The New World of Hosted ServicesFrom Cost Control to Business Innovation

Michelle BaileyVice President, Datacenter Initiatives and Digital Infrastructure

451 Research Hosting & Cloud Coverage

Hosting

Mass Market Hosting Managed Hosting

Shared Hosting / VPS

Dedicated Hosting

Cloud

IaaS PaaS ISaaS

PublicCompute

Public Storage

IT Mgmt

Online Backup & Archiving

CLIENT CUSTOMIZED; PHYSICALLY DEFINED; RECURRING REVENUE MASS PRODUCED; ELASTIC RESOURCE; PAY AS YOU GO

2

Worldwide Hosting & Cloud Market Size, 2010 – 2014Cloud Share Increases from 6.9% to 20.6%

2010 2011 2012 2013 2014

Infrastructure Software as a Service 684 967 1400 1905 2486

Platform as a Service 359 630 1359 2216 3016

Infrastructure as a Service 680 1495 2772 4001 5486

Managed Hosting 12808 15524 18839 22908 27893

Shared Hosting 7359 7979 8662 9416 10254

Dedicated Hosting 3078 3257 3490 3787 4177

$5,000

$15,000

$25,000

$35,000

$45,000

$55,000

$US

Mill

ions

Total Hosting + Cloud $24,968 $29,852 $36,522 $44,233 $53,312

CAGR 10-14

8%9%

21%69%70%

38%

21%

CAGR59%

CAGR16%

3

Encouraging Signs of US Economic RecoveryBusiness Metrics Trend Upward and Consumers are Cautiously Optimistic GDP Growth Jobs Growth Low Inflation Housing Prices Consumer Spending Low Cost of Capital

4

Economic Recovery Changes Business PrioritiesQ. Allocate 100 points among the following five goals

as they relate to your company or organization Priorities by Company Size

Smalln=422

Mediumn=522

Largen=417

Very Largen=179

35 31 29 25

22 25 25 30

22 22 23 20

11 11 11 11

11 12 13 14

Increase revenue Lower costs

Improve product or service quality Speed time to market

Lower risk

In-crease

rev-enue30.6

Lower costs24.7

Im-prove prod-uct or service quality

22.0

Speed time to market

10.8

Lower risk11.9

n=1540

5

IT Spending Has Stabilized, Yet Growth is InconsistentU.S. Corporate IT Spending Indicator vs. S&P 500 Index

Source: 451 Research ChangeWave, Q113

6

Roadblocks to Pre-recession Growth

Cash Rich/Innovation Poor Corporations Cash hoarding

Cash: Assets 1995=6%; 2012=12% Bloated balance sheets Limited long-term investments

Projects with 3-6 month ROI Executive careers built cost-cutting,

not innovation Efficiency projects vastly exceed

new business projects

7

How Business Behavior Impacts Technology Decisions Cost of capital is at an all time low• Investments in efficiency when cash is abundant opens the door for faster

moving competitors• Yields on long term investments start to look better than short term investments

Products for the few have limited long term value and payoff Products for the masses by definition create extensive value and will

be the cornerstone of the next wave of application development

IT Project Portfolio Today IT Project Portfolio for Business Growth

8

Economic Recovery Changes Operational CultureQ. Which of the following best describes the operational culture of your organization?

