Table of Contents
•As more enterprises overcome security concerns, demand for cloud storage and cloud based services is expected to increase rapidly.
•This trend, combined with Mega Trends such as Smart Cities, Big Data, and Internet of Things (IoT), serves as a strong indicator of the demand for the infrastructure as a service (IaaS) industry, making it a viable investment opportunity.
•High barriers to entry and economies of scale make it difficult for a single venture capital (VC) to invest in a start-up. However, VCs account for a large portion of deal volume by investing as a group or by investing in allied software to aid the IaaS industry.
•Pricing pressure and the drive to increase market share are lowering profit margins. The increased demand is also influencing companies to marginally increase their reliance on debt for capital investments. However, the high free cash flow to firm (FCFF) conversion and cash reserves of companies in this industry compensate for these factors.
•Companies within the content delivery network (CDN) segment are providing value-added services to attract and retain customers. Start-ups with key offerings in this segment are good choices for acquisitions and, thus, attractive investments.
•Wholesale data centers are targeting smaller customers, thus affecting retail data centers. Such trends that affect the profitability of business models need to be carefully evaluated before making investment decisions.
•To analyze the investment climate in the US IaaS industry
•To identify key factors and business environments within the segments of the IaaS industry
•To identify key trends and challenges that can affect the performance of industry participants over 2015
Value Chain Definitions
•For the purpose of this study, the IaaS market has been classified into 4 segments namely, infrastructure, infrastructure management software, data delivery solutions, and cloud service providers.
•Infrastructure refers to data centers and providers of hardware and other equipment essential for setting up a data center. This includes storage providers, and hardware and network equipment providers. The scope of this study focuses only on data centers.
•Infrastructure Management Software refers to providers of software solutions used to manage the underlying data center and provide IaaS to customers. This includes the following sub-segments:
oVirtualization Software and Services Sub-segment: This refers to companies offering solutions that help to create virtual images of multiple systems from the underlying hardware. Companies offering virtualization services typically also provide a variety of additional services including, but not limited to, hosting services, data management and recovery services, and consulting services.
oCloud Platform Solutions Sub-segment: This comprises of providers of software solutions used to manage various aspects of the cloud. This includes metering and billing software solutions, provisioning software, security solutions, and IaaS providers.
•Data Delivery Solutions refer to companies involved in content delivery to end users. They include content delivery network companies as well as software used for such purposes. For software, the scope of this study is limited to software providers directly related to IaaS. It also includes networking software such as load balancing software, which is used to manage the workloads in a network.
•Cloud Service Providers refer to companies that provide cloud-based services in the IaaS market. This includes IaaS providers that sell compute-as-a-service and storage-as-a-service and also companies that provide consulting services and managed services.
The business model for companies in the IaaS market is pay-as-you-use, in which the customer pays for computing-as-a-service or storage-as-a-service. There are multiple business models in this industry, detailed as follows.
•Colocation Services: In this business model, data center space is leased to clients. This can be divided into wholesale colocation and retail colocation.
oWholesale Colocation: Data center space is leased along with power and cooling resources. This requires long-term contracts ( x – years). It lacks the interconnection and managed services component offered with retail co-location. Typical clientele include communication service providers and carrier-neutral data center operators. Customers opting for this service have power requirements of at least x kW, with most customers requiring x MW or more.
oRetail Co-location: This refers to leasing of data center space in terms of cabinets, racks, and cages of various sizes. Power and cooling resources are also available. Additionally, bandwidth and interconnection services are offered, along with physical security access such as biometric access. Servers are hosted by clients and are managed either by themselves or through data center providers. The fees charged vary, based on the services requested by the client. Contracts are typically signed for x – years. Power requirements of customers are less than x kW.
•Managed Hosting: In this model, the provider is responsible for providing and managing all IT infrastructure and resources, including servers, network, and storage. Services offered also include load balancing and WAN optimization. Revenue is in the form of a term contract with a monthly recurring fee based on the services used.
•On-demand Business Models: Both managed hosting and co-location services are business models involving a contract and are not on-demand services. With on-demand services, clients can sign up for an account and start utilizing services almost instantly. Thus, customers behave like subscribers paying for the volume of service used.
oComputing-as-a-service: This is a type of IaaS in which subscribers pay for the computer resources used (usually a combination of CPU cycles and memory) as well as the data moving in and out (per gigabyte).
oStorage-as-a-service: This is a type of IaaS in which subscribers pay for storage capacity and the data moving in and out, both on a per-gigabyte basis.
oPublic Cloud: In this model, server infrastructure is shared among enterprise subscribers. Thus, companies accessing storage-as-a-service would store their data along with that of other companies.
oPrivate Cloud: In this model, each server is dedicated to a single enterprise subscriber. Access is generally through a private network.
Thus, companies offering on-demand services offer various pricing structures based on combinations such as computing-as-a-service for public cloud and computing-as-a-service for private cloud.
•Software Providers for IaaS
oLicensing and Value-added Services: Several virtualization software providers offer licensing costs on a per-processor basis. These costs depend on the volume and duration of usage. More often than not, vendors and resellers negotiate licensing costs.
•Content Delivery Networks (CDN)
oProviders of Content Delivery Networks sell a variety of services by building and renting out networks. These companies help to transmit content from content providers to end consumers. Depending on the business model, they obtain revenue from content providers or from Internet service providers (ISPs).
oRevenue from Content Providers: Content providers pay CDNs to replicate their content on servers close to the consumer. Thus, the consumer experiences low latency, resulting in increased business for content owners. CDNs pay hosting providers for hosting the content, and receive revenue from content owners in proportion to the data transferred.
oRevenue from ISPs: ISPs pay CDNs to serve frequently demanded content to subscribers from caches close to subscribers. CDNs own the caches. This is beneficial to ISPs, as they are able to utilize their bandwidth more effectively.
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