maintenance, upgrades and end-of-life). Because it does not involve large capital expenditures, and initially requires very little expenditure of any kind, budgetary approvals can usually be made at much lower levels.

It's an unstoppable trend and many of the software start-ups I am working with are realizing they have an urgent task to move to a SaaS model (if they're not already there).

Of course, the new model represents some new challenges for both the vendors and the customers, but the benefits are so compelling, it's inevitable.

Call for Companies: Under the Radar, Cloud Computing

I spoke to the folks organizing the Under the Radar event (April 24, Mountain View, CA), which is focused on cloud computing. They already have a very impressive line-up of companies presenting, but they are looking for more.

Here's the info the organizers sent me:

we’re looking for startups who are still “under the radar” and looking to get in front of CIOs, CTOs, VPs Technology at companies like AT&T, Getty Images, Google, Microsoft, Cisco, etc, as well as VCs, industry press etc.
 
This is the link to apply: http://www.undertheradarblog.com/nominate-to-present/
We’re looking for startups in: Platforms | Virtualization | Saas | Collaboration | Business Apps | and more... Deadline is March 20.

About the event:  http://undertheradarblog.com

For anyone looking to understand the cloud space and see who’s innovating AND who’s buying -  this is a one-day deep dive into what’s happening.

The current line-up of companies is quite impressive with some of the hot up & comers out there, including Heroku, New Relic, Twilio, Sauce Labs, cTera, Zuora and others. The judges also like an impressive bunch with folks from big companies such as my buddy James Urquhart from Cisco, Joe Weinman from AT&T and Matthew Glotzbach from Google, as well as prominent journalists and venture capitalists.

For those who just want to attend, I understand they are still selling tickets at the early bird price. You can find them here: http://www.acteva.com/booking.cfm?bevaid=165707

Looking forward to the event and seeing you all there.