Welcome!

@CloudExpo Authors: Mark Herring, Gopala Krishna Behara, Sridhar Chalasani, Tirumala Khandrika, John Katrick

Related Topics: @CloudExpo, Containers Expo Blog, Agile Computing

@CloudExpo: Article

Tune into the Cloud: Price Tag By @GregorPetri | @CloudExpo [#Cloud]

Although SaaS at first glance seems very similar to software, profit margins can be substantially lower

Tune into: cloud margins.

One of the most famous quotes of Amazon CEO Jeff Bezos is “Your Margin is My Opportunity”. This illustrates nicely how in the world of Amazon (and in the words of UK’s pop idol Jessie J*): “It’s not about the money³, we do not need your money³, we just wanna make the world dance!”

In the cloud this – a bit unworldly – attitude is fairly normal. Think of Facebook buying WhatsApp for about $ 16 billion, only to make it available for free to large parts of the world via Internet.org. For more traditional competitors this kind of “semi-philanthropic” way of doing business takes some time getting used to.

Indeed, companies like IBM have been working diligently to improve their profit margins, quarter after quarter and year after year. Divisions that could not make the cut towards achieving double digit margins were divested, one might say without mercy. At IBM we saw this with first the divestment of the PC division and not much later the x86 server division to Lenovo, while internally more and more emphasis was put on the much more lucrative software area.

Although SaaS at first glance seems very similar to software, profit margins can be substantially lower. With traditional software – after recouping the initial development costs – any additional sales goes almost directly to the bottom line. Almost, as the cost of delivery (formerly 10 cents for a CD or now 1 cent per download) and of course the cost of sales still have to be subtracted. Cost of sales however typically do not get measured in cents, as many software companies employ senior sales staff (on equally senior compensation plans) or sell through partners, who need and expect significant sales margins. And then we did not even take into account any cost of marketing yet.

On the other hand, the significant costs customers typically incurred after buying software (acquisition of hardware, middleware, paying for implementation and installation services and off course ongoing operations cost and support fees) all came from the customers budget. These were not included in the license fees of the software vendor and thus did not impact its margins. With SaaS it’s a different story.

When a SaaS vendor gets successful and sells thousands of user subscribtions, he must arrange compute, storage, network and (hopefully also some) backup capacity for all those users from his own pocket. The margins may still be better than on the typical sale of  hardware (with Apple as the significant industry exception), but the cost of all this can quickly add up. And – perhaps contrary to what many believe –  SaaS does not sell itself. SaaS requires comparable sales and marketing effort. So the move to SaaS won’t really help traditional suppliers to preserve their margins, let alone increasing them.

Meanwhile the margins of traditional outsourcers and hosting providers are also under increasing pressure from the cloud. In traditional outsourcing and hosting deals the cost for hardware, licensing (middleware, databases, management tools, etc.) and for manpower, typically each accounted for about 30%, leaving a reasonable but not enormous theoretical margin of 10%. But cloud providers have a very different cost structure and are not averse to adjusting their prices accordingly. First, cloud providers define service almost exclusively as self-service, which saves them a significant amount of manpower. And also the delivery of anything requested through these self-service interfaces is largely automated (a one time development investment of which the cost quickly approaches zero at hyperscale). And also paying significant fees for commercial licenses and management tools is not in the vocabulary of most pure-play cloud providers. They prefer to use open source, or if that happens not (yet) to be available for a certain area, they are perfectly happy to develop it themselves. Finally, also in terms of hardware, it is a different story. Hyperscale providers are typically eligible for hyperscale- discounts. And more importantly – thanks to their scale – they can drive their hardware utilization levels to unprecedented heights.

By that time the theoretical 10% margin of traditional service providers has already largely evaporated, even if these hyperscale cloud provider maintain a fair – but not huge – margin on their offerings.

* “Price Tag” (2011) is a number of British singer-songwriter-performer Jessie J, who millions saw perform live during the closing ceremony of the Olympic Games in London, which coincided with the first official reunion of the Spice Girls, a group which – unlike today’s artists – could still live from the sale of CDs.