O ver a l ln=1540

Nor th Amer i c a

n=590

Eur open=409

Asi an=419

L a ti n Amer i can=122

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

32% 31% 33% 35%

21%

26% 32% 23% 23%

21%

21% 16%18%

26%

32%

13% 14%16%

13%

6%

8% 7% 9%3%

19%

0% 0% 0% 0% 1%

Other

There is no directive

Keep doing what we've always done

Invest quickly for new growth

Do more with less

Realign for the next phase of our organizational strategy

Perc

ent o

f Sam

ple

9

How Hosters are Helping Solve Business Problems

Importance of Cut Costs vs. Grow Business

Cut CostsReduce spending on systems hardware

Reduce staff time on IT maintenance

Minimize software licensing costs

Reduce IT Complexity

Improve security of data & applications

Scale IT resources as business demands change

Automate the provisioning of IT resources

Modernize or refresh our technology

Reduce the datacenter space we manage

Pay as we go pricing

Grow BusinessGet new products or services to market faster

Regional or global expansion of our business

Support development of new types of applications

Improve the availability of our applications

Move Resources to Off-premise Datacenters

IncreaseSatisfaction

Meet 2-yearBusiness Goals

n=1540

6x 1.5x 1.5x

10

Website Hosting

Dedicated servers

Storage

Security Services

Database Hosting

Backup/Restore Services

Shared/multi-tenant servers

Disaster Recovery/Business Continuity Services

Premium 24 x 7 support services

Virtual Desktop Hosting/Hosted VDI

Basic Infrastructure Monitoring/Management

Colocation

End to End Application management

Archiving

Big Data/Hadoop Solution

Identity Management

Capacity Planning

Regulatory compliance management

CDN/Content delivery Network

0% 10% 20% 30% 40% 50%

2 yearsCurrent

Hosted Services Adoption Increases Dramatically as Customers Define “Their Cloud”Top 3 Services Ranked by Spending

Q. Rank the top three hosted infrastructure services that you procure today in terms of spending. And in 2 years?

Percent of Sample Ranking 1st, 2nd, 3rd

Growth in hosting will increasingly come from non-core services More than 50% of customers are already paying for

security services Security and database are most prominent with security

spending exceeding that of storage Backup, shared servers, DR and VDI are outpacing

current adoptionThe requirement for “full-service” grows as the size and importance of the off-premise application portfolio grows

Average Number Services Currently Purchased = 930% of respondents currently purchase 10 or more services

n=1225

11

Providers that offer full service capabilities have distinct market advantage

Q. Moving forward, is the preference to use: Multiple

service providers that are good at

doing one or a few

things28.6%

A small number of service providers that can offer a

lot of different services45.0%

No prefer-

ence22.7%

Don't know3.6%

While customers report that they are likely to increase the number of providers they work with over the next 2 years, the preference is to reduce the number of contracts and partners and work with providers that offer multiple services

Median Today: 2 Providers

Median 2 years: 3 Providers

n=1540

12

Enterprise Applications

Email

Database

Business Support Applications

Collaborative tools

Analytics/Business Intelligence/Data mining

eCommerce/eBusiness

Unified Communications

Media Streaming

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

2 Years Today

Emer

ging

Saa

S A

pplic

ation

s

SaaS Applications – Top 3 Ranked by Spending

Core applications remain important in SaaS markets

Growth in spending will come from analytics, ecommerce, UC and media streaming

These applications will be “cloud native” for many customers with implications for underlying infrastructure and datacenters

Shared infrastructure grows with increased adoption of these new applications

13

Applications are already business critical in Hosting & CloudImpact of Service Provider Outage by TimeQ. Thinking about the applications that are installed with your Hosted Infrastructure Providers, what would be the PRIMARY

impact to your business if these applications were unavailable for:

Perc

ent o

f Sam

ple

5-minut es 1-hour 1-da y

10% 16%

32%13%

27%

19%

10%

23%

29%

20%

22%

12%

46%

13% 8%

Little to no impact

Some impact to operations, but nothing detrimental

Loss of credibility externally with our customers or partner

An important or large part of our employees base would be unproductive

Loss of revenue

n=1218

Cloud based applications are already business critical – 80% would experience a severe business impact after 1-day

Security and availability are tablestakes, not nice to have

Customers expect full-service to support business requirements

14

How Customers Select a Service Provider

Importance of Support & Trust vs. Expansion Capabilities

Support and TrustFirst-class customer support

Easy setup and configuration

Superior security capabilities

Can customize for my specific needs

Quality of Service Level Agreements

Low cost

Uses best-of-breed technologies

Trusted Brand

Rich set of management tools

Pay as we go pricing

Expansion CapabilitiesBroad geographic presence

Bursting capabilities to meet seasonal or unpredictable demand

Local facilities with onsite personnel

Offers a wide variety of services or products

Recommended by my peers

Offers 'try before you buy' trial periods

Move Resources to Off-premise Datacenters

IncreaseSatisfaction

Meet 2-yearBusiness Goals7x 2x 3x

15

Today 2 Years0%

10%20%30%40%50%60%70%80%90%

100%

11% 9%

19% 19%

17% 17%

24% 25%

29% 30%

Other Outsourcing PaaS SaaS

IaaS

Follow the MoneyThe Next Two Years will be the Era of Private Cloud as an On-ramp to Public Cloud

