Competing With The Cloud

Custom system builders are closely watching cloud computing to see how it will affect their business models -- for good or for ill

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A major benefit of cloud computing, according to its proponents, is that it reduces the amount of computer hardware and IT infrastructure companies need to run their businesses. So you would think that cloud computing would be bad news for custom system builders who make their living assembling computer hardware for their customers.

"It's a complete reversal from the traditional custom system builder approach," said Todd Swank, marketing vice president at Nor-Tech, a Burnsville, Minn.-based custom system builder. "We start with the hardware sale and the cloud is all about not having hardware."

"We're trying to figure out how this affects our hardware sales," agreed Joe Toste, sales and marketing vice president at Equus Computer Systems, a Minneapolis-based custom system builder.

But while the growing adoption of cloud computing could spell trouble for custom system builders, Swank is convinced there's a golden opportunity in them thar cloud systems. "It's going to be the wave of the future and how we make money on it is the question I'm trying to figure out," he said.

Some aren't buying the "conventional wisdom" that cloud computing means reduced computer hardware sales. "I only see it driving more server sales," said Toste. "Frankly, it's all about selling more hardware."

Why? Cloud computing will spur demand for IT hosting services from midsize, regional Internet service providers, Toste predicts. And the buildout of such facilities will boost demand for more high-performance servers. Some larger solution providers, to whom custom system builders sell their hardware products, are assembling their own network operations centers to provide their clients with cloud computing applications and managed services.

"Many of those guys have expertise to develop smaller cloud environments for their customers," Toste said. "This is no different than the Internet service providers of a few years ago."

Server virtualization might provide custom system builders with another route to cloud computing. Some industry observers see virtualization as a first step toward private and public cloud computing because it decouples users from software implementations, improves IT flexibility and agility, and leads to changes in software licensing and pricing -- all elements of a cloud computing strategy.

True, virtualization is usually equated with server hardware consolidation -- another potential business downer for hardware suppliers like custom system builders. But Nor-Tech's Swank prefers to see the glass as half full in that virtualization and server consolidation are generating demand for "bigger and better servers," he said. That's a potential opportunity for Nor-Tech and its HPC (High Performance Computing) line of servers, based on Intel Xeon and AMD Opteron microprocessors.

Todd Garrigues, North America channel manager at Intel, also cited erroneous predictions that virtualization would reduce server sales as a bellwether for the potential impact of cloud computing. "What we've seen is very much the opposite," he said, arguing that virtualization has boosted server sales. "I think cloud [computing] is going to be very much the same."

Intel is a key supplier of processors, system boards, server adapters, RAID storage technology, chassis and other components to custom system builders.

Intel also offers ISVs and system builders a number of programs that can assist their cloud efforts, including the Enabled Server Acceleration Alliance (ESAA). In addition, the Intel Cloud Builders program, at, offers case studies and blueprints for cloud computing for system builders, service providers and IT managers.

Virtualization and private clouds are increasing sales of high-performance servers with high-availability capabilities, servers with cutting-edge processors and high-capacity disk drives—all high-margin stuff. "It really is about redundancy," Toste said. Operators of mission-critical systems often install multiple servers with some serving as "hot spares," he added. "Frequently you're selling double capacity."

NEXT: The Opportunities
Garrigues sees opportunities for custom system builders to supply servers to businesses assembling private clouds. And cloud computing, which will require lots of network bandwidth, could spur server upgrades as data centers adopt next-generation networking technology such as 10 Gigabit Ethernet.

Cloud computing is also unlikely to signal the death of desktop systems. If users really begin relying more heavily on in-the-cloud personal productivity applications, such as Google Apps and Microsoft's forthcoming Office Web Apps, there could be a shift toward thinner desktop client devices.

That could provide sales opportunities for custom system builders like Entre Technology Group, a Fort Worth, Texas-based supplier of IT services and custom systems, which builds the RunSilentPC desktops for thin-client applications. "That's what they're designed for," said Gary Clayton, Entre president and CEO.

Cloud computing "provides some excellent opportunities for thin-client PCs—with a caution," Clayton said, noting that even with cloud computing, desktop systems still run operating systems, security applications and other software that can require significant disk capacity. He related a story about how one customer deployed RunSilentPCs only to have their capacities quickly exceeded by a software upgrade.

Another potential opportunity for custom system builders is bundling their systems with cloud-based applications and services, whether it be Google's personal productivity applications, Microsoft's Business Productivity Online Suite (BPOS), or data storage services such as the Amazon Simple Storage Service (S3).

BPOS is a set of Microsoft-hosted messaging and collaboration applications including Exchange Online, SharePoint Online, Office Live Meeting and Office Communications Online. Channel partners who resell the BPOS services receive a 12 percent signup fee and 6 percent a year in recurring revenue. But Microsoft angered some channel partners in November when it cut the subscription price from $15 per user per month to $10.

Nor-Tech's Swank said he had just met with his Microsoft representative to discuss cloud computing. "Microsoft, God bless it, is trying to figure out a way for their partners to participate. I think there are great opportunities there. The opportunity to build a recurring revenue stream is what everyone wants."

Microsoft, however, is still working on that plan, apparently. The company doesn't have a formal program for custom system builders to work with BPOS, a company spokeswoman said, declining to make an executive available for an interview.

Still, Swank contrasts Microsoft's efforts with those of Google, Amazon and other cloud computing players that have never been a channel play.

Swank is also keeping an eye on Microsoft's Windows Azure to see whether the cloud computing platform fits into Nor-tech's plans. Azure, which just went live as a paid service earlier this month, offers system builders a way to develop cloud computing applications that run with their hardware products. That could provide system builders with another avenue to increase sales to service providers that host private and public cloud applications for their customers.

Microsoft also helps system builders bridge virtualization and cloud technologies by offering Windows Server virtual machine support on Windows Azure. That allows businesses to leverage virtualized IT infrastructure across on-premise and cloud computing environments. Microsoft declined to make an Azure executive available for an interview.

Entre is mulling such opportunities as bundling its RunSilentPCs with hosted applications such as Google Apps or Microsoft Exchange for customers, particularly for small businesses. "We're testing the waters now," Clayton said.

Swank said another possibility is building add-on services around cloud computing, such as developing BPOS or SharePoint consulting services. But so far Nor-Tech hasn't gone that route, he said.

But some custom system builders don't sell their hardware products directly to customers; they sell them to VARs and distributors who in turn sell the servers and desktop systems to their customers. That would make it difficult for them to resell application services from a vendor like Microsoft or Google.

Custom system builders will have to ally themselves with channel partners who are investing in their own cloud services business, Toste said. "That's certainly a model that we see developing." He added that Equus itself currently has no plans to host cloud applications from Microsoft, Google or other vendors.

Business consulting services have always been a major component of Entre's business and it is currently helping a startup company, an e-commerce furniture wholesaler, evaluate whether to adopt on-premise or on-demand accounting, ERP and CRM applications, Clayton said. Entre isn't providing hardware yet (the company doesn't manufacture custom servers), but Clayton said selling RunSilentPCs to the company is a possibility.

Cloud computing is still in its early stages of evolution and the channel, including custom system builders, is closely watching to see how it will affect its business models—for good or for ill. But it's clear cloud computing in some form is here to stay, and system builders need to figure out what their role will be in a cloud computing world.

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