the economics of buying and selling cloud services through the channel

© 2015 Orbitera Inc.

Boston Cloud Services Meetup

The Economics of Buying and Selling Cloud Services Through the ChannelBrian Singer – [email protected] 27, 2015

© 2015 Orbitera Inc. 2

A Bit About Me

• Started Orbitera ~3 years agooBackground in Enterprise Software, CloudoTrying to figure out how to make it easier for third parties (ISVs, MSPs)

to sell cloud-based services

• Launched billing product for channel providers ~ 2 years ago

• Today ~ 150 channel resellers on the platform

• Experience with AWS, Azure, CenturyLink, SoftLayer, others


Cloud disruption to existing channel economics

• Easier to have a direct relationship with vendors• Rise of SaaS / Shadow IT• Focus on recurring revenue vs. the “whale” deal• Transition to consultative / technical sales by vendors (Microsoft)• Importance of customer churn in cloud models

Providers desire a closer relationship with the end-customer Relationships with channel providers are less sticky


How does the channel add value to cloud transactions?

• Products solutions• On-boarding / migration• Managed services• Procurement and cost optimization• Renewals and support


Types of Cloud Services Resold Through the Channel

• IaaSoLow margin

• PaaS (inc. single-tenant)oHigh margin

• SaaS (multi-tenant, hosted)oVariable margin


How do resellers make money on IaaS?

• Bundle value-added servicesoMigrationoManaged serviceoThird-party solutions

• OptimizationoVolumeoPre-pay

• Resale margin from provideroLOW


What do the margins look like?

Resale: 5% – 15%

Optimization: 10% – 20%

Value-added services: 15% – 30%

Typical Blended MSP margin:30 - 40%


Impact of shifting margins on channel providers

• For every dollar spent on cloud, an efficient MSP can make about forty cents

• Traditional VARs forced to become MSPsoNot enough money in IaaS to be an order taker with a sales force

• Firms must compete on adding value to the transactionoCannot compete on price – not enough margin!


Optimization is critical

• Without traditional channel margin to fall back, cloud channel is dependent on margin from optimization

• Optimization includesoAggregating bandwidth and storage to get lower pricesoPrepaying for consumption to lock in lower rates (RI’s / Commits)oNegotiating lower support costs from suppliers

• Operational efficiency is key to achieving / retaining optimization-based marginoMargins can be as high as 40% on this!


Optimization Example


Channel strategies for IaaS

1. Pass through all IaaS margin, make money solely on value added services

2. Maintain infrastructure margin, provide low cost or free add-on services to drive volume

3. Try to make money on infrastructure and on services


What about PaaS?

• What is PaaS?oAny managed platform that is more than just a VMoAmazon ECS, Heroku, AWS IOT, etc. – all PaaSoWhat about single-tenant managed services? Also PaaS!

• PaaS margins vary wildlyoRule of thumb – whoever does the work gets the rewardoSelling someone else’s fully managed service – low marginoBundling together systems into your own managed service – high

margin! (also higher cost)


Opportunities for channel providers in PaaS

• Managed services wrapped around open source solutions (e.g. managed Drupal – see Acquia)

• Managing the service catalog of cloud solutions available to the end-customer

• Straight resell of PaaS (such as reselling IBM Bluemix)


Selling SaaS through the channel?

• Market is developing quicklyo Most SaaS providers start without a channelo Consolidation is driving change

• Margins are thino Volume-based opportunities exist with certain providers

• How does the channel add value in this situation?o Takes over low margin activities like calling for renewalso Deals with procuremento Bundles together multiple solutions!

• Many SaaS vendors just starting to ramp up channel programs• Services are still critical to this market (see salesforce)

o Tilts market heavily toward value-added-services


Choosing a Cloud MSP

• Understand the economics of the MSP (where do they make their money?)

• Decide where your specific pain points areo Migrationo Running serviceso Security / availability etc.

• Look at who they support, and what certifications they haveo How much have they invested in a provider

• Size is important – but not necessarily in terms of people


Conclusion

• Channel providers play an important, but changing role in cloud

• Margin is shifting from resale to managed services

• Firms that invest in operational efficiency have a huge advantage

• End-users can take advantage economies of scale achieved by channel providers

the economics of buying and selling cloud services through the channel

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