Cloud Computing and Innovation in the Hosting Industry

Some Roots of Innovation

It is still early days in the cloud computing industry, yet new startup businesses supplying cloud enabling technologies are popping up like mushrooms after a rain. While they will not all succeed, they all believe they have an opportunity to grow and profit in this space. At the same time, traditional hosting service providers are extending their offerings beyond shared, dedicated and virtual private servers. They see the opportunities which cloud-based infrastructure as a service (IaaS) promise: rapid growth, high margins, access to new customers, and more. Of course the service providers have more than new opportunities on their minds. For them it is about survival.

Cloud computing technologies and business models are fundamentally changing the competitive dynamics of the hosting industry. Datacenter services are no longer just about highly commoditized hosting. They are about giving customers flexibility, control and agility -- higher levels of value with correspondingly higher levels of potential. “What is the real difference?” you may ask. Simply put, the difference is execution versus innovation. Amazon Web Services (AWS) and its Elastic Compute Cloud (EC2) managed to tip the scales from execution to innovation. Then, over just a few short years, the competitive equation in the hosting industry began to change in the same way… toward innovation that is.

Please don’t misunderstand. Not everyone is innovating. Not everyone wants to innovate. Not everyone has the capability to innovate. And – perhaps the subject of a future blog post – some are not so secretly hoping this whole notion of innovation will go away so they can compete like they always have, based on important intangibles like customer service.

An Industry Disrupted

Still, Amazon has created an important competitive disruption in the hosting industry based on innovation. They proved that innovation can indeed still create entire new markets or industries, and – I believe – large profit margins to go with them. Some service providers, like SoftLayer, have taken note and moved forward with innovations of their own. While any cloud-based IaaS provider will naturally provide some capabilities which are similar to EC2, for SoftLayer this has not been about “me too.” It has been about taking IaaS to the next level to meet the needs of enterprise IT organizations. This means things like private and public network connections to enable out of band management, superior levels of automation for infrastructure components beyond servers, finer grained control over server configurations, the ability to mix physical / virtual and cloud servers on the same network, and more.

Based on discussions with more than twenty other cloud service providers, I believe there are just a handful of other providers in this space that are pursuing the innovation angle with similar vigor. However, none of those announced a change in ownership today. It was published today that the company completed a transaction in which its management team and GI Partners, a private trans-Atlantic investment firm, have acquired all of the equity in SoftLayer. So just what does this mean – if anything – to the hosting industry at large?

Innovation Pays

To me, it is further evidence that innovation pays. GI Partners is a well funded private equity organization that has a lot of choice when it comes to acquisitions. They could have chosen a number of different hosting (or datacenter services) players. In fact, they also have investments in other hosting companies like ViaWest and ThePlanet. However, they chose SoftLayer – a company where innovation has produced the following after just 4.5 years of operation:

• 6,000+ customers
• 30,000+ servers under management
• An annual revenue run rate of $120M+
• EBITDA margins exceeding 50%

With SoftLayer’s executive team staying on to operate and manage the company, this is about keeping the brain trust who knows the secret sauce of innovation in the hosting industry. Further, consider the view points of the insiders from SoftLayer and GI Partners who issued the press release:

• “unswerving commitment to innovation and automation,” press release text
• “pivotal time in the industry, as increased connectivity, virtualization advances, and cloud service innovations dramatically reshape the landscape,” press release text
• “SoftLayer has taken a visionary model and created a company for the future of hosting,” said Rick Magnuson, Executive Managing Director of GI Partners.”

Of course any press release of this nature will call out the positive aspects such as those in the bullets above. However, if you discount the positive and simply look at the content, it sure seems to back up the high value placed on innovation.

Let’s face it. The hosting industry has been disrupted, and innovation – not just commoditization – is once again an important driver of success and even survival. There will probably be a lot more commodity driven activity to come in this industry. There also *should* be a lot more innovation; not just because it pays, but because it is good for customers and good for the industry. However, it is still anyone’s guess as to specifically how it will all play out. There are still strong forces on the commoditization front. Yet, as SoftLayer has shown in this case, the value of innovation should not be underestimated.