Category Archives: Industry

Contracting in the cloud

There are plenty of cloud (or cloud-ish) companies that will sell you services on a credit card and a click-through agreement. But even when you can buy that way, it is unlikely to be maximally to your advantage to do so, if you have any volume to speak of. And if you do decide to take a contract (which might sometimes be for a zero-dollar-commit), it’s rarely to your advantage to simply agree to the vendor’s standard terms and conditions. This is just as true with the cloud as it is with any other procurement. Vendor T&Cs, whether click-through or contractual, are generally not optimal for the customer; they protect the vendor’s interests, not yours.

Do I believe that deviations from the norm hamper a cloud provider’s profitability, ability to scale, ability to innovate, and so forth? It’s potentially possible, if whatever contractual changes you’re asking for require custom engineering. But many contractual changes are simply things that protect a customer’s rights and shift risk back towards the vendor and away from the customer. And even in cases where custom engineering is necessary, there will be cloud providers who thrive on it, i.e., who find a way to allow customers to get what they need without destroying their own efficiencies. (Arguably, for instance, has managed to do this with

But the brutal truth is also that as a customer, you don’t care about the vendor’s ability to squeeze out a bit more profit. You don’t want to negotiate a contract that’s so predatory that your success seriously hurts your vendor financially (as I’ve sometimes seen people do when negotiating with startups that badly need revenue or a big brand name to serve as a reference). But you’re not carrying out your fiduciary responsibilities unless you do try to ensure that you get the best deal that you can — which often means negotiating, and negotiating a lot.

Typical issues that customers negotiate include term of delivery of service (i.e., can this provide give you 30 days notice they’ve decided to stop offering the service and poof you’re done?), what happens in a change of control, what happens at the end of the contract (data retrieval and so on), data integrity and confidentiality, data retention, SLAs, pricing, and the conditions under which the T&Cs can change. This is by no means a comprehensive list — that’s just a start.

Yes, you can negotiate with Amazon, Google, Microsoft, etc. And even when vendors publish public pricing with specific volume discounts, customers can negotiate steeper discounts when they sign contracts.

My colleagues Alexa Bona and Frank Ridder, who are Gartner analysts who cover sourcing, have recently written a series of notes on contracting for cloud services, that I’d encourage you to check out:

(Sorry, above notes are clients only.)

Open invite for public cloud IaaS Magic Quadrant

As I alluded to in some earlier posts, we are doing a mid-year Magic Quadrant for public cloud IaaS. Specifically, this is for multi-tenant, on-demand, self-provisioned, compute services (with associated storage, networking, etc.). That would be services like Amazon EC2 and Terremark Enterprise Cloud. The intended context is virtual data center services — i.e., environments in which a business can run multiple applications of their choice — as they would be bought by Gartner’s typical IT buyer clients (mid-market, enterprise, and technology companies of all sizes).

Vendors invited to participate will see a formal research-initiation email sometime in the next week or two (or so I hope). This is just an early heads-up.

If you are a public cloud compute IaaS provider and you didn’t participate in the last Magic Quadrant (i.e., you did not do a survey for qualification last year), and you are interested in trying to qualify this year, please feel free to get in touch with me, and I’ll discuss including you in the qualification survey round. (Anyone who got a survey last time will get one this time.) You do not need to be a Gartner client.

Of late, I’ve seen some enthusiastic PR folks sign up executives at totally inappropriate companies to talk to me about qualifying for MQ inclusion. Please note that the MQ is for service providers, not enablers (i.e., not software or hardware companies who make stuff to build clouds with). Moreover, it is for public cloud (i.e., multi-tenant elastic services), not custom private clouds or utility hosting and certainly not colocation or data center outsourcing. And it is for the virtual data center services, the “computing” part of “cloud computing” — not cloud storage, PaaS, SaaS, or anything else.

Gartner’s cloud computing surveys

My colleague Jim Browning, who is focused on SMB research, has just published a survey of mid-sized businesses in North America. If you’re a vendor client, I encourage you to check out his Survey Analysis: North American Midsize Businesses Cite Cloud Intentions.

Also, I want to draw your attention to some research that you might not have noticed before.

Back in 2010, Gartner fielded a huge global survey — 7,300 respondents in the United States, Western Europe, and China — with the goal of looking at cloud adoption trends. Out of them, 650 correctly answered a bunch of screening questions about what constitutes cloud computing, and got to answer the rest of the survey.