Off-Premises Hosting Deployment

On PremisesInfrastructure Deployment

On-Premises; 55%

Off-Premises; 45%

IT Budget Allocations

Today 2 Years0%

10%20%30%40%50%60%70%80%90%

100%

47% 39%

33%36%

19% 26%

Standalone VirtualizedPrivate Cloud

On-Premises; 54%

Off-Premises; 46%

Today

2 years

Today 2 Years0%

10%20%30%40%50%60%70%80%90%

100%

56%45%

25%34%

19% 21%

Trad. Dedicated Hosted Private Cloud

Public Cloud

Infrastructure Deployment

16

Hybrid Cloud Models – Strong Adoption IntentionsQ. Has your organization adopted either

of these hybrid cloud models? In 2 years?

Today 2 Years0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

28.8%37.8%

20.1%

30.5%

56.0%

40.9%

Neither

Private Cloud Off-Premises + Public Cloud

Private Cloud On-Premises + Public Cloud

The anticipated adoption of hybrid clouds models in 2 years is strong Both on-premises and off-premises private

clouds with public clouds We expect that the adoption of security

services and hosted private clouds POC is a major driver and is laying the ground work for future architectures

n=1540

17

Security is a necessary investment to make Cloud a Reality, no matter what type of cloud customers build

Q. What is the single biggest challenge for your organization to adopt a cloud model?

Private Public Hybrid0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Other

Reliability

Making a Business Case

Training Issues

Integration/Implementation

High Cost

Security Concerns

Security is a necessary investment to make cloud a reality, no matter what type of cloud customers choose to build

18

n=1540

Jan

2013

Oct

201

2

Jul 2

012

Apr

2012

Jan

2012

Oct

201

1

Jan

2013

Oct

201

2

Jul 2

012

Apr

2012

Jan

2012

Oct

201

1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Very Reliable Somewhat Reliable Not Reliable

Security is a Differentiator in the CloudPublic Cloud Computing Security Perception by Quarter

Cloud Non-Adopters

% o

f Tec

hnol

ogy

& B

usin

ess

Prof

essi

onal

s

2013: n=4842011: n=473Source: 451 Research, ChangeWave Service

Among cloud adopters: Security is perceived to be twice as reliable compared to non-adopters

Cloud Adopters

19

Transparency is Critical to DifferentiateQ. Other than SLAs, are there any other metrics or service terms that you think service providers should report about their

overall service quality among their customer base? CHECK ALL THAT APPLY

20

Data theft and Security Attacks and Time to Recover from Outages are top concerns for hosting customers

SPs with rigorous and successful business practices should report these additional metrics To differentiate from competitors To challenge internal IT departments

capabilities To set a new standard for customer

support and trust To attract Very Large organizations

(5000+ employees) To Change the Game

Data theft/Data loss event

Number of security threats/attacks/breaches

Mean time to recover from outages

Number of datacenter outages

Unauthorized access event

Liability guarantees/insurance policies in the case of loss or theft

Clear ownership rights of data, either primary or backups

Risk of data in motion

0% 10% 20% 30% 40% 50% 60% 70% 80%

61%

57%

57%

51%

47%

43%

39%

36%

70%

67%

61%

60%

54%

54%

44%

43%

Very Large (5,000+ employees) Overall

n=1540

SLAs remain important as a business toolQ. What specifically around SLAs is important to your organization?

Those with the most significant decision making authority have the greatest need to understand SLAs; those who manage the relationship are significantly less concerned with SLAs, with the exception of “Time to Respond” This underscores the importance of

reaching the true decision maker, not just the relationship holder to convey message around Uptime, etc. This decision gets made at a different level in the organization.

Guaranteed uptime

Time to respond

Time to recover

Flexible SLA options

0% 10% 20% 30% 40% 50% 60% 70% 80%

Significant Decision Making AuthorityInfluential in Decisions/StrategyMake RecommendationsManage 3rd Party RelationshipsOverall

n=1540

21

My Cloud, My Way

Transparency: Publicizing SLAs and track record of failures. Defining SLAs in a way that we are

comfortable. Right to audit and review… People will look

at their track records. Transparent with how they can offer an

SLA – how can they offer the SLA and why will they meet it.

Open the kimono. Every bit of it seems a little bit too cryptic and hidden.

