Hyperscale cloud providers are continuing their rapid growth in almost every geography. The impact that this handful of companies is having on the tech industry as a whole has been remarkable and sometimes devastating. Ten years ago, no one could have predicted that an online retailer turned cloud provider was going to be almost solely responsible for turning upside down an entire retail shopping experience. With Amazon Prime, many people find it simply more convenient to shop from their mobile device than to go to the local mall.
The same disruption is taking place in the hosting services and value-added reseller industries. Everyone is scrambling not to be the next outdated product, industry, or avenue to market.
All Was Symbiotic in the Old World Order
The old-world order included a product manufacturer, an avenue to market (typically a value-added reseller [VAR] or distributor), and the hosting services provider working harmoniously together. The service provider took the manufacturer’s product, which was bought through a preferred reseller partner. The service provider productized it into an “as-a-service” model and packaged and marketed it to enterprise customers. Life was good.
Let the Hyperscale Disruption Begin
Then the hyperscale players showed up and began to disrupt both VARs and service providers. One of the most significant new challenges was that traditional resellers, who typically worked low overall margins, were suddenly further squeezed for sales and profits by the onslaught of the early enterprise migration to the cloud. The same resellers who were seeing declining sales numbers were also selling their wares at thin margins in competitive deals. Then, to add insult to injury, they saw their service provider customers reaping healthy 45% to 65% gross margins selling the same equipment to their often-shared enterprise customer lists. As the VARs struggled to compete and cloud models evolved, in contrast, the hosting services industry ended up being in the right place at the right time. Even as the global economy crashed in 2008, service providers often saw significant growth because cloud and hosting were less expensive to consume as a service than to build, manage, and support individually.
A Few Unwritten Tech Industry Rules
There were also some unwritten rules in the tech market to which both service providers and resellers generally adhered and became good at while building mutually successful business practices:
- Service providers did not operate like traditional VARs and stayed in the realm of their own data center environments and go-to-market activities.
- VARs didn’t operate like service providers and didn’t sell cloud and hosting services of any serious magnitude to service provider customers.
Their success was mutually assured.
This World Order Was Significantly Changed by the Hyperscale Cloud Providers
It didn’t take long for the channel to react to these downward market pressures and cloud transformation trends and attempt to build its own clouds and related services. Now virtually every technology reseller has some sort of “cloud” offering that in some way supports the reseller’s traditional go-to-market sales process. As the market shifts and flows, service providers are no longer waiting for enterprise customers to show up and ask for help with their journey to the cloud. In fact, the most recent trends that we see are that many service providers are adding new cloud and hosting services that are taking the cloud closer to the enterprise customer or closer to the “edge.” Service providers are moving into VAR and systems integrator (SI) territories by deploying edge clouds and managing them on enterprise customer premises for enterprise customers. Private clouds managed on the premises and managed hybrid clouds are some commonly used terms.
The Gloves Are Off: There Are No More Defined Go-to-Market Swim Lanes
It’s pretty clear that hyperscale cloud providers are changing how traditional service providers view their go-to-market strategies and their future direction. By moving more toward the middle or into the traditional VAR and SI swim lanes with on-premises managed private clouds and other managed cloud services, service providers see a land of greenfield opportunity that they hope will allow them to sustain their businesses into the future. They want to be the new storage, compute, and network resellers to help enterprises with their managed cloud transformation journey.
It’s no different in the reseller world, where VARs are shifting toward the cloud and hosting swim lanes by trying to sell similar private cloud platforms, cloud-enabled technologies, and many other managed services to the same enterprise customers.
All of these market dynamics and rapid strategy changes for service providers and resellers might be crowding the middle, but they still don’t alleviate the heavy hyperscale pressure being asserted from all angles.
We will have to wait and see who wins in the end and which swim lanes and routes to market for technology manufacturers prevail.
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