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Cloud offers an economic model, not new technology

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The cloud isn’t introducing new technology -- it creates a new way for consumers to use technology and a new model for those who run and operate it.

Technology professionals discussed cloud computing at a recent roundtable discussion hosted by The Daily Transcript and sponsored by Squar Milner.

The cloud is more of an economic model than a technology model, said Tim Caulfield, operational adviser at Seaport Capital and former CEO of American Internet Services.

“The technology model exists whether you’re in a cloud or not,” Caulfield said. “The cloud is attractive because of the change in the economics, or the way people buy and the way they consume the cloud -- whether you’re talking about infrastructure and the service or the software as a service. But underneath, the technology still has to exist somewhere.”

Computers are still needed to run it, and there’s still network connectivity, software and applications, Caulfield said. The difference is in who is going to run it, who is operating it, how people buy it and how people consume it.

“It’s a model that’s changing much more so than the technology side of it," he said. "The technology continues to innovate but it’s really how everyone engages with that technology."

Jeb Spencer, managing partner at TVC Capital LLC, said that while there is no huge technical or logical change, the valuations of companies in this space have increased over the past five years. A software company used to sell for two-and-a-half times its trailing revenue. Now, because of a new model with guaranteed subscription revenue, the multiple was 4.2 times as of the last quarter, Spencer said.

“And you look at some of the valuations of the public companies -- it’s just incredible where you’re seeing regular valuations of 7-8 times trailing revenue, despite the fact that there’s really not this tremendous change,” Spencer said.

He said TVC Capital is spending a lot of its time on the vertical side, with one investment controlling 70 percent of a market in a small niche, and another investment controlling 35 percent of the market.

Dina Moskowitz, CEO of SaasMAX, Inc., said the valuations are also higher because the potential margins on those companies are more efficient and more profitable. Where some of her larger customers would take 10 people to set up a webinar, Moskowitz said new customers with similar types of software are also offering a quality solution with less overhead and fewer people to get things done.

Tim Huckaby, founder and chairman at Interknowlogy, agreed that there’s no real technical innovation in the cloud and it is really an issue of economies of scale.

“There’s no new services being offered in the cloud; there’s no new applications,” said David Maquera, CEO of Edgewave, which is growing 30 and 40 percent in cloud business per year. “What’s going on here is a complete restructuring of costs.”

People are migrating to the cloud because unit costs are dropping precipitously, Maquera said. Unit costs go down with increased scale -- meaning when more people go to the cloud, the lower the costs are going to be.

Caulfield agreed that unit costs are starting to go down and will continue to decrease, but he said that’s only a fraction of the cost of cloud computing.

“Often, people get into the cloud because they think it’s going to be cheap. And then they rapidly find they’re spending as much, if not more, money on the cloud as they are on traditional services,” Caulfield said. “That can be because they’re consuming more than they expected to be consuming. It could be because of how they are moving data around.”

Caulfield gave the example of a company that uses Amazon – it has to pay for either the data to go in or the data to go out of Amazon (Nasdaq: AMZN). If there are big blocks of data, that could be very expensive, he said.

“It’s hard to sit here and say cloud computing is going to get cheaper, because you’ve got to have a comparison in mind between what your cost is today and what you’re trying to get to,” Caulfield said.

Huckaby said he expects the cost of cloud platforms to decrease over time because “the competition is stiff and the leader is getting hammered.” However, he predicts the cost of cloud applications to go up.

Spencer expects there to be opportunity in the next five years, with the total spend in cloud computing expected to go from $109 billion this year to $209 billion in five years.

Charles Finley, president at Transformix, said companies should consider the comparative advantage and compare the current situation to the cost. If the internal operation isn’t working -- people aren’t trained and the company is trying to cure that -- and if going to a cloud provider would offer the kind of service level needed, then the company would be better off.

“Most companies kind of get that some part, or all of their IT infrastructure is going to be in the cloud. They get that we’re going to be there,” said Matt Thoene, managing director at redIT.

Julien Brandt, CEO of Organik SEO, said the company only started about three years ago and uses mostly cloud services -- the office doesn’t even have a printer.

Michael Green, partner at Squar Milner, said if he were a CFO today, he’d have a hard time justifying building an IT infrastructure internally to host internal applications. He added that technology is outstripping the abilities of most middle market companies’ in house IT employees.

“It’s better to get someone who deals with that stuff all the time to deal with it, instead of trying to do it yourself inside, when you can’t even keep track of what you have today -- which is so often the case,” Finley said.

Finley said there’s been quite a change in applications from 40 years ago to now, but a lot of companies never get rid of things. He works with the legacy systems and cloud architecture to modernize the existing applications and take advantage of cost savings.

Thoene said it’s an economic choice, weighing the total cost and risk mitigation.

“From a business perspective, I don’t want my entire business to be sitting in a closet in my own facility," he said. "I want it out there with someone who does this for a living, who is making sure all my mission-critical applications are being taken care of."

Moskowitz agreed that it’s important to have experts knowing where the data is and ensuring that it’s backed up, recoverable, encrypted and secure.

“It really is critical for those people with expertise to help companies. It’s oftentimes not acknowledged until it’s too late,” she said.

Huckaby said the most worrisome part about the cloud is that there is no cloud without Internet access. Caulfield said companies have to design for availability and resiliency in any type of cloud architecture, and have to understand what levels of redundancy they are willing to pay for.

“You’ve still got to follow the basic rules of good IT practices when you’re in the cloud. … [Companies] have to do the due diligence," Caulfield said. "They have to ask questions, and they also have to be smart enough on the front end to understand what’s been provided for them and what the level of risks are. Because your cloud provider isn’t necessary just going to tell you, ‘Yeah, if you do it this way, here’s your list of problems.'"

Roundtable Participants

Julien Brandt, CEO, Organik SEO

Tim Caulfield, Operational Adviser, Seaport Capital

Charles Finley, President, Transformix

Michael Green, Partner, Squar Milner (sponsor)

Tim Huckaby, Founder/Chairman, Interknowlogy

David Maquera, CEO, Edgewave

Dina Moskowitz, CEO, SaasMAX Inc.

Jeb Spencer, Managing Partner, TVC Capital LLC

Matt Thoene, Managing Director, redIT

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