The evolution process of the Cloud Computing Business Model

LIST OF CONTENT

LIST OF FIGURES

LIST OF TABLES

1 Introduction
1.1 Phenomenon Cloud Computing
1.2 Research Question
1.3 Methodology

2 What is Cloud Computing?
2.1 Definition
2.2 Taxonomy of Cloud Computing
2.2.1 Characteristics
2.2.2 Deployment Models
2.2.3 Service Models
2.3 Evolution

3 Aspects of Cloud Computing Business Model
3.1 Business Model Theory
3.2 Customer Relationship Block
3.3 Infrastructure Management Block
3.4 Service Block
3.5 Financial Block
3.6 Review of Cloud Computing Business Model

4 Empirical Part
4.1 Introduction of Choice-Based Conjoint Analysis
4.2 Design of Choice-Based Conjoint Analysis
4.2.1 Hypotheses of Choice-Based Conjoint Analysis
4.3 Results of Choice-Based Conjoint Analysis

5 Conclusion
5.1 Discussion of Findings
5.2 Outlook
5.3 Declaration of honor

6 LIST OF REFERENCES

7 Appendix

LIST OF FIGURES

Figure 1: Blurred hidden Cloud Computing

Figure 2: Users and Providers of Cloud Computing (Armbrust et al. 2009, p. 5)

Figure 3: Visual model of NIST working definition of Cloud Computing

Figure 4: The business model mediates between the technical and economic domains

Figure 5: Nine point decomposition model of a business model

Figure 6: Cloud business model framework

Figure 7: Relative Importance of Attributes

Figure 8: Relative Part-worth Utility of all Attribute Levels

LIST OF TABLES

Table 1: Enabling key technologies of Cloud Computing paradigm

Table 2: Matching building blocks of business model Cloud Computing

Table 3: Pricing strategies of IT services by Harmon et al. (2006)

Table 4: Pricing mechanisms by Osterwalder (2004)

Table 5: Cost Types and Cost Elements of ITIL framework

Table 6: Ontology of Cloud Computing business model

Table 7: Choice set extract of survey

Table 8: Summary of hypotheses

Table 9: Total results of CBCA

1 Introduction

1.1 Phenomenon Cloud Computing

“It’s stupidity. It’s worse than stupidity: it’s a marketing hype campaign.” ¹ Richard Stallmann, founder of Free Software Foundation and creator of the computer operating system GNU (GNU’s Not Unix), quoted in The Guardian about Cloud Computing para- digm on September 29, 2008. Without any doubts Cloud Computing - is THE current buzzword in the information and telecommunication industry since 2007. The hype around Cloud Computing is impressive, but also confusing, as Stallmann’s quotation reveals. Among various market research institutes, governmental agencies of different countries or business consultancies, the market of Cloud Computing services will in- crease immense. For example, Forrester Research predicts that the global market from $ 40,7 billion in 2010 will rise to $ 241 billion per year by 2020 (Ried, Kisker 2011, p. 3). The existence and enormous growth of the Cloud Computing services is obvious, but mere the fact, what exactly is Cloud Computing, still occurs for confusion. The scholars around Armbrust et al. (2010) quoted Larry Ellison, CEO of Oracle, “The interesting thing about Cloud Computing is that we’ve redefined Cloud Computing to include everything that we already do I don’t understand what we would do differently in the light of Cloud Com- puting other than change the wording of some of our ads.”

The term Cloud Computing is used in the Information Technology (IT) industry and research area for about four years and is consider as the next revolution of the IT sector. Although the phenomenon of Cloud Computing is still in its infant stage, it is consid- ered to be a strategic change point of information technology (Chorafas 2011, p. 58). Among many scholars Cloud Computing is seen as an innovation of computing, Koch and Breul (2009) discuss: “If industry analysts are correct, we are at an inflection point—a true paradigm change—in the evolution of computing.” The evolution process of Cloud Computing is diversified and will be discuss in more detail in the subsequent section 2.4 of this paper. The main problem remains about Cloud Computing paradigm is a widely accepted definition of Cloud Computing services (Vaquero et al. 2009).

Hence, even for service providers and consumers it is difficult to delimit the area of Cloud Computing services.

