IT, telecommunications and hosting service providers have considered Infrastructure as a Service as the go-to method for breaking into the cloud. But as the cloud market has evolved, IaaS has become less profitable. Platform as a Service providers may have a better chance of differentiating themselves in an already crowded market.
Domain name hosting provider GoDaddy.com recently killed Cloud Servers -- its Infrastructure as a Service (IaaS) product -- after less than one year of service, and they aren't the only provider who has made the mistake of hastily entering the cloud with IaaS offerings, said Tom Nolle, president of CIMI Corp.
PaaS providers: Avoiding cloud failure by moving up the stack
To ensure success in the cloud, providers need to know their customers. Hosting providers are not seeing success with IaaS because their customers are typically smaller companies without in-house technical support, and not large enterprises with sophisticated IT needs, Nolle said.
"If providers want to avoid a failure, like GoDaddy's IaaS cloud business, they have to climb the stack and offer higher-level services," he said. Even cloud computing giants like Amazon and IBM view Platform as a Service (PaaS) as a long-term winner over IaaS, he said.
PaaS -- the next step up the stack from IaaS -- allows providers to offer differentiated services to their customers in the form of application programing interfaces (APIs) that can enable Software as a Service (SaaS) applications. A PaaS offering serves as a virtual operating system for customers, but not every customer will want to use the same platform or operating system, which means a narrower market opportunity than a standard IaaS offering.
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"Everyone selling IaaS is selling to the same buyer, but providers selling PaaS [are] selling to the buyer of their platform -- like Linux platforms," Nolle said.
Unlike with IaaS, however, the management burden for both PaaS providers and customers is lower since everyone is using the operating systems and middleware tools.
"PaaS providers can treat the users as though they are different applications in a multi-programing environment -- which can be a more efficient use of resources, and equal a greater return on investment for these providers," Nolle said.
While PaaS can help beginner cloud providers differentiate in the congested cloud market, it can still be intimidating for some service providers. Only 55% of service providers currently offer PaaS to their customers -- compared to 95% that offer IaaS, according to Sam Barnett, directing analyst for data center and cloud at Campbell, Calif.-based Infonetics Research Inc.
But hosting or service providers can easily become PaaS providers if they offer IaaS already -- as long as they are willing to invest more in their cloud business on the marketing side, and establish how the PaaS business can be structured so customers can access it easily.
"Many providers wanted to wash the word 'cloud' over their offerings -- but if they are willing to spend a little more, they can be successful in the cloud market with PaaS," Nolle said. "PaaS is higher on the value chain and displaces more buyer cost -- which can generate the potential for higher savings for customers and better profits for the providers."
Overcoming high competition, pricing obstacles
Even the larger cloud providers are struggling to keep their offerings cost-effective for their customers. Amazon has lowered the price of Amazon Elastic Cloud Compute (EC2) -- the provider's IaaS offering -- 19 times since its launch in 2006.
"Getting the pricing model right is very daunting," said Dave Bartoletti, senior analyst at Cambridge, Mass.-based Forrester Research Inc. "Sometimes it's not about the platform. It's about how [a service provider entering the cloud] can keep up with the larger players setting the price bar, and even [established cloud providers] struggle with pricing."
For a traditional hosting provider -- like GoDaddy -- pricing proved to be a race to the bottom, Bartoletti said.
"When you have established cloud providers continuously dropping pricing, providers are having a hard time keeping up and offering a profitable cloud service," he noted.
While competing with large, pure-play cloud providers is no easy task, service providers who stay ahead of the market by offering higher-level offerings -- like Amazon is doing with Amazon Web Services -- can still see success, CIMI's Nolle said.
"The beauty of going higher in the stack is [cloud providers] can start to differentiate with their own features, which makes the offering more competitive," Nolle said. "If [a provider] doesn't have a differentiated cloud at this point, it won't be a profitable cloud," he said.