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New approaches are emerging with the goal of minimizing upfront investments in both hardware and software

One of the major issues facing cloud service providers is the expense of building out infrastructure without knowing how or when revenues will follow. As a result, cloud providers are reevaluating their approach to hardware and software investments and engaging with technology and networking vendors to develop creative pricing models that are aligned with cloud business principles and engineered to reduce risks.

In a perfect world, cloud service providers would pay for infrastructure only after a customer has made a purchase - in order to maintain a tight correlation between revenues and expenses. In the real world, however, implementing this type of model is easier said than done. This was especially true during the ‘iron' age, when hardware and software were highly coupled and there were very few alternatives to big vendors that focused on selling high-dollar, high-performance networking gear.

Today, however, new approaches are emerging with the goal of minimizing upfront investments in both hardware and software. One of the most compelling new approaches takes advantage of performance improvements in server virtualization. Leveraging virtualization has several benefits, one of which is the ability to maximize the use of compute resources. Although specialized hardware can provide some performance advantages, the downside is that unused compute resources cannot be utilized or shared by other functions. For many service providers operating on thin margins, idle resources that cannot be monetized can mean the difference between profit and loss.

In contrast, virtualized server resources can be spun up and spun down to perform a wide range of functions and enable a wide selection of services. While hardware will always remain a large expense, standardizing on server virtualization generates savings in the form of volume discounts and also provides the flexibility to ensure maximum ROI is being extracted from the infrastructure. In other words, a virtual machine that ran load balancing yesterday for one customer could just as easily run application services today for a different customer.

The other major benefit of server virtualization is the ability to decouple expensive software and networking functionality from the underlying hardware. While hardware needs to be purchased up front to provide the foundation for services, software does not. Software can be purchased on demand. In fact, software can enable service providers to be real-time technology resellers - seamlessly making products from a range of technology vendors available to their customers. Or software may be purchased on demand in direct proportion to the provider's need to scale or support services purchased by their customers.

A notable example of this trend is software-based networking products - as exemplified by virtual load balancing, secure access and WAN optimization. Instead of focusing only on high-performance dedicated hardware, networking vendors now give cloud service providers the ability to run essential functions in virtualized environments on commodity servers. By giving service providers the ability to move application networking functions onto a common virtualized server infrastructure - and focusing on integration with orchestration and cloud management systems - networking vendors are giving service providers the ability to significantly lower the cost of service creation.

Although significant, this shift is only the beginning. Service providers are demanding even greater creativity from technology and networking vendors. Although virtualized solutions lower capex and opex and provide the ability to respond quickly to customer needs, they still require service providers to invest up front in costly perpetual licensing. Even with the advent of lower-cost and time-bound subscription models, service providers are still required to purchase licenses up front on the expectation of turning a profit as they resell services.

In response, some technology and networking vendors are breaking new ground and turning traditional pricing models on their heads. As an example, a vendor may charge service providers a nominal amount to run software load balancing in a virtualized environment and forgo traditional licensing schemes. In this new model, service providers pay nothing in the way of user licenses until such time as they ramp customers.

Whether the load balancing is used "under-the-cloud" to support and scale software services, or made available "over-the-cloud" as infrastructure services, these new models offer service providers "map-of-the-earth" pricing. In other words, the service provider pays the networking vendor in direct proportion to demand.

Customers simply purchase services on-demand and get charged by the service provider according to metrics such as time or bandwidth. As customers pay, the cloud service provider and application delivery networking vendor generate revenue simultaneously based upon a predetermined arrangement. Depending on the type of networking service being resold and depending on the nature of the service provider's business model, billing could be driven by throughput, users, connections or transactions per second or any variation that provides the most compelling offering to customers and the greatest margin to the service provider.

On the flip side, for these new business models to gain traction, billing and provisioning for customers, providers and vendors must be automated and integrated with service provider cloud management systems. For technology and networking vendors, that means putting as much effort into orchestration as they put into core capabilities - an effort that is well underway.

By standardizing on a common hardware architecture, leveraging virtualized to maximize ROI, decoupling hardware from software and evolving to new on-demand software business models, cloud providers gain a massive improvement in their ability to be profitable. With less risk and less outlay, service providers are better able to manage and grow their business and a rising tide lifts both service providers and technology and networking vendors. As business increases for the cloud provider, technology and networking vendors can also build automated volume discounts into the business model, which may be triggered to encourage growth and further control costs.

As cloud computing and cloud services continue to accelerate, cloud providers - whether offering software, platform or infrastructure services - are well advised to seek out technology and networking vendors with a broad suite of virtualized offerings and a willingness to work with providers on pricing strategies and business models that enhance profitability for both parties.

More Stories By Paul Andersen

Paul Andersen is the Marketing Manager at Array Networks. He has over 15 years’ experience in networking, and has served in various marketing capacities for Cisco Systems, Tasman Networks and Sun Microsystems. Mr. Andersen holds a Bachelor’s Degree in Marketing from San Jose State University.

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