In part 1 of ‘Service Providers and the decline and fall of the IT empire’, I discussed how cloud computing is often categorised as a disruptive technology and discussed how centralising IT resource and offering it at scale and on an agile basis will make cloud technology to be purchased as a utility, pushing down cost of service.

Now I’d like to focus on what this all means for service providers…

First, let’s consider aggregate demand. The availability of more agile IT resources is going to increase demand from the CIO’s own internal customers. And the fact that IT requirements can increasingly be met using homogeneous service building blocks will increase the likelihood of these being outsourced. So the good news is that this means a huge increase in the demand for cloud services. No wonder Tier 1 Group forecast 68% compound annual growth in this multi-billion dollar market. The bad news is that there will be attrition of non-cloud revenue, as more cost effective cloud services replace non-cloud services. Whilst much cloud take up initially will be new revenue, and legacy services will be protected for a period by sunk costs and migration difficulties, we are already seeing service providers without cloud products losing existing business, as well as new customers.

Secondly, consider the effects of disruption on market structure. Like any disruptive event, it will give rise to both uncertainty and opportunity. Traditional ‘rack and power’ data center operators will face a choice of either going ‘up the stack’ and becoming cloud providers, or hosting cloud providers (or possibly enterprises using cloud technology). The former is a significant organisational, technological and cultural challenge, whilst the latter means fewer larger customers, and technical changes in the service purchased, with smaller operators becoming less viable. Service providers, particularly smaller ones, will need to differentiate further if switching costs drop.

Cloud computing will change the role of the IT department forever. In consequence, the Service Provider market place is, over the next two or three years, going to change completely. Whilst those with their heads in the sand will suffer, the agile and the innovative have the potential to reap huge rewards.

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