Betting on Legacy Distribtuion Strategy for Cloud Future

Throughout the 1990’s Michael Dell was the poster child for IT Channel disintermediation.  His ‘direct’ sales model took the industry by storm.  Leveraging logistical efficiency and a ‘no middle man’ mantra were hallmarks of Dell’s strategy.  Interestingly though, Dell has in recent years given the entire model a rethink.  Nowadays, Dell sells heavily through the channel.

Pioneering giants of cloud computing looked very much like 1990’s Dell in the early days.  And, just like Dell, companies like Rackspace and Google are starting to realize that the Channel plays an important role in the IT service supply chain and broader ecosystem – a horn I have been blowing for years.

The realization of the Channel’s importance to sustained market success creates a rather interesting opportunity for IT channel distribution.  Distribution represents large-scale buying power and market coverage to aggregate the MSP and VAR communities on behalf of vendors.  Leveraging scale efficiency to sell large volumes on thin margins and a better logistical framework than any of the manufacturers allowed distribution to create an important niche for itself during the client/server era of computing.

The emergence of the cloud era represents a fascinating paradox for distribution.  It is not a business delivered through supply chain EDI, warehouses and net 30-day terms.  The cloud is a virtual technology product of sorts.

Companies like Ingram Micro have been very vocal about the channel and the cloud revolution.  But to date I would consider the effort, shall we say, lacking inspiration.

Why?

Because like most big companies in our market that can sense the disruption and fear obsolescence, they revert to what they know.  In the case of IT distribution, what they know is Product Line Cards.  PLC’s basically amount to glossy placards that list the names, descriptions and manufacturers of products they sell.

In essence, early adopters in distribution, like Ingram, have lined up some heavy hitters and they are trying to promote those brands the way they would promote printers, computers and peripherals.    Sure, they put it all under a new division and they wrap some captive managed services in there.  But isn’t that really just a pretty dress on the bearded lady (no offence to ladies with beards intended)?

The line card strategy is fatally flawed because it misfires on what is a volume business model (cloud) with what is needed to exact a volume play (access to markets).

So if the handy line card plays won’t cut it, what exactly is needed to realize the riches for Distribution?   That is a complex question that won’t get answered here.  But I can share some thoughts based on what I know about cloud and the IT service market:

1)   Standardized Skills

The cloud is a nascent and immature world where skillful market execution is extremely hard to produce and the skills to do it are even harder to find. Cloud is missing the underlying foundation of training and certification (think A+, CCNA, MCSE type programs), which buttress efforts to make meaningful market penetration in the IT service business.   Until that happens distribution needs to KISS (Keep It Simple Stupid).   Distribution needs to cast as wide a net as possible without overwhelming the VAR community with scores of technologies for which training is embryonic at best.

2)   Technological Abstraction

Winning at the distribution layer in the supply chain means recognizing what you truly need in order to capture the foundation of a nascent market.   I’ve blogged about this subject before, but what it comes down to is making complex technology simpler to consume.  Giving me brochures for a bunch of cloud vendors is a useful visual, but that’s about it.  Show me how I can reduce vendor sprawl, universalize my customer SLA, and expand markets with as little capital and effort as possible.  That would really raise some eyebrows.

3)   Integration & Interoperability

The cloud is not about selling product silos to your customer base.  That is so 1995.  The cloud is about selling the bridge between legacy IT and the future of IT delivery.  In order to do that you must have tangible and meaningfully integrated solutions that solve real problems for the partners who sell them and the customers that buy them.  I liken the cloud today to what the Remote Monitoring and Management software vendors went through during the early MSP days.  Selling RM&M product is nowhere near as powerful for the VAR partner and meaningful to the customer as selling an IT management solution in an MSP fashion.

All of this makes the early adopters in distribution at risk of either being too early (the market may be ready for line card distribution five years from now) or too late (they are now pot committed just like in a good game of poker and can’t turn back).

Either way, the field of opportunity for distribution is still anyone’s game at this point.  There is a lot of market to be had for the company that steps up with the right model to truly leverage the power of the IT service channel.

6 Things I Think I Think for IaaS in 2011

I love this time of year because it is one of those rare occasions during the corporate and product development process where creative ideas and concepts designed to stimulate future success enter the entrepreneurial blood stream.  It is that rare moment where you have the benefit of an entire year of business fresh in your mind to build upon and an entire new year ahead of you to set new standards and push the envelope of success. 

For our company and for the industry, 2010 was a huge year.   We completed our Series A round of venture financing, relocated the company to the coveted North Carolina State University’s Centennial Campus and tripled the size of our team.  Meanwhile, the industry took meaningful steps toward maturity as mainstream private sector businesses and governments of all shapes and sizes began giving IaaS a very serious look.   If 2010 was the year of formal organization, 2011 will be the year of some serious and meaningful growth.  Not just for our company and our technology, but for the IaaS market as a whole.

