The Channel for Cloud

In the endless sea of pontification about the cloud and its impending dominance as the central force driving IT transformation, one CRITICAL thing is forgotten and that is the role of the channel.

Some people say you don’t need a channel, even Bessemer Venture Partners, revered as ‘writing the business model book’ on the cloud misses the point in its LAW #4 when it says, “(software channels) aren’t much help to Cloud businesses.” They go onto to say that some cloud companies might achieve some benefits leveraging business services channels and emerging players like Appirio, but the message is you don’t really NEED a channel if you fully leverage the internet.

At Digital Bridge Partners, we believe that the emergence of a new breed of channel partners armed with cloud-relevant services will become the secret ingredient that businesses need to leverage the full power of IT as a UTILITY. We believe that so long as traditional channels do not embrace and new channels do not enter this space, that the Cloud will remain a fragmented and piecemeal assembly of IT services, ultimately delaying the tipping point to IT as a UTILITY.

Over the next few months, we will be developing a catalog of required services that partners will be called up on to provide across SaaS, IaaS, and PaaS cloud stacks and create a roadmap to help vendors and partners seeking to evolve to understand the required strategies, investments and ROI.

Meanwhile, its useful to debate which IT vendors (suppliers of SW and HW) and service providers (IaaS in particular) will lead the charge to build loyal cloud-based partner models AND whether the winning partners will grow from within the existing in-house (Private Data Center) IT business or more natively form around the Cloud itself.

The 64,000 question is which of the incumbent vendors and channel partners who are still making a bundle in the private Data center business (replete with HW, SW, and Integration revenues) can develop the will to invest in the ‘annuity business model’ that is the cloud.

Software Pricing Partners does a nice job of depicting the business model differences between selling Cloud and selling Perpetual (in-house) Solutions. The Perpetual business model (which drives the in-house vendor and channel model) is based on up-front payments typically sold and delivered as large projects. These Perpetual model projects generate big revenues at the time of sale and streaming maintenance and services revenues over time. The Cloud business model is based on delivering value over time and being paid ‘typically monthly’ not all up front.

We believe that the reason why most vendors won’t deeply invest enough and commit to creating the ‘new channel model’ for the cloud and why most traditional channels won’t make the move over is that its just too difficult to turn energy away from the cash cow (perpetual model) and invest in an annuity model that takes time to pay out. Any leader who asked the CEO of his company to do this would have to be willing to bet his career or at least his/her job on this decision. Geoffrey Moore in his book Escape Velocity does a great job talking about When Big Companies Get Stuck and more generally in his book talks about how many great companies have failed, Novell, Kodac, etc., because they didn’t have the guts to take dollars from today’s Cash Cow to fund tomorrow’s Rising Star.

We believe that fewer than 10% of existing vendors or their channels will make this bet and that a lot of the channel capacity for the new channel must therefore come from vendors and services companies who are not locked in the past.

Another reason why we thing it will take a new bread of channel partners to tip to the Cloud is that the CIOs and IT Operations folks who have jobs and big orgs to manage the complexity of the in-house IT infrastructure will drag their feet about moving en mass to the cloud. There’s no surprise here, in-house IT is the status quo in the enterprise and these executives are committed to what they know and the power that comes from what they know. 

In parallel, the traditional channel partner business model is fundamentally tied to these CIO and IT Ops customers; so it is quite risky for a traditional channel partner to tell their long-standing CIO/IT Ops customers that they should think about a model in which most of their computing resources will be provided from a Cloud Service Provider.

Conversely, new channel entrants will likely come more from the business side focusing their energies on three customer groups – Lines of Business Execs, CFOs, and CEOs and to those CIOs who see where the wind is blowing and are willing to make the leap.

Don’t get me wrong, there are good channel partners who are adding knowledge of the cloud to their base knowledge of the in-house data center and it is those who jump now and make the required investments who can make it big. In fact, we believe that companies like VMware and their partners are uniquely suited to making this leap, but they have to overcome the inertia that I’ve talked about in this post.

Finally, we believe the investment window that will separate the winners in this new channel model from those who potentially go out of business is 24 mos. In other words, if channel partners and the vendors who are living off of the in-house data business model do not decisively invest to build the skills and overcome the barriers to making the move to the cloud starting now and over the next 24 mos, they will be left behind.

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