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CHANGING DYNAMICS OF CLOUD COMPUTING

Cloud on the horizon

With Microsoft, Amazon and Google expanding their cloud offerings—now one of their biggest revenue contributors—the silver lining for Indian service providers is fading

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A few months ago, when the official Twitter accounts for the Congress party and Rahul Gandhi were compromised, the thing that stood out was the ease with which it is possible to hack high-profile accounts in India. Instead, what happened was an old trick. The hack had nothing to do with the social media accounts. The data servers hosting the emails were attacked, and the emails were re-routed to a proxy destination. Among them were the emails to reset the Twitter account password.

“The hacker attacked systems of Net4 (the email hosting company) and redirected the mail coming to the Congress mailbox,” says Kiran Jonnalagadda, founder of HasGeek. “They got the reset link for Twitter, reset the password and got into it. Those accounts did not have the second-factor authentication enabled. So nobody got to know about it.” Easy does it. Of course, Net4, the domain name server and hosting services provider, which runs data centres as well, denied the allegations that its systems were compromised.

“Traditional (hosting and data centre services) companies like Net4 are not keeping up with the times,” adds Jonnalagadda. “They are running on the back of old customers who just don’t want to move on. Since they don’t maintain the software, they are bound to fall if someone discovers the flaw. And they don’t have the institutional ability to fix it anymore because they don’t have developers. It is a high-risk bet.”

Net4 isn’t the only one in a quandary; as much as it would like to deny. As businesses go digital, services in data security, scalability and flexibility have exploded. There is a full gambit of data centre services (which call themselves cloud providers) in India, running emails, websites and services for businesses, which in turn provide services to their clients. According to industry estimates, there are 150-200 companies, each with revenue ranging from Rs 2 crore to Rs 20 crore and about 1000 customers on an average.

Then there are a handful large cloud providers like Netmagic, CtrlS, Tata Comm, E2E, ESDS and Web Werks among others. Of course, there are telecom and IT companies, which host their clients’ data in their own data centres. Till about 18 months ago, they enjoyed fat margins. They had IBM Softlayer as a competitor but there was enough dough for everyone.

Enter Amazon AWS, Microsoft Azure and Google.

They’ve been in India for a while, but, in the last year or so, have exponentially expanded their cloud offerings. By 2015, globally, the cloud had become one of the fastest growing businesses for the trio. For instance, AWS contributed $7.8 billion or 7.2% to Amazon’s total revenue of $107 billion that year. In 2016, AWS revenue rose to $12.2 billion and contributed 8.9% to the entire sales. Microsoft, on the other hand, last month, said that its commercial cloud had an annualised run rate of $14 billion. Google doesn’t provide breakup for its cloud business, but according to a Wired article, cloud took centre stage for the search giant last year. And when you add the fact that India’s public cloud services sector is on its way to becoming a $1.81 billion market this year, it’s easy to see why they are investing here.

The formidable three have begun to eat the lunch of existing service providers, some of whom are now going to go hungry.

The opportunists

Some background first.

Hosting and data server business—a group of computers which provide storage, network and compute power to others—is a profitable one. Cloud is a nomenclature for a data centre. The only difference between the two is that a data centre cannot scale. If you have five servers in a data centre and you want one more, you will have to buy one more, whereas in the cloud, if you want one more server, you can virtually create one out of the existing servers. Because in a cloud setup, there is a tool called hypervisor, which allows you to create more machines out of existing machines.

Data centre companies at least have 30-35% margins.The bigger companies like Netmagic, CtrlS, Tata Comm and Reliance have data centres in India. They provide colocation services—they let other cloud providers run their servers in their data centres. They lease it to everyone—be it Amazon Web Services (AWS), Azure, Google,  E2E or even smaller companies. That is their cash cow. Of course, this is in addition to private cloud (dedicated resources for end users) and public cloud (shared resources) they offer.

Business has been stellar for the last 10 years or so. Well, up until recently.

With the overall push to digitisation, from banking to government, global cloud firms have doubled-down on their investments. Microsoft set up three data centres in September 2015; AWS started with two data centres in July 2016 and Google plans to debut this year.

For an everyday business, the focus has shifted to a concept called Infrastructure-as-a-Service (IaaS)—where you pay for what you use—something that was being used only by core tech companies and IT services providers so far. “Cloud is more than providing infrastructure. It is about services,” says Vijay Rayapati, CEO at Minjar Inc, a San Francisco-based company that provides a cloud management platform. “Apart from infrastructure as a service, the big companies like Microsoft, IBM, Google and AWS provide applications that make it easy for developers to code, offer development platforms as a service and have software vendors as partners so as to provide software as a service.”

Along with them, global cloud companies brought self-service culture—where one could go and set up data servers (virtual machines) online in no time. They offered security and software tools to build applications. “And then they went after all the big and small enterprises, which were out there,” says Rayapati.

India is still a price-conscious market. So the tech giants did two things. One, they significantly dropped prices (yet they were 50-60% more expensive than local providers). And two, they started with goodies worth thousand dollars for large enterprises. Which is their standard practice globally. For instance, over the last decade, AWS has reduced prices 59 times, the company said in an email response. Microsoft and Google, on the other hand, leverage their existing channels.

“Suppose NDTV was hosting on one of the Rs 20 crore guys and paying Rs 5 crore a year,” says a venture capitalist whose firm has invested in one of the Indian cloud companies. He requested anonymity because he is not the official spokesperson. Now if Microsoft wants NDTV to come on to its cloud platform, it would either need to quote a lower price or offer some incentives over and above it. So Microsoft might sell NDTV its cloud offering for Rs 7 crore a year, along with Rs 2 crore worth of goodies like licenses for its products including  Windows, Office, SQL, etc., he explains.

