What comes first, the horse or the carriage? If you want to start your cloud business, do you need first to come up with a solid revenue model (how can you make money out of it) and then figure out how to implement it, or first you build it with what you know and then figure out a way to make money?
Actually, the most successful cloud companies did not follow either path. Google started as a search engine and then figured out a smart way to sell advertising to the millions eyballs skimming the text results. Amazon spun off IaaS from their main business, beating others on pricing options and rich technical choices. LinkedIn capitalized the business social network. Salesforce started from plain sales automation, now offers a full portfolio of business software. What do all of these have in common?
First, their revenue model constantly evolved down the road. Some started as spinoffs from an entirely different line of business, others offered free web services or subscription-based, yet, all of them changed their revenue models and adjusted their pricing strategies almost every quarter.
Second, they own their software and infrastructure. Instead of shopping around for bits of software, they control their code (by paying good money to talented humans to write, maintaind and update software) and their infrastructure: They own their datacenters. Large ones, with huge economies of scale.
Third, they control their supply chain and rely on partners and affiliates either for pure retail business or for added value services. If you are using their services, you pay them directly. If their services go down, you go after them directly. They do not maintain channel networks to resell their solutions, since the Internet is omnipresent and their portals one click away from your home page, so, why bother setting up a reseller or distribution network?
Fourth, and most important: They control their revenue model. Google capitalizes on hundreds of millions people using their free services. Amazon is perfectly aware that their IaaS services do not address their direct customers, but the customers of their customers and have adapted their pricing and services accordingly. LinkedIn offers a rich business communication platform where online recruiters and businesses can directly interact with their members. SalesForce constantly adapts and add new services that their existing customers can readily use.
The question is: Can I do the same without biting the bullet and instead get bits and pieces off the shelf? For example, get some branded hardware with 24×7 support, rent some rack space, run Azure/VMware/Citrix/RH, get a decent cloud management platform, strike a few deals with cloudified software vendors and bring channel partners to do the reselling and distribution of my services?
Will this work? No.
First, you do not control your revenue model. You depend on a channel to resell your services, which means that you depend on your partner’s revenue model. In turn, you are also a reseller of somebody else services and products: You resell a hosted CRM or Azure/VMware/RedHat virtual servers and software platforms. And finally, you do not own your infrastructure, which means that you cannot control running costs of support and hosting.
Are these a bad thing? Yes.
In terms of money: Channel partner = $$ (their markup). Branded servers = $$ (acquisition & support). Renting rack space = $$. Azure, VMware and friends = $$ (licensing and support).
In terms of agility: Introducing new features and services is not a single step process: From tuning your heterogeneous software and hardware stack up to communicating the new services to your channel partners weeks, if months, pass, without revenue flowing in.
And then in terms of customer experience: Figure out what’s wrong when something breaks (is it the application? Is it the virtual server? Is it the hardware?), call the cavalry (contact the appropriate vendor) and have them fix it. During all this time of this fascinating game of fault tracing and bug whacking, your customers’ business is directly affected: It’s down.