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Cloud computing is poised to turn the data centre hosting industry on its head, providing opportunity and threat to the established players in equal measure

Not long ago, the data centre hosting market was a uniquely blessed segment of the IT industry. As the amount of data and the number of applications used by businesses flew beyond the capacity of their proprietary data centres, many were more than happy to either lessen their load by partially using hosting services, or to hand the whole headache over to someone else entirely.

Now, the picture is not quite so simple. There has certainly been no let-up in the so-called ‘information explosion’, but the advent of virtualisation has radically increased the number of ways in which businesses can address it.

Firstly, server virtualisation has allowed businesses to achieve far greater server utilisation rates, thereby putting off the need to either expand or outsource. That said, what damage it may have done to data centre hosting providers in terms of market opportunity, server virtualisation has more than made up for in improving their own operational costs. But virtualisation’s Internet-sired offspring, cloud computing, is rather more troubling.

Everything as a service

The decision by online bookseller Amazon to make the computing resources of its own (highly virtualised) data centres available over the web as pay-as-you-go services was a decision whose repercussions have reverberated, it can be said with no hyperbole, in every corner of the IT industry.

The uptake of Amazon Web Services (AWS), while growing at a rate that nobody – not even Amazon itself – could have predicted, has yet to disrupt a significant amount of business for mainstream IT suppliers. There has been some enterprise adoption, but like most emerging infrastructure technologies it has enjoyed most traction in testing and development operations, where it is likely to be replacing open source or virtual software environments.

But some indication of the impact those IT suppliers expect AWS to have – if left unchallenged, at least – can be inferred from their reactions to it.

Microsoft responded with the announcement of Azure, a cloud operating system that will allow developers to build applications on Microsoft’s own infrastructure, paid for on a pay-as-you-go basis. Hewlett-Packard, IBM, Cisco and almost every other global IT provider has some form of public cloud offering, although in some cases the private cloud strategy – whereby vendors sell corporations and government the kit required to build their own clouds – is beginning to take precedence (see From Blue Sky to Reality supplement with this issue for more detail).

Nevertheless, so appealing has the hosted IT market become that almost every infrastructure provider is moving in. But this is not all.

Even before Amazon Web Services, a similar challenge to the data centre hosting business was gathering speed in the form of hosted CRM provider Salesforce.com. By removing the need to own the infrastructure required to support an application, software-as-a-service, as pioneered by that company, also precludes any future requirement to outsource that infrastructure.

“When you buy from Salesforce.com you don’t just get the application, you also get the managed data centre hosting service,” explains Stefan Ried, a senior analyst with Forrester Research. As more software companies turn to the SaaS model, Ried says, “hosting providers are suddenly finding that they are in competition with software vendors.”

A cloud taxonomy

For end-users, the result of this wholesale move to the cloud is bemusement, says Ried. “It is causing a lot of confusion in the market. The people in charge of purchasing [IT] don’t know who they should be purchasing from because the suppliers no longer conform to the traditional categories.”

To address this confusion, Forrester Research has drawn up what it describes as a ‘cloud taxonomy’ (see image), which encompasses both public and private clouds. It is impossible to describe the ‘cloud computing’ industry, Ried says, because it overlaps with so many existing IT industries. Instead, the taxonomy defines both new and existing services as a function of two characteristics: the level of sharing and the business value.

At one end of the ‘level of sharing’ axis are single-user IT systems, such as enterprise applications or private clouds. At the other are shared systems such as Salesforce.com or Amazon Web Services – the data itself is not shared but the infrastructure beneath it is.

The ‘business value’ spectrum, meanwhile, ranges from systems with no in-built business logic, such as AWS’s CPU rental service, the Elastic Compute Cloud (EC2), through to business applications whose design reflects business concerns.

According to this construction of the IT industry, data centre hosting providers are fighting a war on all fronts. Generally speaking, their services are partially but not entirely shared. They have some business logic reflected in their design and they are not defined in purely technical terms, but they are still essentially a technical offering.

Of course, what this also means is that they are surrounded by space that, given the immature state of cloud computing, they could yet stake a claim to. And that is exactly what they are doing.

Opportunity knocks

In October 2009, managed hosting provider Rackspace – which counts many websites, SaaS providers and small to medium-sized businesses among its customers – launched a website by the name of NoMoreServers.com, on which it presents the case that businesses need no longer manage their own servers. (The name of the site and the marketing campaign behind it could be said to bear some resemblance to the ‘End of Software’ drive that helped Salesforce.com makes its name.)

Rackspace has executed a cloud strategy in the past year that has seen it acquire two cloud computing companies, JungleDisk and SliceHost, and offer AWS-style pay-as-you-go compute and web hosting services, called CloudFiles and CloudSites. But as is evident from NoMoreServers.com, the company has not abandoned its roots.

“This is not just about cloud computing,” the mission statement reads, “nor is it just about SaaS.” Traditional web hosting, Rackspace believes, will remain alongside SaaS and cloud as one of the three ways businesses procure computing resources from third parties. And it intends to capitalise on all three.

