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Turning the IT-Value Chain Upside Down

Cloud computing will turn the IT-value chain upside down. That will lead to dramatic changes in the way hardware and software is being marketed and managed. These changes will be most profound for IT departments and value added resellers (VARs), but computer manufacturers will feel the heat too.

To illustrate this point we can take a high level view of where servers are being deployed. In 2012 Intel reported that three big server manufacturers no longer account for 75% of their turnover in server processors (Intel confirms decline of server giants). The new kids on the block are the cloud providers. Google in itself is the 5th largest manufacturer of servers in the world, and they don’t sell them. They use them exclusively for their own cloud business. Similar activity is in the rest of the top ten.

This goes to show that IT spend is shifting from buying boxes to renting them. This will have a profound impact on the industry. Servers until recently were mostly deployed at client sites. They will largely move to cloud provider data centers. Cloud providers however are a diverse lot. Although Amazon, Google and Microsoft run millions of servers in their public clouds, there is a big market for midsize private cloud providers, running thousands of servers each. These latter will have to focus on addressing special needs, often in close proximity to their clients.

Next to that we see cloud resellers or cloud brokers appear who don’t necessarily own infrastructure, though they might own a lot of software assets. Included in that category are the incarnations of software publishers, who are shifting from selling software licenses to software services. Think Salesforce.com, but also Microsoft and a ton of smaller software providers. The smaller ones will find it more economical and reliable to run on infrastructure provided by specialist cloud providers.

On the far end of the value chain we find the IT departments. Some of these are smart and big enough to build and manage their own private clouds, but honestly I expect that a lot of them will be better off with cloud computing, be it a private cloud from a local supplier or a complete solution from a global player. The successful IT department will start to act as a cloud broker, integrating and managing services provisioned from multiple external cloud providers. In a sense they will act as an internal cloud provider to the company.

In the middle, this will squeeze out the box movers. They will find themselves stuck with those boxes if they cannot find an alternative business model. They will need to develop cloud services themselves, or at least figure out how to sell, deliver and support them.

That does not appear to be easy for most of them. An executive of a large distributor confided to me recently that he did not expect more than half of the value added resellers to survive the coming five years. So we can imagine that turning the chain upside down will lead to a shake-out.

By Peter HJ van Eijk, Cloud Computing Coach, Author and Speaker

Peter HJ van Eijk is one of the world’s most experienced independent cloud trainers. His website can be visited here.

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