Why Business Models need Cloud Computing

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I have wondered for most of the last couple of years just how long ‘free’, meaning paid for by advertising, services on the web could go on for, and with a recession looming this seems to be the time that this could get cut back. However when I look into this a little more carefully I find that my impression of ‘free’ as a business model supported by advertising is perhaps already out of date as the successful players have used ‘free’ to reach either ‘freemium’ or ‘complementary’ models. Even more interesting it would seem that the ‘complementary’ models are an integral part of Cloud Computing.

Let’s start with ‘freemium’ as a business model, meaning give something away for free to create a market and demand, then charging those who are looking for more than the basic service. Adobe would be the grand daddy of this to me, just look at Flash, or PDF, to see what ‘free’ downloads have done to create a global market standardised around your technology, then consider what this has created in terms of a ‘locked in proprietary’ market for their professional products. Am I complaining? Well, no I am not, as in general I reckon we are all the beneficiaries of Adobe using the ‘freemium’ model. At one end as consumers and at the other by being able to build documents and graphics that we know people will be able to consume. In short ‘freemium’ models work when the balance is set to win- win.

The challenge is exactly how many areas can this work in? I mean is there an indefinite number of consumer end additions that a reasonable number of us are going to want? Take a look at Silicon Alley where they have compiled a list of companies who are working the ‘freemium’ model, try and see how many you are tempted to download from because it seems to offer reasonable value to you as a user. As this piece comments the interesting thing is some of the best known success stories such as Flickr and LinkedIn started as advertising supported and migrated into ‘freemium’ funding so perhaps I am thinking about this into too narrow a way and the model can apply more broadly to sites and services too.

However the real money, both as an investment to get started and in terms of potential to build an unassailable position, belongs with the ‘complementary’ model, and there is no finer example of this than Google. Hang on a minute is not Google the absolute best example of advertising funding? Yes it is, but the Google franchise runs wider and deep these days so more income is starting to come from other sources. The basis of a ‘complementary’ model is very very old, in fact the usual example is the ability to sell mustard to go with the purchase of a hot dog. This doesn’t work for me as usually I expect to get the mustard for free, but try going into a restaurant for a fixed price meal that looks attractively priced and see how much you pay for drinks plus coffee or tea. That’s where the real margin is made.

Google is using free, as in the search engine, to build a huge information base, which it can sell not just as advertising, but as a widening range of complimentary services to commercial users. Think Google maps as an example. Nicholas Carr treats us to his view on this in a longish, but quite interesting blog which I personally found to have some good perceptive insights, including a comparison with Microsoft.

The key question is how to make the various elements of a ‘complementary’ business model accessible to be consumed, by the ‘net economy’ as Nicholas Carr calls it. This brings us back to the Cloud Computing model, not the current much discussed element around using cheap MIPS, but the two higher layers around business services and most of all around ‘platforms’. If you want to understand the Cloud Computing model and its layers then take a look at my past post on this. If you want to make money by getting people/businesses to buy a complementary service then you have to have a way to deliver it, and unlike content this is not likely to be a static page to be sent, but a full on interactive ‘service’ that has to be able to run independently of the people/business using it as part of their process. In other words there are a whole series of major industry players out there who need to get the Cloud Computing model in place to be apply to maximise the use of their ‘services’ and revenues!

So there you have it; whether its IBM, or HP, Google or Amazon, Oracle or Microsoft just to mention a few names they all want to create the Cloud Computing model as a way of making a better business model for them, and to be fair I think for all of us in the same way as the ‘freemium’ model it will be a win-win. As a colleague remarked the technology of the Cloud is evolutionary, but the business model is revolutionary.

Posted by Andy Mulholland on November 19, 2008 | Digg this | Seed Newsvine

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Comments

# on November 19, 2008 10:42 AM, Maarten said:

A funny but somewhat serious note to this: try Googling for 'microsoft azure' and see what Google comes up with. Seems they have figured out where Microsoft hides its Cloud Computing ;-)

More on this at my Blog (click on my name to access)

# on November 19, 2008 12:39 PM, andy mulholland said:

hi maarten

you have an interesting blog - liked 'the ten dumbest ideas in IT' post in particular

andy

# on November 20, 2008 1:16 AM, Niraj J said:

A key thing for success in Complementary business models is Lock in. You give something free to enable a sale elsewhere.The lockin will make sure that the elsewhere is somewhere in your world and not anywhere else.

Some examples:(IMHO)
1.Sun micro did not monetize on java to the extent that it could have - as the elsewhere was anywhere(IBM ,BEA etc).
2.Google App Engine - actually has a very good lockin. The cloud is free to begin with but when your business grows you cannot just plug your application out and put on Amazon. Appengine is totally proprietary. Hence I think a potential financial success . More here http://www.gandalf-lab.com/blog/2008/10/google-microsoft-and-amazon-ibm.html

# on November 20, 2008 10:15 AM, Alain Yap, Morph Labs said:

Obviously, IT is at a crossroads with plenty a cloud compute vendor lining up like a sort of catch basin for the influx of adopters with varied reasons (but mostly driven by promise of relatively inexpensive solution).

What the catch basin will look like remains to be seen. Until then cloud computing will remain mysterious and tempting and bleeding on the free model as well.

Will be keeping an eye on that 'revolutionary' thing especially when there's specifics.

Best.
alain

# on November 20, 2008 8:31 PM, andy mulholland said:

two good comments - and with the current news on Sun taking out 18,000 employees rather clear that they have failed to create a 'lock-in' model with Java, yet looks like IBM have?

good post on google.amazon and microsoft Niraj!

It seems to me that a recessionary market will be a key element in the change of IT business models to one based more on pay by use and offering the vendors an 'annuity' funding model. Licensing got changed in the 1990/1 recession with the advent of the PC and networking - though in truth it had been changing in the late 80s, (bit like the way SaaS has been emerging) but a tighness of budgets became a key factor in accelorating the change.

# on November 24, 2008 5:00 PM, Jeff Hardy said:

About two weeks ago I sat on a panel for Cloud Computing with some of the heavy hitters inthe game. As an independent software vendor, my part of the presentation was to discern truth from hype in all of the claims being made. Needless to say, I got a lot of feedback--so much so that I wrote a follow up article on it:
http://www.smartertools.com/blog/archive/2008/11/20/cloud-computing-challenges-benefits-and-the-future.aspx

It is important for us to remember what Cloud Comuting is and what it is not.

Be well,
Jeffrey J. Hardy
http:www.smartertools.com

# on November 24, 2008 7:38 PM, andy mulholland said:

You are so right to pick up on what cloud computing really is, and more importantly what are cloud services over cloud computing too. We are in a typical hype phase at the moment!

i plan to write more on this topic in the coming weeks to match up with a new white paper that i co wrote with Russ Daniels the CTO for HP Cloud Computing development. There is no sales line in it, just a straight forward attempt to get some more information across and most of all to draw attention to the higher platform service layer.