PS This column published in Dutch at Cloudworks.nu on April 16th, a week prior to the Amazon’s earnings announcement in which it for the first time broke out Amazon Web Services revenue, operating margins and investments.

More Stories By Gregor Petri

Gregor Petri is a regular expert or keynote speaker at industry events throughout Europe and wrote the cloud primer “Shedding Light on Cloud Computing”. He was also a columnist at ITSM Portal, contributing author to the Dutch “Over Cloud Computing” book, member of the Computable expert panel and his LeanITmanager blog is syndicated across many sites worldwide. Gregor was named by Cloud Computing Journal as one of The Top 100 Bloggers on Cloud Computing.

Follow him on Twitter @GregorPetri or read his blog at blog.gregorpetri.com

@CloudExpo Stories
With tough new regulations coming to Europe on data privacy in May 2018, Calligo will explain why in reality the effect is global and transforms how you consider critical data. EU GDPR fundamentally rewrites the rules for cloud, Big Data and IoT. In his session at 21st Cloud Expo, Adam Ryan, Vice President and General Manager EMEA at Calligo, examined the regulations and provided insight on how it affects technology, challenges the established rules and will usher in new levels of diligence arou...
In his general session at 21st Cloud Expo, Greg Dumas, Calligo’s Vice President and G.M. of US operations, discussed the new Global Data Protection Regulation and how Calligo can help business stay compliant in digitally globalized world. Greg Dumas is Calligo's Vice President and G.M. of US operations. Calligo is an established service provider that provides an innovative platform for trusted cloud solutions. Calligo’s customers are typically most concerned about GDPR compliance, application p...
"I focus on what we are calling CAST Highlight, which is our SaaS application portfolio analysis tool. It is an extremely lightweight tool that can integrate with pretty much any build process right now," explained Andrew Siegmund, Application Migration Specialist for CAST, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
As many know, the first generation of Cloud Management Platform (CMP) solutions were designed for managing virtual infrastructure (IaaS) and traditional applications. But that's no longer enough to satisfy evolving and complex business requirements. In his session at 21st Cloud Expo, Scott Davis, Embotics CTO, explored how next-generation CMPs ensure organizations can manage cloud-native and microservice-based application architectures, while also facilitating agile DevOps methodology. He expla...
SYS-CON Events announced today that Evatronix will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Evatronix SA offers comprehensive solutions in the design and implementation of electronic systems, in CAD / CAM deployment, and also is a designer and manufacturer of advanced 3D scanners for professional applications.
SYS-CON Events announced today that Synametrics Technologies will exhibit at SYS-CON's 22nd International Cloud Expo®, which will take place on June 5-7, 2018, at the Javits Center in New York, NY. Synametrics Technologies is a privately held company based in Plainsboro, New Jersey that has been providing solutions for the developer community since 1997. Based on the success of its initial product offerings such as WinSQL, Xeams, SynaMan and Syncrify, Synametrics continues to create and hone inn...
Cloud Expo | DXWorld Expo have announced the conference tracks for Cloud Expo 2018. Cloud Expo will be held June 5-7, 2018, at the Javits Center in New York City, and November 6-8, 2018, at the Santa Clara Convention Center, Santa Clara, CA. Digital Transformation (DX) is a major focus with the introduction of DX Expo within the program. Successful transformation requires a laser focus on being data-driven and on using all the tools available that enable transformation if they plan to survive ov...
A strange thing is happening along the way to the Internet of Things, namely far too many devices to work with and manage. It has become clear that we'll need much higher efficiency user experiences that can allow us to more easily and scalably work with the thousands of devices that will soon be in each of our lives. Enter the conversational interface revolution, combining bots we can literally talk with, gesture to, and even direct with our thoughts, with embedded artificial intelligence, whic...
To get the most out of their data, successful companies are not focusing on queries and data lakes, they are actively integrating analytics into their operations with a data-first application development approach. Real-time adjustments to improve revenues, reduce costs, or mitigate risk rely on applications that minimize latency on a variety of data sources. In his session at @BigDataExpo, Jack Norris, Senior Vice President, Data and Applications at MapR Technologies, reviewed best practices to ...
