Structure Research

*This post is is provided to us by Antonio Piraino, CTO of ScienceLogic. Antonio Piraino was previously vice president and research director at Tier1 Research. He has previously held a number of senior level product management and development positions at Teleglobe, Akamai, China Telecom and Telecom Italia. Mr. Piraino is a regular speaker at hosting and cloud computing industry events.You can follow him @antoniopiraino or visit his site at www.sciencelogic.com.

Background: The largest theme impacting the hosting world is the rapid move to cloud computing. What’s changed is that the paradigm shift influencing the way in which IT is consumed is no longer being driven by SMB’s and rogue IT department developers, but mainstream mid-market and large enterprise organizations are now getting in on the act. That factor, in turn, is driving all the major technology vendors in the enterprise space to hedge their bets in terms of the partners they choose, and how to present their technologies as “cloud-ready”, i.e., simpler and more utility-like in their consumption. With that in mind, we queried a good cross-section of hosting providers participating in the show on:

• their use of integrated reference architectures and cloud technology stacks as a replacement for traditional IT stacks
• and how cloud computing was going to change the way they compete and differentiate in the hosting industry.

Question 1 – Do you currently use or are you planning to use integrated stacks like UCS, VCE, OpenStack, etc?

• The respondents split almost down the middle on this question with 46% indicating no plans to use any integrated stack and slightly more than 50% using integrated stacks or planning to do so.
• 27% of respondents do intend to use an integrated stack from one of the major vendors.
• Another 27% are already using an integrated stack for their IT offerings.

So what does this mean?

On the one hand, this kind of response is indicative of the need for hosting providers to keep costs as low as possible, and retain simplicity in their infrastructure offerings, often extending a series of custom-developed provisioning and other capabilities they have built in-house over the past few years.

On the other hand, it also implies a culture of “wait and see”, an unwillingness to rapidly make changes to their systems at an infrastructure layer, and perhaps a lack of confidence in the ability of integrated stacks to offer much more in terms of simplicity, throughput, or “bang for the buck”. For the most part, it’s usually the larger providers moving towards these integrated stacks because it mirrors what the largest enterprise customers are selecting, thus making it an easier transition for enterprises from in-house to outsourced cloud offerings.

Most likely however, it may be that only half the market believes in the business value of these stacks, considering the generally higher cost of hardware and lack of choice of components in the stack (e.g., at an application layer). For cost-sensitive hosting providers with price-sensitive SMB customers, integrated stacks may be too hard a sell; these providers don’t believe there are substantive operational efficiencies, and stacks don’t help them offer new services. SMB customers don’t spend time thinking about what technologies comprise the cloud offerings they consume –  they just want compute, application, and customer support resources at the lowest possible cost.

Question 2 – Which IT/Cloud integrated stacks are you using or do you plan to use?

• As expected, Microsoft-based stacks and LAMP stacks dominated the findings at 49% and 41% respectively.
• Xen/Citrix and its closely related sibling within the Citrix family, Cloudstack, received 15% and 17% of respondents respectively.
• Cloudstack competitor, Openstack, was seeing 15% deployment amongst respondents.
• 46% of respondents were using VMware-based cloud stacks as part of their offerings.
• Cisco’s UCS offering was in use, or being planned for use by just 12% of respondents.
• Interestingly Vblock had only a single user, as did CA’s Applogic product.

So what does this mean?

Seeing LAMP stacks as a significant answer to this question would not come as a surprise to anyone working in the hosting space over the past decade.  And there is often a clear division where Microsoft has managed to enter the realm of hosters equally well, since so many small business applications require the use of MS SQL on the back end, and with a number of .Net developers in the industry.  Admittedly the question is a broad one, with technology stacks such as Windows server AppFabric and the Windows Azure Service Bus presumably not in the overwhelming mainstream deployments amongst hosters.

However, in the era of cloud computing, it is most interesting to see that 2 years on, Openstack is still lacking significant buy-in from the hosting sector – perhaps having something to do with its main promoter, Rackspace.  Despite the IaaS nature of the open source release, we have anecdotally seen more interest from our customers at ScienceLogic in the Swift component of the offering (related to object storage) than in the compute (Nova) or Image Services (Glance).

Cloudstack (who incidentally support Swift) have also seen low-end traction amongst hosters, despite the fact that the company has seen some very large deployments, including GoDaddy. Curiously, despite the general impression that hosters love open source technology, it was VMware that grabbed our attention.  Normally it would not be a surprise to see them with high response rates at the enterprise end of the market, but it is clear that the combination of VMware’s strategic move downstream, some new flexibility on pricing, and the growth nature of the clientele hosters are serving are all contributing to VMware’s deeper penetration in the hosting space. To corroborate, we have also seen increasing VMware utilization among our ScienceLogic managed hosting provider customers. In addition to the reasons listed above, perhaps the acquisition of Zimbra with its email/collaboration suite, or the growing interest in desktop virtualization that has helped promote VMware among hosters, although we suspect that it continues to be the value of the ESXi hypervisor more than anything else.

Perhaps that explains why the integration of Vblock has lagged behind in this sector. At ScienceLogic, we have seen more UCS deployments where our customers  rely on us to provide the control plane between the various technology vendors rather than relying on proprietary solutions from the stack vendors themselves. Vblock has to work to consistently simplify the deployment and ongoing costs of storage before it will see an increase in its market share within the mid-market web-hosting industry.

Question 3 – Who do you see as your biggest competitor in the market?

