Inevitable consolidation of cloud service providers rears its head

Posted by Mike Vizard on Sep 3, 2015 10:45:25 AM

Cloud ConsolidationA new report from Technology Business Research (TBR) says cloud service providers without the financial wherewithal to survive are starting to fall to earth as the rest of the cloud service provider market continues to segment.

For example, TBR analysts cite Bloomberg reports that Windstream, a telecommunications carrier, is looking to sell the cloud business it moved into via the acquisition of Hosted Solutions in 2010. In fact, Windstream has already announced that it is also reselling cloud services provided by Hewlett-Packard.

Cloud service providers adjusting their strategies

The TBR report goes on to note that carriers in general have not done as well in the cloud space as initially expected. Verizon, for example, acquired Terremark with the goal of becoming a top-tier cloud service provider. But at this juncture at least, it’s clear that Amazon Web Services, Microsoft Azure, Google Cloud Compute, and IBM SoftLayer are pulling away from the rest of the pack.

Below that tier remains a host of cloud service providers that have adjusted their strategies to focus on a narrower segments of the managed cloud market that put a high value on customer service. For example, HP has built a cloud business that for all intents and purposes is an extension of its consulting arm, and Rackspace continues to reinvent itself as a managed service provider.

Meanwhile, other vendors such as VMware are leveraging the capital investments made by one of the four major cloud service providers. Rather than build its own cloud storage service, VMware relies on Google Cloud Compute to provide tertiary storage for VMware vCloud Air customers. As time goes on, such hybrid cloud computing alliances are only expected to increase. Dell, of course, took that concept to its most logical conclusion by opting to simply resell a variety of cloud services provided by other cloud service providers.

Competition in the space 

Predictions concerning consolidation in the cloud service provider space have been made ever since it became apparent that migrations to the public cloud by enterprise IT organizations would be both slow and deliberate. While enterprise IT organizations can’t match the cost efficiencies of public cloud service providers, many of them have existing investments in data centers that they continue to justify in part because of security concerns and regulatory requirements. That means the number of customers looking for a “high touch” cloud service provider experience is not as broad and deep as it might have once been expected. At the same time, however, at least two of the big four providers are already competing aggressively for that managed cloud business as well.

In fact, from a pricing perspective, the larger those Big Four cloud service providers become, the more aggressive they get on pricing. Each new workload added to their platforms makes them more cost efficient, which is the primary reason that the major cloud service providers are able to engage in one round of price cuts after another. Add to that the capital expense associated with building and maintaining additional data center facilities, and it becomes difficult for smaller cloud service providers to compete. In fact, many of those providers are now looking toward hosting service providers that operate data centers at scale to host their services. With that approach, they can leverage the scale of those hosting service providers to remain price competitive.

Clearly, competition across the cloud service provider space is reaching new levels of ferocity. While it's not wholly unexpected, IT services firms would be well advised to consider who among their cloud service provider partners these days really has the financial muscle needed to compete in this space for the long haul.

Photo Credit: Pacheco on Flickr. Used under CC 2.0 license. 

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