Channel Revenue Remains Slightly Cloudy

By Lawrence M. Walsh

Cloud computing generates a lot of interest, as businesses increasingly are looking to their channel providers for cloud options to their legacy on-premises IT and telephony systems. While the channel continues to make only a fraction of its revenue from cloud computing, a new report by the Cloud & Technology Transformation Alliance (CTTA) projects steep increases in channel-driven cloud sales this year.

CTTA, formerly the Cloud Convergence Council, published its annual CTTA 2012 State of the Cloud Channel report based on a survey of more than 220 IT solution providers, managed service providers, telephony agents and master agents. The results of this annual accounting show cloud computing in the channel remains relatively stagnant compared to 2011, with cloud revenue as a percentage of total receipts remaining more or less unchanged.

The majority of the channel is earning less than 10 percent of their gross revenue from cloud products and services. Telephony agents lag behind their IT counterparts in cloud revenue by 11.5 percent. Overall, theres been little cloud revenue movement in the channel. The lack of revenue growth reflects the channels overall struggle to find its place in the cloud sales.

Nevertheless, solutions providers believe cloud revenues and profits will soar in 2012. Overall, channel partners believe the cloud will represent between 25-50 percent of their revenue and profitability by the end of 2012. Telephony agents are the most optimistic, with nearly half projecting their revenue and profits to soar to a quarter to half of their revenue. 

What’s interesting is how profit isnt rising at the same pace as revenue; its lagging by approximately 5 percent across the board. This discrepancy shows that cloud is replacing traditional revenue sources, but isnt as profitable as hardware, software or telephony services.

Solutions providers are seeing a sharp increase in demand for certain cloud servicers. In many regards, cloud product and service requests reflect a high demand and shorter sales cycles. Its no surprise that the cloud services in the highest demand are storage and telephony, which are more affordable, manageable and scalable as cloud services.

Storage, backup and disaster recovery services saw the sharpest increases in demand, up 23 percent and 22 percent, respectively. Telephony agents saw the sharpest increase in demand for hosted VoIP (33 percent), but also saw a higher increase in storage and backup services relative to their IT counterparts.

Cloud computing continues to confound the channel, but the business model is becoming more clear. In 2011, the biggest problem was the lack of expertise and talent in building and delivering cloud solutions. The expertise problem jumped from the fourth biggest problem to first a climb of 21.4 percent over 2010, eclipsing business-model and development expenses.

Telephony agents have a decisive edge over IT solutions providers in understanding the cloud business model. While the lack of clarity in the business model of cloud computing is the second biggest problem in the channel, its not as much of a problem among telephony agents. Solution providers also trail their telephony agent counterparts in not having the right cloud services or products.

While understanding and operationalizing the cloud business model remains a large problem, its clear that the channel is now defining how it will engage in cloud computing. The next challenge is finding the right people to execute those plans.

The channel continues to suffer lost opportunities because solution providers and telephony agents cannot fulfill the cloud needs and desires of their customers.

The number of channel partners that reported losing or possibly losing sales because they dont have cloud solutions climbed 7 percent over 2010. Faring a bit better were solution providers, who reported a 3.5 percent decrease in the loss of sales. Telephony agents, conversely, saw the number of sale losses jump 19 percent.

Its becoming clear that channel partners are at risk of losing sales opportunities because customers have been using cloud capabilities as a discriminator even when they werent buying cloud. In 2011, cloud capabilities became more of a necessity for performance of current and future cloud needs.

Overall, the channel does not feel a tremendous level of conflict with vendors or peers in the race for the cloud. For the most part, channel partners say channel conflict is moderate meaning theres some conflict in cloud sales, but separations exist to moderate such conflicts. Only the smallest minority believe channel conflict for the cloud is intolerable, while a mere 8 percent say no channel conflict exists in the cloud.

Four out of 10 channel partners dont know to whom they lose cloud sales. IT solution providers are slightly more in the dark than their telephony counterparts: When they do know who took their sale, nearly three out of 10 of those opportunities went to vendors.

Channel partners tell CTTA theyre not necessarily losing sales because vendors are competing with them, but rather because theyre not offering the products or services desired by end users. Some cloud products, such as hosted email and productivity software like Microsofts Office 365 or Google Apps, simply are not profitable enough to warrant carrying, they say.

The overall state of cloud offerings in the channel is developing.” Channel partners are still exploring cloud options and developing capabilities. Its incremental today, not strategic, as shown in the scant percentage of revenue and profitability.

Whats curious is that 10 percent of channel partners dont have a cloud strategy, but are looking into it. Three percent of the channel does not have a cloud strategy or plans for one. These numbers roughly correspond to the number of solution providers that report no cloud revenue in 2011 and have no plans for cloud solution development in 2012.

Lawrence M. Walsh is executive director of the Cloud & Technology Transformation Alliance. He also is president and CEO of The 2112 Group, a channel services company, and editor-in-chief of Channelnomics, a blog on channel business models and trends. He founded the Cloud Convergence Council (now CTTA) with Virgo Publishing in 2010. His role is facilitation of CTTA operations and activities. You can reach him at [email protected].

MORE INFORMATION

Download the Cloud & Technology Transformation Alliances CTTA 2012 State of the Cloud Channel report at www.cttalliance.com.