Continuous Delivery makes it possible to exploit findings of cognitive psychology and neuroscience to increase the productivity and happiness of our teams. In his session at 22nd Cloud Expo | DXWorld Expo, Daniel Jones, CTO of EngineerBetter, will answer: How can we improve willpower and decrease technical debt? Is the present bias real? How can we turn it to our advantage? Can you increase a team’s effective IQ? How do DevOps & Product Teams increase empathy, and what impact does empath...
DevOps promotes continuous improvement through a culture of collaboration. But in real terms, how do you: Integrate activities across diverse teams and services? Make objective decisions with system-wide visibility? Use feedback loops to enable learning and improvement? With technology insights and real-world examples, in his general session at @DevOpsSummit, at 21st Cloud Expo, Andi Mann, Chief Technology Advocate at Splunk, explored how leading organizations use data-driven DevOps to close th...
Smart cities have the potential to change our lives at so many levels for citizens: less pollution, reduced parking obstacles, better health, education and more energy savings. Real-time data streaming and the Internet of Things (IoT) possess the power to turn this vision into a reality. However, most organizations today are building their data infrastructure to focus solely on addressing immediate business needs vs. a platform capable of quickly adapting emerging technologies to address future ...
Most technology leaders, contemporary and from the hardware era, are reshaping their businesses to do software. They hope to capture value from emerging technologies such as IoT, SDN, and AI. Ultimately, irrespective of the vertical, it is about deriving value from independent software applications participating in an ecosystem as one comprehensive solution. In his session at @ThingsExpo, Kausik Sridhar, founder and CTO of Pulzze Systems, discussed how given the magnitude of today's application ...
There is a huge demand for responsive, real-time mobile and web experiences, but current architectural patterns do not easily accommodate applications that respond to events in real time. Common solutions using message queues or HTTP long-polling quickly lead to resiliency, scalability and development velocity challenges. In his session at 21st Cloud Expo, Ryland Degnan, a Senior Software Engineer on the Netflix Edge Platform team, will discuss how by leveraging a reactive stream-based protocol,...
Mobile device usage has increased exponentially during the past several years, as consumers rely on handhelds for everything from news and weather to banking and purchases. What can we expect in the next few years? The way in which we interact with our devices will fundamentally change, as businesses leverage Artificial Intelligence. We already see this taking shape as businesses leverage AI for cost savings and customer responsiveness. This trend will continue, as AI is used for more sophistica...
In his session at 21st Cloud Expo, Raju Shreewastava, founder of Big Data Trunk, provided a fun and simple way to introduce Machine Leaning to anyone and everyone. He solved a machine learning problem and demonstrated an easy way to be able to do machine learning without even coding. Raju Shreewastava is the founder of Big Data Trunk (www.BigDataTrunk.com), a Big Data Training and consulting firm with offices in the United States. He previously led the data warehouse/business intelligence and B...
Digital transformation is about embracing digital technologies into a company's culture to better connect with its customers, automate processes, create better tools, enter new markets, etc. Such a transformation requires continuous orchestration across teams and an environment based on open collaboration and daily experiments. In his session at 21st Cloud Expo, Alex Casalboni, Technical (Cloud) Evangelist at Cloud Academy, explored and discussed the most urgent unsolved challenges to achieve f...
"Digital transformation - what we knew about it in the past has been redefined. Automation is going to play such a huge role in that because the culture, the technology, and the business operations are being shifted now," stated Brian Boeggeman, VP of Alliances & Partnerships at Ayehu, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
You know you need the cloud, but you're hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You're looking at private cloud solutions based on hyperconverged infrastructure, but you're concerned with the limits inherent in those technologies. What do you do?
"We started a Master of Science in business analytics - that's the hot topic. We serve the business community around San Francisco so we educate the working professionals and this is where they all want to be," explained Judy Lee, Associate Professor and Department Chair at Golden Gate University, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.