Who will be your utility company?

THINKstrategies –

Even as the debate continues about whether utility computing will become a reality, market researcher IDC is already challenging the conventional thinking about who will deliver on the utility computing promise. In a recent report, IDC suggests that the major Internet companies, such as Amazon, eBay, Yahoo, and Google, are poised to wrest utility computing business away from the established players and seriously disrupt the IT industry.

IDC's theory is based on the same trend that I reported in this column after attending a utility computing conference in March. At that conference, I listened as CIOs of major corporations indiscriminately referred to their various application, desktop and Web hosting service agreements as utility computing initiatives.

Yahoo is already reselling Web-hosting services. eBay is already a major clearinghouse for IT equipment and services. Google is developing knowledge management systems that could be sold as services to corporations. And Amazon could do almost anything it wants given its brand equity and supply chain infrastructure.

Taken in this light, IDC's suggestion that the Internet companies could become key utility computing service providers certainly seems plausible. Yet, I would argue, it is not probable.

The major IT vendors and outsourcers (IBM, HP, EDS, CSC, and others) have invested heavily in their utility computing products, services, and marketing campaigns, and most industry observers believe those companies are in prime position to capture the lion's share of the utility computing market -- when, that is, it emerges from its current embryoninc state.

But the Internet companies have an even bigger hurdle ahead of them than marketshare and mindshare: they will have to become true utility computing service providers. IDC draws a comparison between Toyota's successful transformation from a low-end manufacturer to a producer of high-end, luxury vehicles -- and the third largest automaker in the U.S. -- and the potential for a similar transformation of the mass-market Internet companies from commodity suppliers to utility computing providers. The difference is that Toyota didn't have to change its industry focus. Instead, it improved the way it operated. Not so for the Internet companies.

In order for the mass-market Internet companies to truly compete with the major IT vendors and outsourcers, they will have to fundamentally change their corporate missions.

Large-scale enterprises considering utility computing are not just looking for a new way to consume technology. They are looking for a new method of managing their technology needs. When IBM, HP, EDS or CSC discuss the benefits of utility computing with CxOs, they are not only promising to transform IT systems but also to take on the burden of managing those systems. Even when smaller, niche players like ASPs and MSPs approach enterprises with utility computing solutions, those solutions include out-tasking IT management hassles.

The consumer and small business (SMB) oriented IT services currently being offered by the mass-market Internet companies are point solutions directed to specific business needs. They don't include taking full management responsibility for their customers' IT operations.

If the Internet companies were to become true utility providers, they would have to make significant investments in hardware, software, and management technologies, investments that would severely impact their existing financial models. Moreover, the service delivery and customer support requirements that are part of a utility computing offering would significantly tax, or even deplete, their staff resources. These are high barriers to entry indeed.

I believe that the mass-market Internet companies are not looking to enter into utility computing wholesale but instead are looking for new, packaged IT services that they can easily resell to their vast customer bases. At the same time, the major IT vendors are in need of a new sales channel to consumers and SMBs, as most traditional VARs (value-added resellers) are too financially dependent on product sales to handle the economics of utility computing services. This very real opportunity for partnerships and strategic alliances between mass-market Internet companies and the major IT providers falls far short of the disruptive usurping of the utility market foretold by IDC.

Could Amazon, eBay, Google or Yahoo make a move to become a major utility computing service provider? Absolutely. But I believe they are far more likely to become important channels to market for the established players than direct competitors.

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