Security Encrypt your data, become compliant and

more transparent. More on security. We are hearing way too

many horror stories. Minimizing Data Leakage and Security

Breaches and Improve Reliability. Not showing in news reports as being

broken into.

Availability Provide insurance in the event of service

disruption. Not make it to the newspapers at least

once a week. The problem is the number of service outages.

A lot more open. Amazon had an outage a month ago. Losing power is not an excuse for loss of service.

Build a Trusted Relationship – Demonstrate Competence Provide case studies of success cases.

I would like to see a greater level of transparency as well.

Do what they say and follow through – deliver on promises.

Think product maturity. Reference-able examples of maturity.

Q: What could the vendor/service provider community be doing to increase confidence and trust?Customers will go to cloud

when they are in the drivers seat Data locality Security Recovery Transparency

Source: 451 TIP Research, 2013

22

Microsoft Windows Azure

IBM Managed Services

Amazon Web Services

GoDaddy

Verizon Terremark

Rackspace

Saavis

None of the Above

76%

75%

68%

50%

34%

32%

14%

3%

Big Brands are Important in HostingQ. Which of the following hosting service providers have you heard of?

n=1540

Awareness does not match market shareBig name brands are particularly strong among: Large Businesses (>500 employees) Individuals with significant decision making authority Among organizations where SP outages would have a business

impact

Microsoft and IBM are best known among organizations seeking to “grow quickly” or “realign for the next phase of their business”

Amazon is best known among organizations seeking to “do more with less”

Lower SP awareness in Latin America across the board

Partnering for brand awareness is increasingly an option in a heated, competitive market, particularly channel partners

23

Software is StickyQ. When buying SOFTWARE-AS-A-SERVICE or SaaS applications, does your organization typically use:

Overall Very Large (5,000+

employees)

Age of Organization

25+ years

Early Adopters

0%10%20%30%40%50%60%70%80%90%

100%

0.6250.758 0.702

0.489

0.3750.242 0.298

0.511

Software HAVE used previously on-premisesNew Software HAVE NOT used previously n=1334

Two-thirds of SaaS customers use software online that they had previously installed on-premises

Software loyalty and brand recognition matter in the hosting market, particularly for Very Large organizations where software migration is far-reaching and expensive

24

Bundle, but be TransparentPreferred Services Packaging

More than half of all IaaS & SaaS customers prefer bundled offerings rather than paying separately for services. Early Adopters prefer separate pricing

Overall

Early Adopters

Early Majority

Late Majority

Laggards

0.452

0.531

0.464

0.368

0.417

0.548

0.469

0.536

0.632

0.583

Separately Bundle

Q. Do you prefer to buy hosted infrastructure services separately or packaged as a bundle?

Q. Do you prefer to buy SaaS applications separately or packaged as a bundle?

Overall

Early Adopters

Early Majority

Late Majority

Laggards

0.48

0.57

0.48

0.44

0.37

0.52

0.43

0.52

0.56

0.63

Separately Bundle

n=1182 n=1051

25

Global

Regional

National

Other (MSPs, VARs, Social media)

TelecomProviders

Hosting ProvidersISVsSystems

integrators

Build Ecosystems Across a Number of Segments

Mergers & Acquisitions

Effective Partnerships: Shared Risk Shared Resources Shared Rewards Shared Vision Shared Values

26

Trends: Service delivery models consolidate

Lines between managed hosting, dedicated hosting, co-location and cloud blurring.

Hosting & co-location SPs benefiting from bundling technology and services together.

Expectation: market heading towards an abstraction of the technology products offered by SPs versus the services offered on top of those infrastructures/platforms.

27

ConclusionsFocus on your core competencies and value proposition, but understand what lies ahead

IT runs a portfolio and they want you to outperform on IT operations Full service is the future – and where the money is made Partner where it makes sense

Differentiate on outstanding service & promote your successes Hire a Chief Customer Officer Provide customer wins and references with case studies – be clear how you can help an how you

are keeping pace with the market

Better Metrics!!!!!!! Prove why customers should trust you Provide metrics on security and management that will challenge your biggest competition – the

internal IT department SLAs are table stakes, but not sufficient

Make cloud non-disruptive Brands still matter Make security the stepping stone to cloud Bundle offerings, but provide transparency

Help customers grow their business, not just cut costs New geographies Support new and existing applications Time to Market

28