From The Expert Feature Article
November 06, 2014

The Rise of Wholesale Cloud Services

By TMCnet Special Guest
John Humphreys, VP Marketing, Egenera

As MSPs know, the growth of the Cloud has had a major impact on the IT service industry. It has caused many to re-evaluate the services they offer, and some to jump into the Cloud with both feet by adding cloud services to their portfolio.

Until recently, the two options available to MSPs who want to add cloud services have been to (1) build your own or (2) resell standard services from a large incumbent.  Both of these choices come with financial pitfalls.

Those who decided to build their own clouds believed they would be able to reap a greater profit margin by doing everything in-house instead of reselling infrastructure built by a third-party vendor. However, they are instead coming to the realization that the opposite is true:

  • Up-front cost required to build a cloud service in-house could be upwards of $1M.  
  • Many new providers start with Infrastructure as a Service (IaaS) in hopes of profiting from their own unused infrastructure, but the low, market-based pricing model established by cloud computing giant Amazon Web Services (News - Alert) (AWS) leaves providers with little room for margins.
  • Beyond capital costs, time and resources must be allocated towards training staff to build and manage the infrastructure. This is problematic because these are resources that MSPs could put towards providing the consulting and managed services their customers require.
  • New cloud providers also have to invest in sales and marketing to acquire new customers and hold onto them.
  • Pay-as-you-go cloud pricing models offer service providers limited security, making it difficult to predict revenue as well.

So, is reselling third party infrastructure from the large providers a more profitable option?  The short answer is no. Over the past few years Amazon has cut prices of their cloud instances about 25 times. With a direct to end user model, these prices are public information, and with no or minimal discounts available to resellers, there is little margin left for MSPs.

Margins from offering the same services as many other providers also does not provide a sustainable business model for MSPs, and the lack of differentiation makes it unattractive to businesses that can directly contract with larger providers.

It is not surprising, therefore, that in a TechTarget survey of nearly 300 cloud providers, 44.8 percent listed ‘profitability of cloud services’ as their main business challenge.

Today, however, a third option is coming into play – to resell wholesale cloud services MSPs can brand as their own. Unlike reselling clouds that come from the big name cloud providers, “white-label” clouds provide MSPs with better branding capabilities, more control and a higher level of customer service. Additionally, vendors focused on white-label offerings must ensure there are sufficient margins for resellers to sustain their business.

With more wholesale cloud service providers entering the market there are also an increasing number of cloud service options beyond the traditional Infrastructure as a Service. Recently we have seen the public cloud space moving from one of generalization to one of specialization as the competition heats up and new companies look for ways to add new higher value services and climb the value chain.

There are some really interesting companies building out recovery as a service, desktop as service, identity as a service, and database as a service offerings  - just to name a few. Another growing opportunity is to provide an environment better suited to the needs of the enterprise. Recent studies have shown the growing acceptance of the cloud to run mission critical applications. Many of these apps, like databases and performance-intensive applications, are not well suited to running in virtual machines. Most cloud services don’t offer full physical servers as an option, so an MSP who can support both virtual and physical servers and very high SLAs has an opportunity for a differentiated service.

For MSPs, another way to differentiate is with higher levels of support and professional services. Most MSPs already have relationships with their customers that aren’t like the arms length relationship a user has with Amazon for example. This provides the opportunity to offer these as value added services that customers can pick and choose from depending on the particular need or application.  It also means the end user has a cloud with a personal face on it.  They know the people supporting them, they know whom to call if there is a problem and most importantly – there is trust – which makes the transition to the cloud so much easier.

The wholesale model allows MSPs to quickly enter the cloud services market with no up-front or ongoing management costs and with the ability to add service offerings that complement their particular skills and added value. It is very important for MSPs to look for white-label offerings which give them the added ability to put their brand front and center, and partner with wholesalers whose management capabilities are required to provide strong levels of customer support. This is the best road to profitability and growth for MSPs in the coming years. 

Edited by Stefania Viscusi