The results show:

  • Why people called something cloud
  • Adoption patterns by type of service
  • Key drivers of adoption
  • Key stakeholders in driving adoption
  • Whose budget is it?
  • Key concerns
  • Influential factors when selecting a provider
  • Project IT budget allocated to cloud
  • Impact on the IT organization

If you haven’t looked at this data, I’d highly encourage you to.

Gartner clients only, sorry. (US data has not been consolidated into a publishable form, i.e., turned from big tables of raw numbers into pretty graphs.)

Is early consolidation bad for cloud innovation?

So, we’ve just seen Verizon buy Terremark and Time Warner Cable buy NaviSite. All contemplation of the deals themselves aside, is consolidation at this stage of the market good for the progress of the cloud IaaS market?

I’m inclined to think not.

We are still pretty early in the cloud IaaS market. While most service providers in the space — especially those betting on an enterprise-oriented, VMware-based strategy — have visions and product roadmaps that converge a few years out, there is still an aggressive race to introduce new features and capabilities into cloud IaaS platforms. In other words, everybody needs engineering time, and lots of it. But they also need the fire in the belly that makes people not just do their jobs, but really push themselves — to feel a genuine sense of inexorable pressure to get things out ahead of the competition, a sense of passion for what they’re doing, and the knowledge of the freedom to go do the right thing with a minimum of encumbrance.

Acquisitions, especially ones that require significant integration work, can really extinguish fire in the belly. Verizon and Terremark, for instance, need to consolidate their systems, platforms, and roadmaps. That’s engineering energy that’s not being devoted to building awesome new stuff. (Yeah, if you have enough money, you can try to do that in parallel with your integration, but you lose precious time and willpower and creative efforts on the part of your best people, who only have so many things they can do with their day.) NaviSite is getting wedged into a cable company, which is a massive culture shock that creates a distraction, potentially sends their best people job-hunting, and requires rethinking their strategy and the engineering that should support it.

VMware really needs their service providers to be awesome, because that’s key to their hybrid vCloud strategy. These acquisitions take out two of the most innovative VMware-based providers. I suspect the market’s not really aware of this, especially in the case of NaviSite. NaviSite has never really publicized some of the things that differentiate their cloud IaaS platform and make it pretty cool — for instance, NaviSite allows VM oversubscription and prioritization coupled with auto-scaling, which is great for enterprise applications (which generally require low resourcing, as opposed to, say, consumer-facing Web properties that fully consume scale-out resources).

Just one service provider being really aggressive about adding new features to its platform spurs the others to follow suit — the slower companies may need the idea (or want to wait until someone else has done it to see how it goes), and then respond competitively. The more service providers are innovative, the more the others have an invisible flogger spurring them on. So if the pacers slow down, so to speak, the entire market potentially does.

While Amazon is innovative, and its pace of feature introductions is extremely rapid, those features are also split out between Amazon’s multiple constituent customer types. And many of the VMware-based providers habitually dismiss Amazon as a competitor and thus do not feel as internally pressured to competitively match their feature set. (This is arguably a potentially fatal mistake, especially as Citrix gets serious about its ecosystem.) Consequently, though, Amazon’s not a substitute pacer for innovation amongst the VMware-based providers.

You can argue that acquisitions potentially give innovative companies a lot more money to work with, which can significantly accelerate their roadmap and business plan. This might even be the case for Verizon/Terremark in the long term. But it still comes with a near-term cost, in almost all cases.

Cloud companies, whether service providers or software, have gotten snatched up rapidly over the last two years. How many of those companies have turned out to have accelerated, not diminished, innovation under new ownership?

Time Warner Cable acquires NaviSite

The dominos continue to fall: Time Warner Cable is acquiring NaviSite, for a total equity value of around $230 million. By contrast, Verizon bought Terremark at a valuation of $1.4 billion. Terremark had about $325m in 2010 revenues; NaviSite had about $120m. So given that the two companies do substantially similar things — NaviSite has largely shed its colocation business, but does managed hosting and cloud IaaS, as well as application hosting (which Terremark doesn’t do) — the deal values NaviSite much less richly, although it still represents a handsome premium to the price NaviSite was trading at.

The really fascinating aspect of this is that it’s not Time Warner Telecom that’s doing this. It’s Time Warner Cable. TWT would have made instant and obvious sense — TWT doesn’t have a significant hosting or cloud portfolio and it arguably needs one, as it competes directly with folks like AT&T and Verizon; most carriers of any scale and ambition are eventually going to be in this business. But TWC is, well, an MSO (multiple system operator, i.e., cable company). They do sell non-consumer network services, but mostly to the true SMB (and their press release says they’ll be targeting SMBs with NaviSite’s services). But NaviSite is more of a true mid-market play; they’ve shed more and more of their small business-oriented services over time, to the betterment of their product portfolio. NaviSite has services that best fit the mid-market and the enterprise, at this point.