All this has put tremendous pressure on the smaller, Rs 2-20-crore hosting providers. “Now all these guys are feeling the heat because there is no strong differentiation as compared to Azure or AWS,” adds the VC official.

Targeting the native-born

The multinationals also went after India’s born-in-cloud startups. Starting late 2015, they began offering free credits to startups.

“While we were developing our product, we were hosting it with a local company. Because AWS was too expensive,” says Pragnya Srivastava, co-founder of FlatPi, an AI-based hiring company for enterprises. “But every other day, our system was down. Ultimately, we were told by the company that our system was being attacked multiple times by programmes known as crawlers.”

She says, “The local provider told us this: ‘boss, itna to hoga hi’.” (This much breakdown is a given.) A few days later, FlatPi switched to AWS using free credits. “We found that all the software that we were using on our servers on AWS, including the operating system, were tweaked to enhance security. We could have done it from our side using other means, but AWS already took care of it,” says Sudeep Patil, who was the technical lead at FlatPi then.

“For the startup community, AWS is equal to security”, adds Srivastava.

While Microsoft provides $120,000 worth of cloud credits for startups, AWS offers up to $100,000 worth of credits for funded startups. For individuals, it’s a free trial—meaning, you can run a dual core server with a 5 GB storage space for an entire year without paying anything. No surprise then that AWS has more than 80 of the top 100 startups in the country running on its platform. Google is not far behind. In 2015, it had announced free credits worth $20,000 for 1000 startups in India. It also runs Google Cloud Platform, which offers startups up to $100,000 in credits. Naturally, the companies migrated in huge numbers.

While the dual strategy worked for the tech giants, they also started packaged offerings for running, say, a blog or a website, just like the smaller players. It was the last nail in the coffin. “This impacts small hosting providers, who have been riding on selling such services to individuals, the mom-and-pop shop or small businesses, now that the cloud providers are essentially providing the same at a lesser cost,” says Rayapati. “It is almost the end of the road for the smaller guys. While many are going out of business, others are gearing up for merger and acquisitions.”

However, some Indian companies think all is not lost.

“The impact of setting up local data centres is overrated,” says Tarun Dua, CEO at E2E Networks Private Limited, a Faridabad-based cloud provider. “However, the major impact is via a traditional capital dumping model of MNCs of providing free credits up to $120,000 to larger customers. It is hard to compete against that. We do lose customers now and then to free credits from one or another cloud operator but it hasn’t created a massive dent in our growth rate.”

BS Rao, vice president of marketing at CtrlS, which has four tier-4 data centres (the most secure of data centres) in the country, says that India has a need for local players because of the poor data privacy laws.

“When you say you have data centres in India, you can have 5, 50 or 500 servers. If there is an overshoot on capacity, what would happen? You may not want to build or lease another data centre, so you can always take the liberty to host the data anywhere in the world, isn’t it?  The customer will never know that,” he says. “India has very poor and weak data sovereignty, data governance and privacy laws. Awareness regarding cloud is poor in the country;  customers do not even know where their data is hosted.”

“Apart from government and banks, every enterprise has mission critical data, and we protect that,” he says.

The silver lining

The only challenge for the big guys is that they do not have people who can help clients run their businesses on the cloud,” says Rayapati. “So these smaller guys would be able to survive for a little more time.”

For instance, for AWS, server support is very expensive. Say your server cost is $20, but you will have to pay $100 for server support. This pricing doesn’t suit smaller customers. For larger ones, the problem is more of you-do-it-for-me mentality. Which is where there lies an opening, at least for the larger local service providers.

“Over the last 18 months, Indian cloud vendors and hosters have transitioned to a service broker model. They are delivering managed services by leveraging a combination of their own data centre services and from hyperscalers, such as Amazon Web Services and Microsoft Azure,” says Santhosh Rao, principal research analyst at Gartner. “They now have to compete (with) and complement these big companies. That is the only way to survive.”

That is exactly what E2E has done. Apart from converting part of its public cloud into a private cloud, last year it started its CloudOps—a platform for managed services. Basically, it helps users run their businesses on the cloud for other cloud providers like AWS and Azure.

That’s the only way out for small data centre companies, say experts. To work with the bigger guys and sell their cloud services to local customers, under their own name. And help customers use those cloud services. Because they don’t have money to transition to becoming a true cloud company that can scale on demand.

Meanwhile, companies like Netmagic and CtrlS, which have money, and thus have transformed into a cloud company, are trying to create differentiated offerings. For instance, CtrlS is investing more on data centres and creating a partner ecosystem. The company says it has already invested Rs 700 crore in the country and will put in Rs 1100 more to fuel the data centre expansion by 2020.

“We are in a good position. Last year, we created something called community cloud. One for banks, the second for ERP providers and the third for Goods and Services Tax Network, which we are deploying for the government,” says Rao of CtrlS. “What it means is that these are the specialised clouds, which will have core industry-specific software available for our clients to use.”

However, industry veterans acknowledge that consolidation is inevitable. Unless the data centre companies adopt new technologies, like, say, hypervisor, they would not survive. But the problem is they don’t have that kind of money. And as they lose clients, even the slim hope diminishes. Sure, they can work with bigger companies, but for how long?

“The smaller guys will have to get acquired by somebody because the dedicated server business is dead. All these hosting players are going to face challenges unless they adopt new technology, but for that, you need to put Rs 30-40 crore in R&D, and then also, you may fail or succeed,” says Rao of CtrlS.

Consolidation will happen in the industry, says Dua, who is planning to acquire two or three smaller hosting firms. “Apart from the top 10 (cloud) companies, there will be only 25-50 (smaller cloud firms) left. This battle is far from over.”

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