In a post I wrote recently I did my best to explain some of the core characteristics that would be central to IaaS achieving mass adoption as the technology revolution marches forward.  While I think it’s very difficult for anyone to offer up accurate predictions for the year ahead of any fledgling market, there are some specific ‘themes’ that I think, as we look back a year from now, will have clearly emerged as bell weather trends in the industry.

To borrow a format from Peter King, one of my favorite sports writers, here are the six things (6 things, 6fusion, get it?) I think I think (for the cloud biz in 2011):

1. Hybridization Will Prove Critical to Enterprise Adoption.  I’ve been to the edge and back and I have a few words of wisdom to share with my peers about the Enterprise cloud.  Unless what you are doing bridges a gap between what exists inside the four walls of the enterprise data center and what might safely and securely exist outside of those four walls you are just another GUI in the Red Ocean peddling the same wares we’ve seen for years.  Hybridization is something enterprise buyers will use to separate the crème from the crop in 2011.
2. Regional Clouds Unite.  The arms race among regional managed hosting providers to beef up for cloud services was evident in 2010.  But the silo approach to building up IaaS on a regional basis will prove difficult if not impossible to compete on scale – and it won’t take long to figure this out.  In 2011 expect to see the concept of broad-based IaaS federation become a much more prominent theme as owners of regional facilities and compute partner to create scale and increase market size in the quest to truly monetize their resources and compete with the national players.
3. The Ecosystem is Bigger Than the Organism.  The IaaS industry is beginning to realize that the creation and quantification of IaaS demand is much more important than the creation of supply.  Its one thing to have the capability to power or enable the creation of IaaS resources, but it is entirely another to drive revenue and margin to the cloud.   The emergence of business ecosystems will be a consistent theme for the coming year because partnering is the key to success in a nascent market.  In 2011 you will see more and more eyebrow-raising deals announced based on ‘synergistic’ partnerships – partnerships that drive mutual revenue and margin between companies that are bound by the common interest of leveraging, distributing and powering IaaS.
4. It’s All About the Channel.  Building a global business tackling one end-user customer at a time doesn’t scale if your business is supposed to compete with the market pioneers.  In order to generate a serious outbound push to globalize IaaS the cost of business acquisition will be too high for almost every player.  In 2011 IaaS vendors will wake up to the fact that they need help in order to scale revenues and ultimately generate the ROI they are promising shareholders.  Queue the channel gold rush.
5. Communities Will Emerge.  I subscribe to the notion that one day every business in every vertical will consume a form of public cloud – but we are not anywhere close to this reality.  Large scale IaaS operated by a trusted third party and made available to a select group of common-interested stakeholders is a concept that has legs.  Trust me on this one.  Building out community clouds will emerge in 2011 as one of, if not the most important, concepts to help accelerate IaaS adoption. 
6. A Course Will Be Charted for an IaaS Futures Market.  If you don’t subscribe to the notion that the final destination for this ride is a commodity exchange for compute, stop and take a look around.  Spot markets emerged in 2010, much to the surprise of many industry pundits.  But spot markets, as novel as they are, do not a true market make.  The real money and the real opportunity are in futures trading.  There are forces at work on this as I type away, and although you won’t actually see compute on a major exchange in 2011, do expect to see this theme to creep it’s way into mainstream IaaS thinking.

Ok, so with the predictions for themes and threads out of the way, I’ll conclude this post with the 6 things I’ll be watching closer than my wallet at a pick-pocket’s convention as 2011 progresses:

1. Shifting Big Iron:  Companies like HP and IBM have yet to emerge with serious IaaS plays and if you read the tea leaves they won’t any time soon.  I’ll be watching to see if any of the whales in the pool make a splash in the IaaS business.
2. Processor Plays:  Intel made huge moves in the cloud in 2011 and you don’t need your tarot cards out to see where they are going.  Anyone know what AMD is thinking these days?  I’ll be watching to see if this gentle giant makes any moves that can rival thier kool-aid-drinking-all-in-pot-committed competitor.
3. Government Clouds:  The GSA announced a major IaaS initiative announcing a schedule of vendors that could be purchased from their schedule.  But will these IaaS vendors truly make any money this way?  I’m not so sure.  My personal opinion is that the money is at a different level of the Public Sector.  Can’t wait to see!
4. Hypervisor Competition:  KVM is rocketing up the relevance chart.  No doubt.  I’ll be watching to see how VMware plans to keep it’s toe-hold on the hypervisor market as IaaS enablement begins to drive more and more purchasing decisions.
5. Network Providers:  The accelerated adoption of cloud services will put a big piece of the pie squarely in the hands of the network operators.  I will be watching to see how Network operators jockey to position themselves.  I don’t think it is a foregone conclusion that operators will follow the lead of companies like BT and DT.
6. Disclosure Watch:  As more and more private sector orgs make the move to the cloud, the greater the potential that something somewhere is going to go wrong.  I will be keeping a watchful eye on key disclosures and cloud failures which could dramatically stunt the industry’s pace of growth.