• As one might expect, Rackspace is the biggest competition in the hosting market with 32% of respondents acknowledging the industry heavyweight.
• Another 20% saw Softlayer as their biggest competitor.
• Amazon with its AWS suite, took bronze at 17%.
• Although some service providers have become Google resellers, 7% of respondents saw the Everything-as-a-Service company as their biggest foe.
• The remainder of respondents were a mixed bag of competitors ranging from GoDaddy and Hostgator, to Microsoft.
• An interesting 22% of respondents said they didn’t have a biggest competitor or would not acknowledge anyone – not even internal IT, a perennial favorite.

So what does this mean?

It’s no secret that Rackspace is the 800 pound Gorilla in the hosting space, given the fact that the Texas-based company virtually created the notion of selling support over servers.  And being first to market has given the company the advantage of crossing the billion dollar marker, with momentum in the form of 32% growth on year over year quarterly earnings with over 80,000 servers and 172,000 customers under management.

Up and coming hosting provider SoftLayer was once relegated to being just a dedicated hosting provider, without the level of human intervention (and differentiation) offered by support specialist Rackspace. SoftLayer comes in at an unsurprising second in mindshare amongst hosters. In fact, it would come as no surprise to see the lean hosting provider lead the competition in future years, given the fact that cloud computing generally requires less physical support, particularly amongst developers, who enjoy utilizing a rich set of online tools to “do it themselves”. We see this as an increasing trend that our hosting provider customers are taking advantage of and using the ScienceLogic management platform to provide greater visibility and control of hosted IT assets to developers and enterprises.

Given the amount of attention generated by AWS, and the direct correlation between the decline in shared and dedicated hosting and the growth in AWS traffic, it is surprising to us that AWS was not top of the list. AWS, often viewed as the hosting industry’s favorite punching bag, has now taken to courting hosting providers, much like Google has done in Asia, and Microsoft has been orchestrating for years as they build their channels. This is especially attractive for hosters willing to forgo the Capex dollars and control of their own servers. We will have to wait and see if AWS can really gain hosters’ trust and provide enough margin for the web-hosting ecosystem to have a shot at building a viable channel of their own.

When it comes to AWS, our ScienceLogic customers tend to fall in two buckets – hosters looking to utilize ScienceLogic as a mechanism for combating the performance and costing issues often associated with AWS versus those using our tool for monitoring and managing their customers’ AWS assets and locally hosted Microsoft apps (e.g., MS Exchange) in a hybrid cloud model.

Question 4 – Who/What do you see as the biggest threat to the hosting industry?

• Price Wars rang in as the largest recognized threat to hosters, according to 43% of respondents.
• Closely on the heels of price wars, perhaps not coincidentally, were the behemoths of the cloud space: AWS/Facebook/Google with 39% of respondents.
• New Market entrants (5%), and Internal IT (2%) were a far cry away from being recognized threats to hosters.
• Other more nuanced responses from the hosting field included speed to market, DDOS, cost confusion, and customer acquisition costs.

What does this mean?

Many analyst surveys show security, trust, and performance as some of the largest obstacles to enterprise adoption of the cloud. It’s interesting then that hosters view their biggest threat as a financial one rather than as an external security or regulatory hazard; a response that perhaps points to the inadequate differentiators amongst the majority of hosting providers. It also speaks to the cost sensitivity that vendors need to be aware of, especially those offering cloud stacks and complex tools.

Knowing that the massive server deployments within the likes of AWS can be subsidized over the long term via the ability to generate additional revenue from overlay SaaS offerings, the ecosystem, and even book sales or advertising, hosting providers should be looking way beyond just a good discount from the vendors in order to survive. They will have to understand precisely how these technologies will allow them to deliver profitable new service offerings to new market segments that plan to outsource, but require specialized functionality.

Question 5 – How do you differentiate yourself from your competitors?

• As one would expect, Management and Support dominated this category, at 59% of respondents.
• Price was seen as a differentiator by 34% of hosters.
• 32% of respondents recognized “Customer control and tools” as an equally important source of differentiation.
• Interestingly, only 22% of respondents believed that Applications were a significant differentiator for them in the hosting space.
• To an immaterial degree, other hosters recounted their network connectivity and datacenter, customized offerings, combined colocation offerings, security services, and, (the best response we saw) “bad-ass servers” as differentiators in the market.

So what does this mean?

At ScienceLogic, we obviously completely agree with the notion that management and support of both customers and their IT infrastructure is critical.  The corollary to that axiom is presented in the 32% of respondents recognizing the need for tools as their differentiators. Over the last year in particular, we have seen an increasing trend among our hosting customers to rely on us as a technology partner, providing truly multitenant solutions that give differentiated and contextual visibility and control to distinctive constituents. Availability and performance statistics are important, but our customers look for more via analytics, for example, that show the health and risk factors of infrastructure and services alike.

As mentioned above, price as a differentiator is a slippery slope that only a very few can win using. Cost and operational efficiency are increasing differentiators in a commoditized business arena, and the ability to parlay those efficiencies into prices, and juggle the different balls of retaining margins, meeting SLA agreements, and still remaining proactive in the management of increasingly complex, virtual environments will separate the winners and losers in this space.

Similarly, having a robust management system is also critical for introducing and effectively managing the true growth opportunities in the hosting space. From the results, we see that 1 out of 5 respondents are taking advantage of the opportunity at the applications level – an area that not many hosters are comfortable with since it’s a step beyond their current infrastructure expertise, and requires an unknown amount of work to get right and be able to sell. At ScienceLogic, we are focused on helping our hosters rapidly and confidently introduce new high margin IaaS and SaaS services. We free up valuable engineering time for our hosters, who rely on us to provide the control and multitenant management required for engineers and enterprise customers to ensure the availability and performance of their cloud applications.