A Winning Service Provider Strategy For The Next 10 Years

Who will be the service provider winners ten years from now? They’ll be the service providers that capitalize on strategic growth areas. Service providers are companies that provide network access (e.g., broadband/Internet), applications (e.g., SaaS), and IT services (e.g., IaaS/PaaS) — or a combination. Today’s players include Apple, Rackspace, Google, AT&T, Facebook, Equinix, eBay, Microsoft, Salesforce.com, eBay, Digital Realty, Verizon, IBM, Amazon, and CenturyLink.

Okay, so what will be the strategic growth areas for these providers? I believe it will be in two primary areas: data center deployments and “SMAC” applications.

The data center race

Google is investing about $2.5 billion per year in data centers, building out capacity quickly to serve customers. Figures from other well-known cloud service providers are difficult to come by, but Google’s quarter-by-quarter data center CapEx is nothing short of astounding.

Other service providers, like Rackspace, are mitigating CapEx risks by deploying a lease-versus-purchase strategy and by partnering with data center developers, like Digital Realty or Equinix.   In the long run, though, how many service providers can keep pace with giants like Google? Not many.

To overcome the CapEx challenge and achieve data center economies of scale, expect infrastructure consolidation to continue since only the largest players with the deepest pockets will be able to afford to compete in the data center race. Service providers such as Facebook, Amazon, Microsoft, Apple, IBM, and HP will continue as standalone entities.

Smaller players, however, will survive by transforming their business models into what Gartner calls cloud services brokerages (CSBs). CSBs will specialize in software customization/development, systems integration, or the aggregation of cloud services from various providers. Hundreds of “new” VARs, SIs, or Managed Service Providers will deliver more intimate, or specialized, IT services.

The SMAC applications race

In 2010, I remember when Frank Gens, Senior VP and Chief Analyst at IDC, outlined four IT growth strategies for service providers, including:  1) Mobile; 2) Social Business; 3) Cloud Computing; and 4) Business Analytics. Then, just recently, I discovered a new acronym called SMAC, which describes similar categories as: Social Media, Mobile, Analytics, and Cloud.

SMAC customers range from developers to consumers to businesses. As a society, we’ve become quite familiar with their use cases, with applications in electronic music and videos, social networking, subscription-based application services, cloud storage, and thousands more. So it’s no surprise that SMAC applications will continue to drive enormous demand for new data center capacity and build-out over the next decade.

What this will mean for business

The winning service providers will likely pursue a growth strategy around data center deployments and/or SMAC applications. As a customer, what this means for your business is that you’ll want to:

1. Select service providers that are among the largest, and, therefore, the least likely to go out of business or be acquired (which complicates things).

2. Avoid vendor lock-in so that if a service provider goes out of business or loses its competitive edge you won’t be stuck. (An open source approach is smart here.)

3. Select cloud services brokerages that are expert in your industry, whether it’s for custom software development, systems integration, or aggregation of services. (No CSB can do it all.)

We’d like to hear from you. Do you believe that SMAC will drive service provider growth for the next ten years? How many service providers will be displaced by new entrants? We look forward to your comments.
Ed Lucente Network Application and Cloud Solutions Application Sales Executive AT&T About Ed