The Next Multi-Billion Dollar Market For Service Providers

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Last month I attended HostingCon and got a chance to talk to a lot of Managed Services Providers (MSPs) and Cloud Services Providers (CSPs). One thing that struck me was that a lot of them were concerned about the growing popularity of public clouds and the shrinking footprint of standard enterprise applications.

Traditionally, MSPs have worked with a lot of standard business applications like IT helpdesk, managed storage, backup, disaster recovery, email service, managed VoIP, telco services, remote monitoring, patch management and even virtual CIO services. This is still a huge market and according to Everest Group, the MSP market globally is around $85-$90 Billion.

So why is there a concern around the long-term state of MSPs? Or Cloud providers?

Problems With The Existing MSP Market
There are two key reasons causing these concerns:

1) Standard Enterprise Applications Are Converting to SaaS
If you look at all the major SaaS vendors, they are offering one or more of these large enterprise applications as a service. Salesforce, Zoho, and SugarCRM offer CRM; Netsuite offers a financial application suite, Workday offers HR and employee management, and email service is moving to Office 365 and Gmail. So the footprint of these large, complex, expensive, mission-critical applications for enterprises is shrinking. Any modern day company will have six to eight SaaS contracts for all these business applications, and they don’t need anyone to help run these applications. This causes the existing market for these applications to shrink and most of the new companies now offer consulting for one or more of these applications. But fundamentally, there is no big value that MSPs can offer for such applications.

2) Workloads Moving to Pay-As-You-Go Consumption Model
As customers are looking for platforms to run workloads, they are moving to large public cloud vendors and looking to deploy workloads on that platform. The ease of use, transparent pricing, and quick pay-as-you-go consumption make it compelling to companies to try public clouds and often use them as a benchmark for their next-generation consumption model. Once a workload moves to public cloud, the associated backup, disaster recovery, performance monitoring and management are also moving to that new platform. So a lot of revenue is lost for MSPs due to this move.

The Next Big Market that MSPs and Cloud Providers Can Target

Let’s look at the existing IT and growth in workloads in last five years. Based on Mark Hurd’s Oracle Open World keynote this year, the GDP growth in various sectors and countries is around two Percent. This reflects that the overall IT budgets are not growing a lot over time, and the demand for standard enterprise applications is not growing quickly. However, the growth in revenue of cloud companies is almost 40 to 60 percent. Now, that is a market worth looking into and going after. So let’s look at the workloads that people are running on cloud. The best description of the workloads running in cloud is: “Custom Apps.

Now, these can fall into different categories like SaaS applications, web applications, mobile back-ends, big data analysis, business intelligence, security and machine learning. Basically, cloud has become the de-facto standard for building and deploying all kinds of new applications.

This is exactly the huge opportunity for service providers – they can now target the biggest segment in IT and the largest workload that exists out there. They can offer a platform to build, test and do production deployment of custom applications of all types.

In fact, public clouds have enabled the creation of cloud as a standard platform, validated a consumption model and also made it very popular for enterprises to outsource their infrastructure needs to someone else. Most enterprises don’t want to deal with infrastructure, compute, storage, etc., and they just want to consume these in a self-service manner.

Capturing this Multi-Billion Dollar Market

A cloud provider cannot win in this market using the standard ways of building infrastructure. The standard way of using servers, storage, networking, virtualization software stack, monitoring and operations software from different vendors and stitching it together with custom scripts is not going to scale. That will not be cost-competitive in this market. One needs to have two key ingredients in their hosting platform to win:

1)   Public cloud cost economics
2)   Integration with public clouds to offer choice and flexibility to customers

In a separate blog post, I will talk about how MSPs can get an infrastructure with similar economics as public clouds and how they can offer the choice and flexibility of both private and public cloud to customers.

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