Small Cloud Hosting Providers Must Adapt, Differentiate Offerings To Survive: Survey

It's tough out there for small to medium-sized hosting providers when Amazon, Rackspace and Google are strong in the game, and according to a recent study, it could even tougher down the road unless they adapt.

Competitive pricing, brought on by the giant cloud companies, and commoditization are the principal perceived threats to the continuance of the hosting industry, according to a study by cloud monitoring and management firm ScienceLogic.

While IT commoditization does have positive effects, it can also negatively impact service providers when it becomes difficult to individualize all that commoditization, said Antonio Piraino, chief technology officer of ScienceLogic.

"[IT commoditization] is a nightmare for service providers as it becomes difficult to evaluate what you're paying for if you have one application or use case that's more important than the other," said Piraino. "[It] leads to price corrosion, which is good for consumers but bad for the supplier. If you're a hosting provider, IT commoditization doesn't let you distinguish from the rest, so hosting providers have to think creatively and differentiate with value-added services."

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According to the Reston, Va.-based vendor's survey, 41 percent of respondents thought price wars were the biggest threat to the hosting industry.

"Last year, 44 percent of respondents responded price wars as the biggest threat, but this year it remained 41 percent," said Piraino. "When you look at the various obstacles like security, trust and performance for large adoptions of cloud enterprise, the big technology challenges can be overcome. However, financial threats caused by price wars are a downward spiral because of more risk [associated] with commoditized service offerings."

Dave Monk, CEO of San Francisco-based ArcSource Consulting, said he believes pricing conflict and commoditization are affecting hosting providers. For ArcSource, hosting is just a percentage of its business, said Monk.

"We are a hosting provider, and I tend not to feel the price pressure as much because I often bundle hosting services with managed services," said Monk. "I can see how [hosting providers] are having tremendous pressure for pricing, I would refuse to sell hosting at $3-$4 a month. I do see the competition as fierce out there, and I would not be surprised if there was a collapse or condensation where a bunch of hosting providers buy each other out in a way."

Currently, IT hosting companies like Rackspace, Google and Amazon are dominating the market, attracting VARs and hosting providers, said Piraino. Of the ScienceLogic survey respondents, 26 percent cited Rackspace as the biggest competitor in the market.

"There are certainly a lot of IT administrators within organizations that feel threatened by the big guys because they are competing from a brand-recognition perspective," said Piraino. "It's really about the 'coolness' of the brand whether they are using Amazon Web Services or Google, whereas hosting providers don't have that brand recognition."

NEXT: The Pressure Around Pricing Brought On By Inundation Of Offerings

As the market becomes oversaturated with different service offerings, pricing becomes pressured around them, said ScienceLogic's Piraino.

"That is the truth. As [customers] ask for more, hosting providers are still gaining from the growth overall in the market, but the growth trajectory is slowing down significantly as a hosting provider," said Piraino.

When hosting providers are left competing on prices, setting low prices to remain competitive is the last thing they should do, said Piraino.

"In the long run, none of these hosting providers providing hosting can survive; it's a lifestyle business but it's a difficult business to grow if they are just offering just hosted services even if they are virtual servers." Said Piraino. "They have to do something different, and that can mean offering new services that speak specifically to business productivity, or some other attractive way to enable services for consumers."

To stay competitive and afloat, hosting providers must make a decision to invest, take a risk or offer new services, said Piraino. Supporting the big companies like Microsoft Azure, Google or AWS is a way for hosting providers to remain valuable.

"We see more hosting providers saying maybe Amazon and Microsoft aren't the enemy and aren't trying to take away our business," said Piraino. "There is safety in the sense that they don't need to spend capital on data center and new servers when they can just rely on the big providers that have infrastructure. [Hosting providers can] start to offer new services to further elevate [themselves]."

To differentiate themselves, hosting providers must focus on infrastructure, determining which tools they can invest in -- security, strategies, monitoring and billing systems -- and where they can reduce manual intervention in driving out costs, said Piraino.

"The first thing I recommend [to hosting providers] is to look into their internal systems and see which one of those systems would both reduce costs and increase revenue, and that is where ScienceLogic is positioning ourselves to help with the monitoring and managing," said Piraino. "A lot want to exit the business, make a lot of money, and it becomes a lifestyle business for them. To exit, they need to show some value, and if they are not going to exit, they have to figure out how to grow again by growing the value of the business."