The Cloud Computing paradigm provides enterprises and other end users the ability to manage and store computer resources, data and applications within a ‘cloud’ in the In- ternet. The underlying hardware, and the stored information and applications in the ‘cloud’, can be access from anywhere and at any time. This oversimplified description of Cloud Computing approach seems to be simple and straightforward, but in fact the Cloud Computing paradigm consists not only of benefits, also obstacles occur. Through the internet-based utility of provisioned Cloud Computing services, reduced infrastruc- ture and administration costs may gain cost advantages in comparison to in-house data center and other computing resources, as incurred costs are mainly charged on a con- sumption-based usage. From surveys of various agencies and research firms² among SME’s in Europe and USA the most quoted benefits of Cloud Computing service have been cost savings, high performance such as flexibility, scalability and availability of computing resources and business continuity such as disaster recovery. But in addition to the aforementioned advantages, there are also great obstacles, which must be consid- ered. Among scholars widely quoted obstacles are security and privacy issues of confi- dential data and information of the users (Vouk 2008, Armbrust et al. 2009). The great- est concerns of the survey participants have been opaque pricing schemes, confidentiali- ty of corporate data and privacy issues.

The rapid increase in the last years in number of papers, workshops and conferences about Cloud Computing indicates the research interest of scholars about the phenomenon, not only the interest among enterprises (service providers and consumers). According to Khajeh-Hosseini et al. (2010), much research is dedicated on technical evolution and prob- lems of Cloud Computing, many authors neglect the business perspective of Cloud Compu- ting paradigm (Leimeister et al. 2011). Rather the business model of Cloud Computing is the real innovation of this emerging technology paradigm (Youseff et. al. 2008). However, previous work focused on technical aspects and business implications driven by providers (Iyer and Henderson 2010), but left out a consumer perspective (Youseff et al. 2008; Vaquero et al. 2009; Briscoe and Marinos, 2009; Koehler et al. 2010). Moreover some scholars (Weinhardt et al. 2009; Wyld 2009) argue that more research about business aspects of Cloud Computing need to be consider to support Cloud Computing service providers to create innovative Cloud Computing business models for sustainable industry growth and reliable operational models.

Referring to Vouk (2008) “the most important cloud entity, and the principal quality driver and constraining influence is, of course, the user”. In particular, the development and im- plementation of business models for Cloud Computing services is a critical challenge, be- cause the user is not only the consumer of it, he is influencer and also constraint by various key drivers such as pricing method or cost savings to realize commercial value of Cloud Computing services.

1.2 Research Question

As the preceding chapter indicates Cloud Computing has gained momentum in IT area in the last five years. But scholars are still struggling to capture the nature of this IT phenomenon, they are concentrating on the technological emerge and technical issues of Cloud Computing, but “the dialogue needs to be moved away from technical issues to user-related issues” (Iyer, Henderson 2010, p. 117). Also Koehler et al. (2010) argue that business-related issues of Cloud Computing, in particular consumer-driven issues, have been barely studied in literature. This paper intends to fill this gap by exploring Cloud Computing from the consumer perspective in regard of the business model. To- day’s Cloud Computing offers are technology- and provider-driven (Durkee 2010), but the provision of value, especially the commercialization of value is an essential chal- lenge of Cloud Computing paradigm. A well-going business model, considering well- defined consumer preferences, is needed.

The primary research question of this thesis is what are the key building blocks of Cloud Computing business models. Secondly, how can these key building blocks are utilized by consumer preferences at the adoption of Cloud Computing services?

The study consists of a literature review to define the key building blocks of Cloud Computing business model and an empirical part that is carried out as a choice-based conjoint analysis to gain insights of the detailed utility by consumer stated preferences of these key building blocks.

There are some delimitations in scope to this thesis. First, the literature of Cloud Com- puting business models is barely considered, and is filled by research results about gen- eral business models, especially for (innovative) technologies and outsourcing services. Second the empirical part is focused on the Korean market and the discoverable con- sumer preferences.

1.3 Methodology

As a first step towards Cloud Computing business models, their building blocks and the consumer preferences of it; the answer what is Cloud Computing need to be addressed. Hence, the second section of this thesis explores the definition, the underlying charac- teristics, the deployment models, the service models and the evolution of Cloud Compu- ting paradigm. Many scholars address the missing definition of Cloud Computing, as confusing, and contrary views of Cloud Computing are existing (Vaquero et al. 2009, Youseff et al. 2008). For the further research of my thesis about business models and consumer preferences a unified understanding of Cloud Computing is indispensable. The goal is not to conduct an own definition, but to explore the widely accepted consid- erations about the Cloud Computing paradigm. A clear, well-defined comprehension of Cloud Computing is tremendously important for the following sections.

