Friday, May 14, 2010

Exploring Differentiation Among Cloud Service Providers

I just got off our weekly Enomaly Webex in which I filled in as the host in place our product manager Pat Wendorf. I've become notorious for getting off topic when I do our Webex presentations and this week was no different. Actually doing these presentations really does help me think through some of my ideas as well as helping me get the temperature of the IaaS / hosting market of potential customers. Lately it seems that the questions have shifted from does your product have ABC or XYZ feature to how do we build a differentiated cloud service. These are the kind questions that I enjoy the most. So I'm going to explore this a bit today.

One of the biggest transitions in the hosting space over the last decade has been that of Virtual Private Servers (VPS)-- a market controlled effectively by one company, Parallels. A critical problem with the Virtuozzo Containers product line and approach has been that there is effectively no difference between any VPS hosting company. The lack of differentiation among the various VPS hosting firms has meant that the only real way to set your service apart from that of the other guys is based purely on price. This price centric approach to product/service differentiation creates a commodity market for all the providers. Basically they're sales pitch is "We're cheaper". This means you're now competing based on a low margin, high volume business, not on any real value proposition. Effectively the VPS space has become a race to zero. So in this market you'll find that most VPS hosting companies are now charging roughly the same low price, a few dollars a month, with the same low margins for same basic service. The only one making any real margin is Parallels at the expensive of their customers.

What's interesting about the emerging cloud service provider segment is the opportunity to differentiate based on the value you provide to your customers. It's not that you're cheaper than the other guy, but instead that you have an actual solution to a problem they have -- today. Maybe your platform can scale more easiliy, or you're in a specific region or city, you possibly you have a particular application deployment focus. In the case of Enomaly ECP when we developed our platform we focused on developing a cloud infrastructure with the capability to define various economic models that run the gamut from pure utility offering to quota or even tiered quality of service centric approaches. By doing so, we understand that there may still be multiple ECP deployments in a particular region, but from an end customer point of view (The customer of our customers) they can be significantly different from one another. This allows for competition based on business value not purely on price. I'll choose ECP cloud provider A because they solve my particular pain point, even though they may be more expensive than cloud B who doesn't.

My position has always been to create a shared success model, one that is mutually beneficial. The better our customers do, the better we do. A model that doesn't cannibalize our service provider customers margin in return for higher margins for us. A shared success value also provides an incentive to buy more licenses based on our customers growth. At the end of the day those 500 customers City Cloud in Sweden have now effectively become my responsibly too. (The customer of my customer is my customer) I win because my customers wins and they win because they're different, they're compelling and they have a service people need and more importantly want to buy.

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