IDC analyst Darren Bibby will tell you why solution providers must go to the cloud. But first, he’d like to talk about marshmallows.
Bibby, vice-president of channels and alliances research at IDC Corp., recently kicked off the Canadian Channel Chiefs Council’s (C4) first education seminar – From Cloud Illusions to Cloud Realities: Cutting through the Hype. And as he opened his presentation Why Solution Providers Must Go to the Cloud, he started by talking about the marshmallow test.
Conducted by Walter Mischel at Stanford in 1970 and later repeated around the world, the marshmallow test studied delayed gratification with children aged four to six years. The kids were presented with a deal – you can have one marshmallow now, or two if you wait a bit. Most of the kids were impatient – 2/3s ate the one marshmallow right away. In the follow-up 18 years later, the children who waited had better life outcomes.
The lesson – patience can be rewarded, but delaying gratification is hard. It’s a scenario most solution providers face when considering shifting business models to cloud computing. Going to layers of incremental revenue will pay off over time, but it’s hard to do with that up-front, product-based license deal is right in front of you.
“The nirvana is that build-up business of multiple revenue streams, but it’s hard to do with that marshmallow is right in front of you,” said Bibby.
It’s a significant business model challenge – the monthly revenue comes in much more slowly. Sales people are used to a big commission hit, and they may keep pushing the on premise option as they need the commission. While Bibby said the cloud managed service provider is great by year three, surpassing license revenue, the challenge is managing that trough to get to year three.
“This is the No. 1 reason I hear from partners and vendors on why companies are having a hard time getting to the cloud and selling services,” said Bibby.
While partners may have fear of the unknown, and of managing the transition, Bibby said the date is clear – the third platform is the future. The first platform was main frame terminals and the second clien servers; the third platform is IDC’s umbrella term for mobility, big data analytics, social business and the cloud.
“All of the growth on the next eight years is going to come from the third platform,” said Bibby.
If a partner or vendor chooses to stay in the second platform world there’s still a lot of business there, said Bibby, but it’s a market that will only grow at one per cent annually.
“You’re still beating the tobacco industry, but you’re going to have to take share off another company if you’re going to grow faster, and we all know how hard that is to in this competitive economy,” said Bibby.
Meanwhile, the 3rd platform is forecast to achieve 20 per cent annual growth. Worldwide public IT cloud services revenue is forecast to reach $107.2 billion by 2017, growing at 5X the overall IT industry. And that doesn’t include lucrative services revenue.
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A market shift is already underway from servers to services, as a brand new hyperscale market emerges. According to IDC, service providers will account for 27 per cent of total server shipments by 2016. And 25 companies represent the bulk of this market – service providers such as Facebook, SoftLayer, Amazon and Google.
There’s also a shift underway from on premise to cloud software, with IDC predicting 90 per cent of new net commercial apps will be developed specifically for the cloud in 2014. Also, over 92 per cent of companies surveyed said they had plans to shift their IT budget towards public cloud. IDC is predicting that nearly 25 per cent of all software revenue will be subscription-based by 2016.
“The numbers are small but the shift is happening,” said Bibby. “Channel partners need to adopt a cloud-first mentality – enter with a cloud solution and see where it goes.”
Cloud can be a door opener – many customers will be happy to pay monthly even if they pay more over time. It’s also a very sticky model – Salesforce.com has a customers for life department. It’s a great place to get to and, while the transition will be a challenge, the change is becoming inevitable.
“You can’t keep going the way you’re going,” said Bibby.
And to make the deal even sweeter, the cloud model has another advantage – data shows recurring revenue companies tend to get valuations from six to eight times annual revenue, versus three to five times revenue for traditional license revenue companies. Investors like the steady, predicable revenue base.
Just let that marshmallow sit long enough.
Great article Jeff, and something that we see and hear a great deal about for sure. One thing that has been an issue in Canada to date is the lack of try on-demand public cloud providers as compared to the robust ecosystem in the US for example. The net effect is that many Canadian VAR’s either partner with US based cloud providers and then run into issues with data residency concerns wit their clients or they just ignore the cloud altogether. Today there are options in Canada and that is a trend that will continue to grow. In addition most have channel partner programs that include things like reoccurring revenue sharing opportunities that create the much needed additional revenue streams.