“Hosting plus cloud plus SaaS adds up to a pretty big opportunity,” says John Engates, Rackspace’s chief technology officer. In terms of Forrester’s cloud taxonomy, Rackspace intends to offer cloud-based services across the ‘business value’ spectrum.

Engates does not believe that cloud computing will eat significantly into its traditional hosting business because the use case for each is different. “The advantage of the cloud is that it is highly scalable,” he explains. “So if you are a website or a blog, and you get heavy spikes in traffic, it’s great because you only have to pay for what you use, but if you do get that spike you can handle it.” The same also applies to large organisations rolling out project-based systems or temporary micro-sites.

But when demand is predictable for long periods of time, traditional hosting trumps the cloud, says Engates, for reasons both economic and technical.

Predictable demand allows Rackspace to plan capacity, and to pass the savings on to the customer. Also, when there is no need to scale at lightning speeds, Rackspace can operate its systems without the virtualisation layer, and therefore more efficiently. While in most data centres virtualisation has done much to improve efficiency, global-scale data centre operators such as Rackspace and Google customise commodity hardware to operate their own home-grown systems at scale. This approach, Engates says, renders virtualisation unnecessary. He adds that it is an approach that he expects more enterprise IT shops to adopt in the future.

Another hosting company to have staked a claim in cloud computing is Savvis, which has traditionally focused on wholesale data centre outsourcing contracts with larger customers. In October 2009, Savvis unveiled its plans for Project Spirit, which it describes as a virtual private data centre offering for the enterprise.

What separates Project Spirit from existing cloud computing offerings is the ability to establish “multiple layers of quality assurance” – logical partitions within a single, virtual data centre that have different service level agreements and different pricing. Following its launch in 2010, customers will be able to create a hosted data centre that includes everything from testing and development environments through to mission-critical systems, says Savvis.

According to David Shacochis, vice president of research and development at Savvis, Project Spirit makes full use of VMware’s latest vSphere virtual data centre operating system to provide inter-cloud security controls that are unavailable elsewhere. Plus, Savvis owns and operates its own virtual private network, allowing for greater service assurance than the public Internet. “This is the next generation of cloud computing,” he says.

"We’ve been rolling with the different billing algorithms for years, and this is just another business model to adopt"

To refer again to Forrester’s cloud taxonomy, Savvis plans to make cloud computing more palatable to the enterprise customer by moving it further down the ‘level of sharing’ axis, while still operating an outsourced service.

Like Rackspace, while Savvis is investing in cloud computing, it certainly sees a future in traditional hosting. There are still plenty of enterprise systems that organisations may wish to hand to a third party, but are in no technological shape to be based on cloud environments, says Shacochis.

“The reality of most enterprise IT departments is that they are carrying applications from before ten years ago.” These will provide ample opportunity for Savvis-managed service business to grow in the future, he adds.

Indeed, Scachocis argues that cloud computing poses less of a threat to Savvis and its ilk than it does to other sections of the IT industry. “We’ve been rolling with the different billing algorithms for years, and this is just another business model to adopt,” he says. “It’s not as disruptive to us as it is for software companies who have been billing for licence fees upfront, now that customers are coming to them saying they want to pay for usage, or for hardware vendors whose shipments are shrinking.”

However, it could be argued that it is not the direct threat from cloud computing providers such as Amazon that endangers the hosting provider industry, but the reaction of said software and hardware vendors to that threat.

Change of pace

US hosting provider Terremark has been more closely associated with the advent of cloud than any other. Even before VMware acquired a $20 million stake in the company in May 2009, it was a case study client for the virtualisation lynchpin, and it is usually among the first to deploy its public cloud infrastructure offerings commercially. In September, for example, Terremark announced a service based on VMware’s vCloud Express software that allows enterprise organisations to integrate its virtual data centre offerings with their proprietary systems.

Not long ago, Terremark’s position as the cloudiest of the hosting providers was a lonely one. “Two years ago, we were a niche provider,” says Christopher Drumgoole, Terremark’s senior vice president of product development. “Now there are TV commercials for cloud computing. Our competitive landscape has significantly changed.”

“We think we have a first-mover advantage,” says Drumgoole. “We can say to enterprise customers that we’ve been running cloud for 16 months. But [the competition] will catch up quickly.”

In the face of escalating competition and the approaching commoditisation of cloud services, Terremark acknowledges that it must differentiate to survive. “Electricity is the same wherever you get it from,” says Drumgoole. “But if I am a corporation, I get a very different service offering from the utility companies than if I am a consumer.”

One point of differentiation is Terremark’s pricing, Drumgoole argues. “We offer our customers the opportunity to commit to resources in advance,” he explains. “That allows us to better predict our load.” Other ways to differentiate cloud services will revolve around security and continuity assurances, he explains.

The entrance of Microsoft into the market looms large. “We’ll never be able to compete with the one-click cloud deployment that Azure will allow for .NET applications,” Drumgoole says. Terremark is therefore hoping to carve out a new niche around hosting services for emerging development platforms such as Ruby on Rails. “We want to be the arms dealer to the platform guys.”

As Drumgoole’s comments demonstrate, cloud computing in all its permutations is rapidly reshaping the IT industry. If hosting providers are to survive, above all else they must demonstrate the ability to move quickly.