6fusion’s first webinar of our 2011 series called: “Make your 2011 New Year’s cloud Resolution Now”. I’ll be elaborating on some of these points and drilling down into how service providers can drive new business to kick the session off. Come join the discussion!

Understanding the Role of the Channel in Cloud Computing

Larry Walsh, of Channel Insider, recently tackled the sensitive subject of the role of the IT service Channel in the burgeoning market for cloud computing services and then subsequently posted a follow up. Since 6fusion is the only 100% Channel focused cloud computing provider in the market that I know of, I naturally read Larry’s piece with an extra amount of attention.

Walsh makes a couple of very poignant observations about what is happening in the market regarding Cloud computing and the impact it has on the thousands of IT intermediaries we often call Resellers or Managed Service Providers (MSPs) but I think Walsh’s perspective on the role of the Channel is somewhat uninviting.

The first point he makes is that the majority of Cloud service offerings are aimed at cutting out the Channel from the business equation. He couldn’t be more right about this. Maybe I’ve been in this business for too long, but everything you hear and read about regarding the Channel and Cloud computing stinks like some Michael Dell ‘how to’ screw the Channel guide from the 1990s. Make no mistake. There is no room for the Channel in the cloud business plans of Microsoft, Salesfore.com, Google Apps (as I recently wrote about) or any of the other hosting providers that have jumped into Cloud computing.

What I would add to Larry’s analysis is that the threat of disintermediation is like none other we’ve seen in the industry. I know we’ve all heard the displacement theory before, but it’s not like the old days. Cloud computing is very much a paradigm shift. It is not about a more efficient way to package, sell and ship the same commodity hardware and software. Cloud computing is a business model rooted in the fundamentals of how we consume technology. It’s much bigger than most IT service providers can imagine and it’s about control over the very elements that keep IT service providers in business.

The second point that Larry makes is that the Channel would be ill-advised to build a mini-cloud and hope for a measure of insulation from the threat. He points to tough slogging MSPs had when they built out big NOCs for the rising tide of support subscriptions, but here is the true reality: Cloud economics is about sheer volume. This is why Google, Microsoft, Hosting shops, big telcos and the hardware vendors are leading the charge. An IT Service Provider thinking about dropping a couple hundred grand on some kit and virtualization software to ‘take on the Man’ better think again. This is a mistake of epic proportions. It would be like bringing a hundred dollar bill to a high-stakes poker room.

So what is a Channel company to do in this situation? Walsh says MSPs and VARs should adopt an ‘agency’ approach acting as an advisor to customers trying to sort out the malaise of application integration, SLAs and contract matters.

6fusion is taking a much different approach with the Channel.

When we started our company a few years ago and told our peers, investors and others that 6fusion’s technology was going to be 100% Channel focused we got a lot of quizzical looks. Channel focused? Huh? Isn’t the middle man dead? I don’t know. Why don’t you go ask Michael Dell. Dell isn’t so brave these days and contrary to the pundits predictions 15 years ago the Channel is alive and kicking. But seriously, here is why 6fusion is the only Channel focused company in the Cloud Service business today: Because Cloud Computing is about business processes, operational improvement and cost containment as much as it is about purely innovative technology or cool apps. And we understand that. Period. We resisted the temptation to become an apps vendor because we are not the ones that should be deciding what apps to run and where to run them. We simply provide the cloud infrastructure and tools to help you build what YOUR customers want and need to integrate with how they run their businesses today. And most importantly, we can do this with zero capital investment from the Partner. We operate 6fusion the same way an Electric Light Co. would. Pure consumption.

So my experience makes me disagree with Walsh in that I believe whole-heartedly that VARs and MSPs can and should build Cloud services into their portfolio without compromising their client base to the likes of Google and Microsoft or picking up the tab to launch a rack full of servers to get into the game. We are helping the Channel go to market faster and with fewer financial resources every day. And if you speak with our growing number of Channel customers about it, they will tell you they are beginning to make more money than they could ever make peddling someone else’s SaaS or yielding the infrastructure market to others. This in spite of the fact that the world is telling them they no longer matter. Again.