NaviSite has been on a real upswing over the past year — Gartner Invest clients who have talked to me about investment opportunities in the space over the last year, know that I’ve pointed them out as a company worth taking a look at, thanks to the growing coherence of their strategy, and the quality of their cloud IaaS platform. This is a nice exit for shareholders, and I wish them well, but boy… bought by a cable company. That’s a fate much worse than being bought by a carrier. I can’t remember another major MSO having bought an enterprise-class hoster in the past, and that’s going to put TWC in interesting virgin territory. And there’s no mercy for NaviSite here — TWC has announced they’re getting folded in, not being run as a standalone subsidiary.

Lest it be said that I am negative on network service providers, I will point out that I have seen plenty of these acquisitions over the years. All too often, network service providers acquire hosters and then destroy them; the only one that I’ve seen that worked out really well was AT&T and USi, and that was largely because AT&T had the intelligence to place USi’s CEO in charge of their whole hosting business and let him reform it. Broadly, the NSPs usually do benefit from these acquisitions, but value is often destroyed in the process, primarily due to the cultural clashes and failure to really understand the business they’ve acquired and what made it successful.

I wonder why TWC didn’t buy someone like GoDaddy instead — rumor has long had it that GoDaddy’s been looking for a buyer. Their portfolio much more naturally suits the small business, and they’ve got a cloud IaaS offering about to launch publicly. It would seem like a much more natural match for the rest of TWC’s business. I suppose we’ll see how this plays out.

(I expect that we’ll be issuing a formal First Take with advice for clients once we have a chance to talk to NaviSite and TWC about the acquisition.)

Verizon buys Terremark

A couple of days ago, Verizon bid to acquire Terremark, for a total equity value of $1.4 billion. My colleague Ted Chamberlin and I are issuing a First Take on the event to Gartner clients; if you’re looking for advice and the official Gartner position, you’ll want to read that. This blog post is just some personal musings on the reasons for the acquisition.

Terremark has three significant businesses — carrier-neutral colocation (with the most notably carrier-dense facility being the NAP of the Americas in Miami, which is a major interexchange point), managed hosting, and VMware-based cloud IaaS (principally The Enterprise Cloud). As such, it overlaps entirely with Verizon’s own product lines, which are (non-carrier-neutral) colocation, managed hosting, and VMware-based cloud IaaS (Verizon CaaS). Both companies are vCloud Data Center partners of VMware, and both have vCloud Director-based offerings about to launch.

Verizon’s plan is to continue to run Terremark standalone, as a wholly-owned subsidiary, with the existing management team in place. Verizon might push its own related assets into the subsidiary, as well. Verizon will be keeping the carrier-dense facilities carrier-neutral.

The key question about this acquisition is probably, “Why?”

  • While Terremark’s cloud platforms are arguably better than Verizon’s, there’s not such a huge difference that this necessarily makes sense as a technology play.
  • In managed hosting, Terremark (or rather, Data Return, its managed hosting acquisition from a few years back) was the beneficiary of customers fleeing Verizon’s decline in Web hosting quality mid-decade, and it has certain cultural similarities to Digex (the Web hoster that Verizon bought to get into the business). It has superior automation but again, not so vastly better that you can point to the technology acquired as significant. It has better service and support, but not at the differentiating level of, say, Rackspace.
  • Terremark does have a bunch of data centers in places that Verizon does not, but Verizon hasn’t previously prioritized widespread international expansion. The two big flagship US data centers are nice facilities, but Verizon was already a tenant in the NAP of the Capital Region (reselling to federal customers), and thus able to derive value there without having to buy Terremark.

For Terremark, of course, the reasons are clearer. Mired in debt from data center construction, it has under-invested in the rest of its business of late (I believe VMware invested in Terremark because they needed money to accelerate their cloud plans). As a modest-sized company, it has also had limited sales reach. This represents a nice exit. Having a deep-pocketed sugar daddy of a carrier parent ought to be useful for it — provided that the carrier doesn’t wreck its business doing the things that carriers are wont to do.

Verizon’s sales force is probably the best thing that Terremark will get out of this. No carrier is as aggressive as Verizon at trying to sell cloud IaaS to its customers. It’s a way of changing the conversation — of getting a carrier sales rep in to see the CIO, rather than getting into the argument with the network guy (or worse still, the procurement guy) over penny-a-minute voice services. And while this is resulting in a lot of conversations with customers who aren’t ready to move their entire data centers into the cloud just yet, it’s planting the buzz in the ear — when these customers (particularly in the mid-market) get around to being ready to adopt seriously, Verizon will be on their mind as a potential vendor.

