THOUGHT LEADERSHIP The Rise of the Cloud Channel Ecosystem JULY 2016 Carl Brooks, Analyst A maturing channel market for cloud infrastructure has lowered the barriers to access, not just for consumers, but also for third-party players that broker technology goods and services instead of create and sell them directly. End users want to buy what s nearest, easiest and most accommodating, so middlemen come in when there s an opportunity to facilitate consumption. Vendors that ignore this ignore both a competitive threat and an opportunity to mutually benefit. 2016 451 Research, LLC WWW.451RESEARCH.COM
ABOUT 451 RESEARCH 451 Research is a preeminent information technology research and advisory company. With a core focus on technology innovation and market disruption, we provide essential insight for leaders of the digital economy. More than 100 analysts and consultants deliver that insight via syndicated research, advisory services and live events to more than 1,000 client organizations in North America, Europe and around the world. Founded in 2000 and headquartered in New York, 451 Research is a division of The 451 Group. 2016 451 Research, LLC and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication, in whole or in part, in any form without prior written permission is forbidden. The terms of use regarding distribution, both internally and externally, shall be governed by the terms laid out in your Service Agreement with 451 Research and/or its Affiliates. The information contained herein has been obtained from sources believed to be reliable. 451 Research disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although 451 Research may discuss legal issues related to the information technology business, 451 Research does not provide legal advice or services and their research should not be construed or used as such. 451 Research shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. NEW YORK SAN FRANCISCO LONDON BOSTON 20 West 37th Street 3rdFloor New York, NY 10018 P 212-505-3030 F 212-505-2630 140 Geary Street 9th Floor San Francisco, CA 94108 P 415-989-1555 F 415-989-1558 37-41 Gower Street London, UK WC1E 6HH P +44 (0)20 7299 7765 F +44 (0)20 7299 7799 1 Liberty Square, 5th Floor Boston, MA 02109 P 617-261-0699 F 617-261-0688 ABOUT THE AUTHOR CARL BROOKS ANALYST Carl Brooks covers cloud computing and the next generation of IT infrastructure for 451 Research. Previously, he spent several years researching and reporting on the emerging cloud market for TechTarget. Carl has also spent more than 10 years supporting small and medium-sized businesses as an IT consultant, network and systems integrator, and IT outsourcer. II
Key Findings The traditional channel market is reasserting itself and finding its feet in the cloud market very quickly; there is significant disruption. The hyperscale cloud services vendors have established new ways to interact with users based on channel activity that are predicated on automation and interconnection. The major shift in business and sales strategy revolves around on-demand consumption and subscription sales for most VARs and resellers. There are newly established avenues for channeling cloud services downstream, but more are coming. Examining the cloud channel partners 451 Research is tracking via our Market Monitor service, we believe the aggregate contribution of these channel partners to the IaaS and PaaS markets to be in the $1bn range with growth that is outpacing the market totals. Existing channel and partner programs for hosting providers generally are not impacted but may become marginalized fairly swiftly. III
Executive Summary INTRODUCTION In the IT world, as with most developed industries, hardware (servers, storage, networking appliances, components, datacenter equipment) and software (on-premises licenses and physical copies) have long had a vigorous army of partners, middlemen, systems integrators, value-added resellers and bulk resellers to facilitate consumption, and that same army is an increasingly critical part of how the market for cloud infrastructure and services will function. That means there is another seismic shift underway in the IT market; the flow of money from cloud infrastructure consumers to cloud providers is changing radically, and swiftly, to include this army of ecosystem players. This report focuses on the most significant new channels that have developed, namely IaaS and cloud services resales. For customers, this is mostly an upside: They simply get more choice and more competition for their attention. For providers and technology vendors, however, it will be absolutely vital to have a firm grasp on what the cloud channel will mean to their business and how best to navigate the strategic choices therein. White-label IaaS is a distinct subsegment now that allows for quick cash and quick growth, but comes at the expense of brand differentiation and the specter of price wars and falling net value. High-end, expensive human touch and professional services allow providers to stay above the crowd but risk isolation into niche or regional markets as well as constant risk from innovation. For the technology majors such as Microsoft, IBM, VMware and Cisco (to name only a few), their partner ecosystems have historically been critical to their success, but many of their traditional partners were not at all geared up to sell services and subscriptions (and support) instead of slinging shrink-wrap and boxes. That is changing rapidly after years of scattered and slow responses to cloud computing by resellers. Many providers and technology vendors have already made strategic bets on how to incentivize their resellers and partners, but that can mean picking winners and losers and losing a firm grip on good relations. That said, few observers can doubt that just as it does in hardware and software, the vast majority of the money spent on cloud services will not flow direct in the future. It will pass through various channels and routes to get there, and this report is a high-level examination of what that looks like today, and what it s going to inevitably look like it in the near future. METHODOLOGY This report is based on information gathered from a variety of sources, both public and private, regarding channel activities and partner programs from vendors, partners and end users. Reports such as this one represent a holistic perspective on key emerging markets in the enterprise IT space. These markets evolve quickly, though, so 451 Research offers additional services that provide critical marketplace updates. These updated reports and perspectives are presented on a daily basis via the company s core intelligence service, 451 Research Market Insight. Forward-looking M&A analysis and perspectives on strategic acquisitions and the liquidity environment for technology companies are also updated regularly via Market Insight, which is backed by the industry-leading 451 Research M&A KnowledgeBase. Emerging technologies and markets are also covered in additional 451 Research channels, including Business Applications; Cloud Transformation; Data Platforms and Analytics; Datacenter Technologies; Development, DevOps and IT Ops; Enterprise Mobility; European Services; Information Security; Internet of Things; Mobile Telecom; Multi-Tenant Datacenters; Networking; Service Providers; Storage; and Systems and Software Infrastructure. Beyond that, 451 Research has a robust set of quantitative insights covered in products such as Voice of the Connected User Landscape, Voice of the Enterprise, Market Monitor, the M&A KnowledgeBase and the Datacenter KnowledgeBase. All of these 451 Research services, which are accessible via the web, provide critical and timely analysis specifically focused on the business of enterprise IT innovation. For more information about 451 Research, please go to: www.451research.com. IV
Table of Contents 1. WHAT S CHANGED AND HOW RESELLERS HAVE RESPONDED 1 Figure 1: Channel Players Are Heavily Overlapped at the Top................................... 1 Figure 2: Cloud Service Usage Will See an Upsurge During the Next Six Months....................... 2 Figure 3: Future Revenues Are Tied to Partner Success........................................ 4 2. A NATURAL ORDER RETURNS TO CLOUD 5 NEW VALUE PROPOSITIONS FOR CHANNEL PLAYERS..................................... 5 Figure 4: Preferred Methods of Purchase for Cloud Services..................................... 5 3. TWO SIDES TO THE CLOUD CHANNEL: NETWORKING AND SALES 6 SHI...................................................................... 7 INGRAM MICRO............................................................. 8 GREEN CLOUD TECHNOLOGIES................................................... 8 4. NEW CLOUD PROVIDER PARTNER PROGRAMS 9 Figure 5: Reseller Discounts for Major IaaS Companies....................................... 9 MICROSOFT.............................................................. 10 AWS.................................................................... 10 VMWARE................................................................. 11 5. CONCLUSIONS AND RECOMMENDATIONS 12 Figure 6: The Response Varies but All Can Share........................................... 13 6. FURTHER READING 14 7. INDEX OF COMPANIES 15 V