How Developing Nations Could Revolutionize Cloud IT

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Rob Salkowitz
How Developing Nations Could Revolutionize Cloud IT
Written by Rob Salkowitz
8/24/2010

When companies like Forrester Research Inc. issue forecasts about the “upheaval” caused by cloud computing, they generally mean upheaval in the IT and software industries: those whose traditional business models and revenue streams are most directly disrupted.

But the rise of cloud computing — particularly infrastructure as a service (IaaS) and platform as a service (PaaS) models — has the potential to upend more than just the data center. It may end up changing the whole concept of economies of scale and put market power into the hands of a whole new set of players.

Despite the increased capabilities of hosted enterprise infrastructure from top-line vendors like Microsoft Corp. (Nasdaq: MSFT), Oracle Corp. (Nasdaq: ORCL), and SAP AG (NYSE/Frankfurt: SAP), full IaaS/PaaS uptake will probably take awhile in developed markets, as established enterprises slowly unwind their investments in on-premises data centers. Then there are those pesky issues around security, data custody, business continuity, and regulation, which are unlikely to be fully resolved anytime soon.

But IaaS makes perfect sense in developing markets. Customers in these markets are as concerned with privacy, security, and regulation as first-world enterprises, but the business case is simply too compelling to resist for long.

Why would a relatively new business in a such a market — where equipment costs, infrastructure, and security are problematic — dump scarce capital into an on-premises money pit, when it could get the same or better service through the cloud, and count it as an operating expense rather than a capital cost?

The drive to cloud-source infrastructure in emerging markets remains constrained by bandwidth and availability issues, but those barriers are falling fast as carriers amp up service and extend broadband beyond the big cities. Seventy-two percent of Indian infrastructure firms recently surveyed by Ernst & Young International reported significant interest in migrating to IaaS in the next two or three years. Other emerging markets will likely follow this same path.

In these emerging economies, the vast majority of growth is at the lower end of the market: SMBs and small enterprises (fewer than 1,200 staff). Typically, these would be prime customers for SaaS offerings like Salesforce.com or Google Apps. The problem is that many of these businesses are in traditional or highly specialized industries. Their workforce may not be digitally literate or English-speaking. The kind of software they need to run core business functions requires customization and localization.

Few individual firms can afford to pay for that kind of custom development, and the market as a whole is too poor and fragmented for any software developer to bother making an off-the-shelf product that could help them be more competitive.

IaaS/PaaS changes that equation. As more small businesses move to the cloud for both applications and infrastructure, they present an increasingly attractive market for IT service providers and software vendors. Developing a specialized business app for a dozen Hindi-speaking fabric makers, each with its own quirky IT systems, is a bit of a stretch — but what about 1,500 or 15,000 of them all gathered in one place, on one robust platform?

Clouds not only consolidate IT infrastructure across a fragmented market, they can potentially consolidate business relationships. The costs of managing those thousands of individual SMB accounts could be simplified and dramatically reduced by using the cloud provider as a single point of contact for the businesses using its hosting services.

Cloud hosts could broker deals that promise the big providers of IT services and localization a threshold volume of business in exchange for a per-unit pricing structure that brings enterprise-quality services within the reach of smaller businesses.

In this scenario, clouds of SMBs sharing a common IT infrastructure become indistinguishable from large enterprises, and the economies of scale that enterprises use to generate competitive advantage through custom IT begin to vanish.

Upheaval? When the cloud becomes the customer, it’s going to look more like revolution.

— Rob Salkowitz is the author of Young World Rising: How Youth, Technology and Entrepreneurship Are Transforming the Global Economy.

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