As an acceleration and market share play on Verizon’s part, this potentially makes more sense — Terremark likely has the highest market share in VMware-based self-managed IaaS. But it’s not Verizon’s way of getting into the cloud, despite the press spin on the acquisition — Verizon already has cloud IaaS and its offering, CaaS, is doing pretty decently in the market.

Why cloud IaaS customers care about a colo option

Ben Kepes has raised some perceived issues on the recent Cloud IaaS and Web Hosting Magic Quadrant, on his blog and on Quora. It seems to reflect some confusion that I want to address in public.

Ben seems to think that the Magic Quadrant mixes colocation and cloud IaaS. It doesn’t, not in the least, which is why it doesn’t include plain ol’ colo vendors. However, we always note if a cloud IaaS vendor does not have colocation available, or if they have colo but don’t have a way to cross-connect between equipment in the colo and their cloud.

The reason for this is that a substantial number of our clients need hybrid solutions. They’ve got a server or piece of equipment that can’t be put in the cloud. The most common scenario for this is that many people have big Oracle databases that need big-iron dedicated servers, which they stick in colo (or in managed hosting), and then cross-connect to the Web front-ends and app servers that sit in the cloud. However, there are other examples; for instance, our e-commerce clients sometimes have encryption “black boxes” that only come as hardware, so sit in colo while everything else is in the cloud. Also, we have a ton of clients who will put the bulk of their stuff into the colo — and then augment it with cloud capacity, either as burst capacity for their apps in colo, or for lighter-weight apps that they’re moving into the cloud but which still need fast, direct, secure communication with interrelated back-end systems.

We don’t care in the slightest whether a cloud provider actually owns their own data center, directly provides colocation, has any strategic interest in colocation, or even offers colocation as a formal product. We don’t even care about the quality of the colocation. What we care about is that they have a solution for customers with those hybrid needs. For instance, if Amazon were to go out and partner with Equinix, say, and customers could go colo in the same Equinix data center as Amazon and cross-connect directly into Amazon? Score. Or, for instance, Joyent doesn’t formally offer colocation — but if you need to colocate a piece of gear to complement your cloud solution, they’ll do it. This is purely a question of functionality.

Now, you can argue that plenty of people manage to use pure-play cloud without having anything that they can’t put in the cloud, and that’s true. But it becomes much less of a typical scenario the more you move away from forward-thinking Web-native companies, and towards the mixed application portfolios of mainstream business. It’s especially true among our mid-market clients, who are keenly interested in gradually migrating to cloud as their primary approach to infrastructure, hybrid models are critical to the migration path.

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Qualifying for the next Cloud IaaS Magic Quadrant

Now that the Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting, 2010 has been published, we’re going to be getting started on the mid-year update almost immediately (in February). The mid-year version will be cloud-only, specifically the self-provisioned “virtual data center” segment of the market.

Since I have been deluged with questions about what it takes to be included (and there’s been some interesting fud on Quora), I thought I’d explain in public.

For many years now, Ted Chamberlin and I have done this Magic Quadrant using criteria that are very black-and-white; anyone should be able to look at them like a checklist. Those criteria are pretty simple:

  • You are required to have certain services, which we try to define as clearly as possible.
  • There’s a minimum revenue requirement.
  • There’s a requirement to demonstrate global presence, either through data centers in particular geographies, or a certain amount of revenue derived from outside your home region.

If you meet those criteria, you’re in. If you don’t meet those criteria, no amount of begging will get you in. It has nothing to do with whether or not you are a client. It doesn’t even have anything to do with whether or not our clients ask about you, or whether we think you’re worthy; in inquiry, we routinely recommend some providers who don’t qualify for the MQ but who compete successfully against included vendors.

Because we routinely recommend vendors who aren’t on the MQ, and we’re obviously interested in the market as a whole, we welcome briefings from all vendors who believe that they serve Gartner’s end-user client base (mid-sized businesses to large enterprises, technology companies and tech-heavy businesses of all sizes), regardless of whether they qualify for inclusion. We also track the lower end of the market, though, so we do look at the vendors who serve small businesses; vendors in this segment are similarly welcome to brief us, though in that space we’re generally primarily interested in market-share leaders and anyone doing something that’s clearly differentiated.

Analysts at Gartner choose what briefings they want to take, regardless of whether or not a vendor is a client (our system for briefing requests doesn’t even tell analysts the vendor’s client status). You are welcome to brief us as frequently as you have something interesting to say.

