Perfect storm for managed service, co-lo and cloud industries

BOSTON -- Even with the cloud computing market growing at more than double the pace of the managed service and colocation industries, analyst Philbert Shih of Structure Research told a conference of hosting providers Monday that their sector is still well poised for growth into the future.

There is a "perfect storm" of events that leave outsourced IT functions, including managed hosting, colocation and cloud all well positioned for future growth, says Shih, who spoke at the annual HostingCon 2012 event in Boston.

"This is a snowball rolling down a slow, gradual hill," says Shih, noting that outsourcing IT will continue to be a dominant trend for years to come.

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The first wave of outsourcing IT data center functions happened with colocation services, which Shih defines as a setup where the provider supplies only the data center space and power with the customer being responsible for the hardware infrastructure. Managed hosting has since become popularized, which is where the provider supplies not only the data center architecture but also the servers, leaving only the applications as the customer's responsibility. In the past few years the shift has gone to cloud computing, which Shih defines as similar to managed hosting but with an even more flexible pricing model where the services can be rented by the hour with no long-term contracts, as is typically needed with colocation and managed services. Shih predicts that in the coming years colocation will continue to grow at 20%-27% annual rate while managed hosting will grow at 23%-27% and cloud computing will increase by more than 50% per year.

The growth, he says, is fueled by this perfect storm of events that continue to push IT functions to be outsourced, he says. Outsourcing IT functions not only has the potential to save money, but it can also be a way to more easily manage increasingly complex infrastructure. Furthermore, as legacy on-premise IT systems hit their refresh cycle, business will more seriously look toward renting only the exact amount of equipment they need rather than buying it. Managed hosting, and to an even greater extent cloud computing, also allows customers to be more agile and to scale up and down resources as their needs change. And finally, the increasingly competitive landscape has resulted in there being dozens of providers in the market, making it easier for customers to find ones that meet their needs.

Even with the positive signs for the future for upstart providers, there will be bumps in the road. Amazon Web Services has a strong market-leading position, he says. Microsoft with Azure and Google with its Compute Engine have each made moves to extend their offerings into the infrastructure-as-a-service (IaaS) market, providing even more competition for smaller providers. Still though, Shih says, the top competition for managed hosting and cloud providers is not from these vendors, but rather from in-house IT functions. "The fundamental battle is still convincing the CIO that outsourcing is a better path compared to insourcing," he says.

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During the kickoff on Monday of the three-day HostingCon event there were a variety of other sessions related to management of hosted environments, discussions of the OpenStack open source cloud deployment project and the launch of IPv6. One overarching theme was about how to compete with Amazon Web Services.

Ditlev Bredahl, CEO of OnApp, says the key is for managed hosting providers to team up to create a network of providers that can rival the scale and breadth of AWS service offerings. OnApp, whose main product is software that cloud providers use to manage their cloud offerings, has already made steps in that direction through the Content Delivery Network (CDN). It's made up of providers from around the globe who combine their offerings to create a global CDN that's comparable to that from Akamai, seen as the market leader. If the same is done with cloud, he argues, then there would be a market alternative to AWS that has similar, if not greater, scale capacity and product depth.

A similar idea is being pushed by backers of the OpenStack project. Lew Moorman, president and CEO of Rackspace, spoke at a recent conference about the need to have a market alternative to Amazon, and for that to be an open source offering. But Bredahl says he's not buying into the OpenStack project yet because of the lack of offerings based on the open source code. "For this to work there needs to be a critical mass of companies," he says. OpenStack is just not there yet, he says.

Others aren't convinced OnApp is the provider to organize such a network either though. Antonio Piraino is CTO of Science Logic, a software-as-a-service (SaaS) cloud performance and security application provider, and says he doesn't expect that users will have the need to federate their services across multiple cloud providers, as the OnApp or OpenStack models would allow. Customers want reliable, inexpensive service with the security and compliance certifications necessitated by their business. They don't need their provider to be part of some massive international cloud network. "Customers won't spend their time moving around from cloud to cloud," he says. "They just want it to work."

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at and found on Twitter at @BButlerNWW.

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