Cash clouds: great if you're savvy, grim if you're not

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This article appeared in the August issue of CRN magazine.

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Cash clouds: great if you're savvy, grim if you're not
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The rise of cloud computing has seen Australian businesses outsource their hardware and software requirements to huge data centres.

This brave new world of infrastructure and software “as a service” grants businesses access to enterprise-grade resources while converting considerable upfront capital expenditure into an ongoing operational expense.

While it may be empowering business, this shift from capex spending on physical assets to opex spending in the cloud is a significant blow to some channel partners. Those reliant on shifting hardware and software, along with the professional services surrounding deployment, can struggle to make up lost revenues.

Building data centres is not for the faint-hearted, leaving many channel players at the mercy of giant cloud service providers. Such providers have channel partner programs designed to help cope with this shift, offering not only technical guidance but also support with the business transformation that a focus on cloud services can require.

Unfortunately the cloud is becoming commoditised and channel margins can be razor thin. It’s also easy for customers to bypass the channel completely. As such, channel players can struggle to make money from the cloud unless they’re prepared to transform themselves into solutions providers which integrate cloud services.

Server sales are likely to feel the brunt of the cloud shift, although Australian-owned hardware distributor Dicker Data has yet to feel the pinch.

“At the moment most of the cloud customers are enterprise customers which are so large they tend to have direct relationships with hardware vendors anyway,” says CEO David Dicker.

But further down the chain some channel players are doing it tough. Perth-based IT managed services provider Bounce Services is feeling the impact as cloud computing eats into server sales.

Margin fall

Small business customers are abandoning Microsoft’s Small Business Server in favour of the software giant’s Office 365 cloud service, says Bounce Services director Matthew Wood. Unfortunately Office 365 reseller margins fall far short of the margins lost on server sales.

“We were just poised and ready to suggest our customers with older servers move to Small Business Server 2011 or even 2012,” Wood says. “Then Microsoft really put the nail in the coffin by announcing that Small Business Server 2011 is the last version of SBS.

"Now Telstra reps are telling our small business customers to forget in-house servers and go with Office 365. We haven’t sold a server for three months now and that’s where a lot of our margin was.”

Telstra offers Office 365 as part of its T-Suite bundle of cloud services, with plans starting at $7.10 per user, per month. Office 365 incorporates hosted Exchange, SharePoint, Lync and Office Web Apps, while tightly integrating with the desktop Microsoft Office suite. Other T-Suite components include Microsoft Dynamics, Xero, Mozy, Symantec and McAfee.

Meanwhile Optus and AAPT offer rival services built on Google’s online office suite. Microsoft and Telstra recently dropped Office 365 pricing, with the software giant announcing that channel partners can now bill customers directly. Around 75 percent of Office 365 subscriptions have involved a channel partner, according to Microsoft.

Even with channel partner programs, these commoditised cloud services can leave the channel out in the cold, says Ken Lowe, managing director of Sydney-based national reseller ASI Solutions.

“It doesn’t make a lot of sense for some channel players to push these sorts of cloud solutions, because they’re really handing over the customer,” says Lowe.

“The margins that channel partners are making are minimal via the large players such as the Telstras and Microsofts. I don’t think there’s much of an opportunity in reselling cloud services, unless you’re something like an application developer.”

Big bang theory

As customers shift their capex spending to opex spending on cloud services, it offers channel players the chance to cultivate regular annuity revenue streams. Landing large deals has traditionally provided channel partners with a shot in the arm which then funds further growth.

Moving away from “big bang” deals can smooth out revenue peaks and troughs. This lets channel players target larger deals while reducing the risk of over-expansion which can leave the business exposed when times are lean.

One challenge in this shift can be a significant drop in upfront revenues. Small players such as Bounce Services are struggling to compensate for this by ekeing ongoing margins out of services such as Office 365.

“The commission rebates we’re getting for Office 365 are negligible,” says director Matthew Wood. “As far as services go, our customers are already paying us a monthly fee so they don’t see why they should pay more to move to the cloud. Of course there can be just as much work for us setting up a three-seat customer in the cloud as in setting up a 30-seat customer. But that work is not rewarded in the annuity revenue model.” 

Even channel players with their own cloud infrastructure can struggle in the face of competition from cloud giants such as Microsoft, Google, Amazon and Rackspace.

Rather than rely on a large-scale cloud player, Perth-based systems integrator Réseau Consulting built its own cloud platform 12 months ago. Managing director Alfa Aminudin was looking to reduce dependency on large infrastructure deals by generating a new revenue stream from cloud services.

Yet Aminudin found the take-up rate of virtual servers “wasn’t that fantastic”. The SMB-focused Réseau instead turned to hosted backup services to generate revenue from its cloud infrastructure, along with offering white-label cloud services to other channel players.

“We’ve always been very solutions-driven, I guess like most integrators, so we wanted to do it ourselves. But to be honest I think we built our cloud infrastructure a little bit prematurely, we made that decision based on a lot of hype,” Aminudin says.

For now Aminudin sees opportunities in the “hybrid” cloud model, which links in-house servers to cloud infrastructure; leveraging the scale of the cloud while addressing issues such as latency and data jurisdiction. Aminudin sees the mining industry’s reliance  on data-intensive applications, sometimes in bandwidth-restricted environments, as an opportunity for hybrid cloud solutions.

Whether they’ve embraced the cloud or had it forced upon them, many channel players are struggling with the transition. But the rise of the cloud has also spawned a new generation of cloud-focused channel players which aren’t forced to balance their cloud interests against legacy revenue streams.

Rather than compete against the cloud giants, this new breed of cloud integrators treats their services as building blocks for creating cloud solutions.

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