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Cloud adoption and polling

I’m pondering my poll results from the Gartner data center conference, and trying to understand the discontinuities. I spoke at two sessions at the conference. One was higher level and more strategic, called “Is Amazon or VMware the Future of Your Data Center?” The other was very focused and practical, called “Getting Real with Cloud Infrastructure Sevices”. The second session was in the very last slot, and therefore you had to really want to be there, I suppose. The poll sample size of the second session was about half of the first. My polling questions were similar but not identical, and this is the source of the difficulty in understanding the differences in results.

I normally ask a demographic question at the beginning of my session polls, about how much physical server infrastructure the audience members run in their data centers. This lets me cross-tabulate the poll results by demographic, with the expectation that those who run bigger data centers behave differently than those who run smaller data centers. Demographics for both sessions were essentially identical, with about a third of the audience under 250 physical servers, a third between 250 and 1000, and a third with more than 1000. I do not have the cross-tabbed results back yet, unfortunately, but I suspect they won’t explain my problematic results.

In my first session, 33% of the audience’s organizations had used Amazon EC2, and 33% had used a cloud IaaS provider other than Amazon. (The question explicitly excluded internal clouds.) I mentioned the denial syndrome in a previous blog post, and I was careful to note in my reading of the polling questions that I meant any use, not just sanctioned use — the buckets were very specific. The main difference in Amazon vs. non-Amazon was that more of the use of Amazon was informal (14% vs. 9%) and there was less production application usage (8% vs. 12%).

In my second session, 13% of respondents had used Amazon, and 6% had used a non-Amazon cloud IaaS. I am not sure whether I should attribute this vast difference to the fact that I did not emphasize the “any use”, or simply because this session drew a very different sort of attendee, perhaps one who was farther back on the adoption curve and wanting to learn more basic material, than the first session.

The two audiences also skewed extremely differently when asked what mattered to them in choosing a provider (choose top 3 out of list of options). I phrased the questions differently, though. In the first session, it was about “things that matter”; in the second session, it was “the provider who is best-in-class at this thing”. Where this really became a radically different result was in customer service. It was overwhelmingly the most heavily weighted thing in the first session (“excellent customer service, responsive and proactive in meeting my needs”), but was by far the least important thing in the second session (where I emphasized “best in class customer service” and not “good enough customer service”).

Things like this are why I generally do not like to cite conference keypad polls in my research, preferring instead to rely on formal primary research that’s been demographically weighted and where there are enough questions to tease out what’s going on in the respondent’s head. (I do love polls for being able to tailor my talk, on the fly, to the audience, though.)

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Observations from the Gartner data center conference

I’m at Gartner’s Data Center Conference this week, and I’m finding it to be an interesting contrast to our recent Application Architecture, Development, and Integration Summit.

AADI’s primary attendees are enterprise architects and other people who hold leadership roles in applications development. The data center conference’s primary attendees are IT operations directors and others with leadership roles in the data center. Both have significant CIO attendance, especially the data center conference. Attendees at the data center conference, especially, skew heavily towards larger enterprises and those who otherwise have big data centers, so when you see polling results from the conference, keep the bias of the attendees in mind. (Those of you who read my blog regularly: I cite survey data — formal field research, demographically weighted, etc. — differently than conference polling data, as the latter is non-scientific.)

At AADI, the embrace of the public cloud was enthusiastic, and if you asked people what they were doing, they would happily tell you about their experiments with Amazon and whatnot. At this conference, the embrace of the public cloud is far more tentative. In fact, my conversations not-infrequently go like this:

Me: Are you doing any public cloud infrastructure now?
Them: No, we’re just thinking we should do a private cloud ourselves.
Me: Nobody in your company is doing anything on Amazon or a similar vendor?
Them: Oh, yeah, we have a thing there, but that’s not really our direction.

That is not “No, we’re not doing anything on the public cloud”. That’s, “Yes, we’re using the public cloud but we’re in denial about it”.

Lots of unease here about Amazon, which is not particularly surprising. That was true at AADI as well, but people were much more measured there — they had specific concerns, and ways they were addressing, or living with, those concerns. Here the concerns are more strident, particularly around security and SLAs.

Feedback from folks using the various VMware-based public cloud providers seems to be consistently positive — people seem to uniformly be happy with the services themselves and are getting the benefits they hoped to get, and are comfortable. Terremark seems to be the most common vendor for this, by a significant margin. Some Savvis, too. And Verizon customers seem to have talked to Verizon about CaaS, at least. (This reflects my normal inquiry trends, as well.)

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