Cloud Computing business models
Let's start with the financial aspects of the current business models of cloud computing providers. There are three components that are important in the business model.
- Value Proposition
- Pricing Mechanism (Revenue Model)
- Cost Structure
As I understand it, the value proposition of a particular provider would determine what the provider's cost structure would be and what kind of price the provider can demand from its customers. Thus a short discussion of the current value chain is necessary to understand the cost structure and pricing mechanism.
Value ChainThe diagram below describes the cloud computing value chain and was developed based on the work of Jaekel and Luhn (2009) titled "Cloud Computing – Business Models, Value Creation Dynamics and Advantages for Customers", Leimeister et al. (2010) titled "The business perspective of cloud computing: actors, roles, and value networks", and Zhang et al. (2010) titled "Cloud computing: state-of-the-art and research challenges".
By now, you probably understood that firms choose to serve any number of components of this value chain according to their capabilities and long term strategies. Moreover, firms form strategic relationships, technical alliances and consortium memberships to integrate functions so that they can deliver a value added service to the consumers.
Most of the current cloud providers offer fixed pricing and volume dependent pricing. Some of the industry giants provide some customization as most of the consumers are SMEs and look for little to no customization. Thus you can find some differential pricing in the market mainly because of volume dependent pricing. The market pricing category, in my opinion, would be relevant mainly for big enterprises which are yet to move their entire ICT need to Clouds. As I discussed in the previous post, providers need to innovate more to offer additional value added services to attract big enterprises.
In the Service Delivery Book, Office of Government Commerce (2001) lists hardware, software, people, accommodation, external service and transfer as traditional ICT cost types. Because of the presence of elastic resource utilization and virtualization, cost structure in the cloud computing paradigm differs significantly from that of the traditional ICT. In the article titled "The Method and Tool of Cost Analysis for Cloud Computing (2009)", Li et al. listed two cost types that are to be included while calculating the accounting cost of cloud computing for the providers.
- Total cost of ownership (TCO): Its the fixed cost of providers that they incur to build the cloud infrastructure and to operate the cloud.
- Cloud utilization cost: Its the variable cost that is incurred by the users depending on extent of usage.
Because of automation, operational staff cost is below 5% are thus is not included in the cost calculation.
Depending on the existing capabilities and long term strategies, providers design their value propositions. Cost structure and pricing strategy or revenue model are direct dervatives of the value propositions. Thus ROI of the providers depends how attractive their value propositions are.