Where is the Revenue Stream in Cloud Computing?

This is a fascinating question to which there is no settled, practical answer today. Despite efforts to set up cost centers and chargebacks, most enterprise IT infrastructures are like those all-inclusive holiday resorts where no money changes hands on the premises. So the technology to measure and bill for services has always taken a back seat.

The average techie can pontificate for hours about how to mashup services and measure feeds and speeds, but ask them to set up a commercially robust infrastructure for paid services and you'll be greeted by an embarrassed silence. Outside of a few specialist providers like Aria Systems, Zuora, Metratech, Mashery and a handful of others, there's simply no expertise out there.

That's why, until the credit crunch came along, most cloud services were still in free-of-charge beta trials, and why social networking services like Facebook and Twitter still don't have a revenue model. The mechanisms and business models for charging for services and sharing out revenues are still in their infancy.

I think the cloud computing industry will borrow some of the best practices of previous generations of tech partnerships to solve today's revenue sharing challenge. The rapidly evolving cloud environment is creating a new set of supply-chain relationships which will be governed by the same partnering principles of the past, but with a different set of revenue tracking requirements and economic parameters. This means new tools and techniques will have to be employed to automate the monitoring and billing processes so they are cost-effective in this price-competitive market.

Apple with iTunes and iPhone have proved out a successful model for marketplace delivery of applications, but I believe the same model could be used to deliver a marketplace for services. However, the missing ingredient for services is the killer medium(in Apple's case this would be the device). Facebook and Twitter may be on their way toward creating the medium that could work.

Like all things, the money is controlled by the owner of the medium. Ask anyone selling apps for iPhone if they're truly happy with the revenue sharing model.

Interesting coincidence – or rather an indication of the topic’s temperature? It is exactly this topic that I have discussed this morning with two colleagues representing pillars of IT and Cloud computing. Personally, I have researched this topic since early 2008 but so far it is still in flux. The bottom line coming out of our discussion is that it is too early in the lifecycle for some best practices to firm-up.

Let’s look at the next phase of SaaS, coming out of the “bowling alley� and mushrooming in the “tornado� (borrowing Geoffrey Moore’s lifecycle milestones). At that point, I’d expect a multitude of smaller ISV’s with “long tail� SaaS offering, either in geographical or vertical terms. I suppose they’ll be using a SEAP (SaaS Enabled Application Platform) such as uniPaaS to develop and deploy their solution, host it with a Cloud Provider, probably outsource the application operations (1st level support, billing, SLA…), and eventually join a Services Marketplace/Portal to promote and sell the service.

What it amount to is a service made of an aggregation of services and supplies, with quite a number of stakeholders who expect to get a piece of the revenue from users who would consume the service and pay for it. How should that be shared? How can it be traced to the appropriate stakeholders? I can think of a few similar models – such as artistic content (music…) and distribution, communications (cell phone…), or even transportation services.

I’m quite keen to learn about other persons views and experience on this.

Shared delivery infrastructure has been common to communications, media, financial information, and other industries. Industry participants are always concerned with revenue and have developed techniques such as compliance reporting and audits to ensure appropriate revenue sharing.

Additionally, these industries have been concerned with revenue leaks which are schemes to systematically steal information and service. Their response has been revenue assurance: the data quality and controls that improve profits, revenues and cash flows for all providers without influencing demand.

It makes logical sense that the Cloud will arrive at its version of revenue assurance, compliance reporting, and audits.

There is a dream of pay-per-use. In my eyes, it will stay a dream because companies that use services will not be able to forecast their expense on their activities.
I think that the charge methodology will stabilize around monthly charge for the certificate to use the service and some variable part that will reflect the traffic.
Just like renting a car. You can forecast how much will you pay as the large sum and you could expect some fluctuation because of usage.

I think the picture changes as you go up the cloud stack from Infrastructure, to platform, to software. At the lower levels the focus is still very much on strict pay-as-you-go and reducing costs for adopters. However moving up there are more opportunities to actually create new value and hence revenue streams.

Looking at companies which now offer their data as a service or specific types processing (recommendations, semantic analysis, video rendering etc.) there is clear value to be generated. A lot of the companies we work with are considering a variety of business models at that level but almost all have a freemium element and the majority have tiers of fixed rates + a variable component based on traffic / resource usage on the service - reflecting what Noam said.

I think the cascade effects you mention Avigdor (and how to share revenue) are starting to appear with companies leveraging each other's APIs. There an incentive for everybody to offer their services at a fair price since upstream companies leveraging those services know how much they can actually make from the product which is finally delivered to the end customer (either by charing or by selling ad space or whatever). With usage based models in places this makes for a potentially interesting ecosystem of value creation and reward. You no longer need to be delivering something which hits user eye balls to receive a cut for what you're contributing to a user experience.

Great discussion,

Steven Willmott
Technical Lead
http://www.3scale.net

Since the cloud is an infrastructure or provisioning environment, whatever we run on that infrastructure and provides business value is ultimately what needs to be measured -- and where costs should be accounted. Service providers (software/process/application) can provision any service through the cloud, but the relationship to the end-user (the client), and the price paid by that end-user has to be determined by the business value delivered - and potentially redistributed through the various elements that constitute that service. Cloud computing certainly democratizes computing power, opens new markets and facilitates new business models, but the value delivered to an end-user ultimately determines the monetary worth of the service. There's nothing new there.

Cloud computing is commoditizing IT in the same way that other utilities have been commoditized. Given that it is logical to look to the revenue generating and revenue share models of the electrical and telecom utilities for an inkling of where the revenue model is heading.

True some existing players with differing economics will fall by the wayside.

I agree with Avigdor's point about the splitting of revenue streams and the micro-revenue/revenue share modeal that looks likely to develop going forwards