Netflix versus Blockbuster redux

Many cloud players are really only offering hosting services and may not survive, argues Julian Painter

We all know how quickly the internet changed the face of media distribution. Apple, which started life as a computer hardware manufacturer, is now the largest distributor of music in the world. In 2004 there were 774 independent record shops in the UK; just six years later this figure had more than halved to 300.

Of the 150 million singles sold in 2010, more than 98 per cent were downloaded.

Just as The Buggles announced in 1979 that video killed the radio star, at the turn of this decade Netflix, a video-as-a-service outlet, started to wipe out long-established traditional video rentals rival Blockbuster.

When the Dish Network corporation bought the bankrupt Blockbuster business in 2011, Blockbuster still possessed about 1,700 stores, which Dish closed at the start of this year.

Conversely, Netflix gained tens of millions of users for its video-streaming business.

The IT channel is experiencing a similar shift from physical distribution of hardware to distribution of software and services.

IT vendors have traditionally engaged with distributors to reduce the overheads in managing and recruiting channel partners.

Most independent software vendors now deliver SaaS, either as part of the portfolio or as a whole new focus. Within our own SaaS market relationships, Microsoft is the only vendor that still uses traditional distribution, which is probably a hangover from its boxed-product days.

While some distributors and resellers cling to their hardware and software capex-based sales revenues, a new breed of IT-as-a-service cloud aggregators are challenging their business model.

For small businesses looking to take on the big guys with smart technology, there are a couple of options. They could go to a distributor and be sold racks of servers, software, multi-year support contracts and onsite fix arrangements, then spend endless hours patching, upgrading, and then more upgrading.

The distributor, reseller and vendors are more than happy with this arrangement. The risk is all with the small business users and there is no incentive for the seller to drive customer satisfaction. It's on to the next sale.

Under-utilisation of servers? Only using 10 per cent of the available functionality? Not my problem, until contract renewal time, they might say.

The second option is for small businesses to go to the cloud and consume apps that power their business like a blue-chip organisation, paying a subscription for what they use, and not paying for anything they don't.

If they become dissatisfied, they switch to something else. If usage is low, they pay less.

Some resellers have recognised the service revenue that can be generated from cloud service adoption. However, many wrap even more support and maintenance services around customers' server use, and call it cloud.

In fact it's just hosting and merely moves all the customer's existing IT problems from its office to a datacentre.

Small businesses can currently consume apps Netflix-style. However, imagine if you had to download Lucy from Netflix, stream Maze Runner from another video-as-a-service provider and Lego Movie from a third service provider.

Then – unlike in the Lego Movie strap line – everything would certainly not be awesome!

Cloud aggregators like us believe that both the old IT sales model and the subsequent hosting model are still taking the Blockbuster approach to putting technology in the hands of small businesses.

Cloud aggregators put all business cloud apps (SaaS) and cloud infrastructure (infrastructure-as-a-service and platform-as-a-service) in one place for purchase. This provides end-user business with a single logon to all apps and services, a single support line, and a single management and reporting console.

What's more, there's just a single itemised bill, just as you get for all the movies you watch on Netflix.

Cloud services brokers or aggregators offer SaaS vendors a new route to market. This new breed of partner changes the game for distributors and traditional channel partners, while protecting productivity and reducing expense for their small business customers.

True cloud is a game-changer for IT and we are starting to see a radical change in the channel as more businesses adopt cloud-based apps, infrastructure and services.

Distributors need to act now to ensure that they adopt a Netflix model rather than clinging to Blockbuster thinking.

Julian Painter is chief executive of Appura