Wednesday, May 5, 2010

How to Make Money in Cloud Computing

It's been fairly quiet on the blog front lately mostly because of my ridiculous travel schedule as well as an endless series of meetings both with new customers & partners. A recurring question I've been asked lately has revolved around one of the more difficult questions to answer in cloud computing. The questions is how does one make money in cloud computing? A very good question, one that I've been asking myself for quite sometime. So let me begin by giving you a brief history of my company, Enomaly.

Over the last 6 1/2 years since we founded Enomaly Inc I've often considered myself a bootstrapper. The ability to build a self-sustaining business that succeeds without external financial support - built and supported by the money we make . In my case Enomaly was formed out of the previous consulting work I was doing in enterprise content management, back then (pre-2004) I focused on open source CMS's products. (I made money on others free software) Basically I built Enomaly by taking the money I made as an independent consultant / freelancer / contractor and brought together a founding team and created Enomaly. The original partners, George a financial whiz looked after the operations and Lars looked after both the product and project management, they both excelled in areas I found myself weak in. As time passed we used the revenue to hire more people and develop our products all the while gradually growing the business. This time gave us the ability to both grow and adapt to emerging market trends in what we called "elastic computing", now generally refereed to as "Infrastructure as a service" or Cloud Computing. One of biggest advantages was time.

This time gave us the ability of watching the industry evolve over the years and to see the concepts of cloud computing go from fringe concept to main stream phenomenon in what seems like overnight. Although I do admit, one of the biggest problems with bootstrapping your business is that of scale, it's hard to grow a business based purely on your own financial resources. On the positive side you remain in control of your destiny (mostly). Another issues we faced was timing (not to be confused with time), by creating the first version of Enomaly in 2005 meant we were probably 4 -5 years to early. So for the first 4 years we just gave away our software under an open source license in the hopes that it would act as an opportunity generator of sorts. Which it did, opening up opportunities at companies like NBC/Universal, France Telecom, Intel, Best Buy, John Hancock and even an early beta invite to a yet to be released project at Amazon called EC2 in 2006. So the original value of our product was that of being mostly a market reseach tool and lead generator, but not a direct revenue generator. Unfortunatly, we really never made any money from our software until we finally decided to offer a properiery edition focused on a sector who had the most to lose, the sevice providers and web hosts who began to see revenue being lost to a selection of newer cool, cloud service providers such as Amazon Web Services.

This brings me back to how do you make money in the cloud. First let's look at software. Let's be honest, for the most part providing traditional single tenant software is dead. Most broad customer software today is being provided as a service over the internet and in a browser. Companies like and Google represent the poster children for this approach with Salesforce now making more than 1 billion dollars a year. Other areas of software such as infrastructure are much more difficult. At the end of the day whether it's a PaaS or SaaS, you still need to power the underlying infrastructure and this means software sitting on a server somewhere.

The move toward free and open software models in this space means that revenue has become a secondary objective, second to that of ubiquity. It's no longer about who makes the most money but instead it seems to be about who can get the most market share and hopefully sell their business to some larger technology company making it "their problem". One of the main problems with the no revenue approach is that of sustainability. Another issue of the free model in an emerging market is that of disruption. In an established market such as Enterprise Databases, the market is there, money is being made so disrupting the incumbent makes sense, but when you attempt to disrupt an emerging market, the only one you're disrupting is yourself. Something that became painfully obvious after several years of asking why aren't we making any money from our free software to which someone said to me, have you tried charging for it? In which I responded. Well, no actually.

Good software takes a long time to build, it's not about throwing more people on it, or spending more money, it's about spending more time developing it. Software development is not linear. Sure those with deep pockets can attempt to drive the market value of software to zero in the hopes of owning the largest possible segment in shortest possible timeframe, but at what cost? I'd say quality. Another issue with this approach is it creates an environment that bases success not on the best most mature products but on the free-est. Today most free/open source commerical software tends to be an amalgamation of a variety of others free software held together by some glue. Of course there are exceptions, mostly in the more mature community driven open source projects such as Linux, Apache and others, but unfortunately for the most part this isn't the case in the for profit realm. Customers have come to expect everything and pay nothing for it and than ask why the software doesn't work they way they would expect. Then they're given the answer, we will sell you support to help you with our hard to install and buggy software. To which I say, why not create software that works so you don't need to offer professional services as a way to monitize.

So how do you make money in Cloud Computing? By making and more importantly "selling" products and service people want to buy.
Reblog this post [with Zemanta]

#DigitalNibbles Podcast Sponsored by Intel

If you would like to be a guest on the show, please get in touch.