Subsequently, section three carries out an investigation of Cloud Computing paradigm business models through a literature review, based on a joint comprehension of Cloud Computing. As the Cloud Computing paradigm is relatively young, the research litera- ture, especially about the business aspects is very limited. Therefore, key paper from general research about business models has been added. This research step enables new perspectives of Cloud Computing business models, but this enhancement is very lim- ited, too. Thereby the goal is to identify the building blocks of Cloud Computing busi- ness models, and there variables to examine the key driver of consumer preferences. The variables of the building blocks are needed for conducting the investigation in the following section.

The next step of the methodology is the identification and analysis of the consumer preferences using a choice-based conjoint analysis (CBCA). The CBCA is the most popular method to measure consumer preferences (Sattler et al. 2003). After identifica- tion the most important variables of the building blocks of Cloud Computing business models, they will be separated in attributes. However, these attributes will be used to estimate consumer preferences (and hence of demand behavior) based on selective deci- sions in a survey. The goal of this section is an analysis of the consumer preferences of Cloud Computing services as a whole by a multi-attribute approach such as conjoint analysis.

The results of the CBCA allow understanding the relative importance of each attribute of the provided Cloud Computing service, here in terms of business model. In the last section conclusions will be given how the attributes of building block variables may change the nature of the Cloud Computing business models. This section’s goal is to provide answer to questions such as why consumer prefer one Cloud Computing service instead of another, and what are the most important building blocks variables of Cloud Computing business models in terms of consumer utility and to achieve commercial value.

The overall goal of this thesis is to explore the nature of the Cloud Computing business models by identifying the building blocks and their variables, and in regard the most important consumer preferences by their utility for users at the adoption of Cloud Com- puting services.

2 What is Cloud Computing?

This section introduces Cloud Computing paradigm in more detail. First chapter consid- ers a definition of Cloud Computing. Subsequently, second chapter outlines essential characteristics and taxonomy of Cloud Computing with details of deployment and ser- vice models. Least and third chapter summarizes the development of Cloud Computing since the late 1990s.

2.1 Definition

The term Cloud Computing origins from the field of IT Management and consists of the both words cloud (acronym for Internet), and is inspired by the depiction of Internet as a cloud (components remain hidden in it, cp. Figure 1) for computer network diagrams, and computing (reckoning, calculating), which means the activity of using computer, software, and hardware, together. This approach sounds very vague, and is even under closer examination not fully explicable, for two reasons: On the one hand, there is no universal or accepted common definition of Cloud Computing [Martens et al. 2011 p. 1; Armbrust et al. 2009 p. 3; Youseff et al., 2008 p. 1], on the other hand by the concept of Cloud Computing - the shift of resources (computing power, storage, software and hardware components) from the local client (or data center) into Internet - it is often for the user not clear with which technology the Cloud Computing services are deployed, or what else is procurable. However, Figure 1 is showing a simplified illustration of Cloud Computing, and it is indisputable that the phenomenon enables computing resources to be available anytime, anywhere from any device - so long as there is access to broad network [Breul, Koch 2009 p. 2].³

The concept of Cloud Computing is lacking a well-established definition and it is often confused with other related technologies like grid computing (Vaquero et al. 2009, p. 3; Weinhardt et al. 2009a, p. 2). Number of attempts to find a unified definition of Cloud Computing is given by scholars, research and consultancy firms or other practitioners, but all being oversimplified or failed to capture the full nature of the concept.

illustration not visible in this excerpt

Figure 1: Blurred hidden Cloud Computing⁴

Among scholars, especially Vaquero et al. (2009, p. 54) made efforts to find a compre- hensive definition, and studied 22 different definitions of Cloud Computing and they ended up with:

“Clouds are a large pool of easily usable and accessible virtualized resources (such as hardware, development platforms and/or services). These resources can be dynamically reconfigured to adjust to a variable load (scale), allowing also for an optimum resource utilization. This pool of resources is typically exploited by a pay-per-use model in which guarantees are offered by the Infrastructure Provider by means of customized SLAs.”

But there is one more widely cited definition of Cloud Computing among scholars, also known as UC Berkeley definition, published by Armbrust et al. (2009, p. 4; 2010 p. 1):

“Cloud Computing refers to both the applications delivered as services over the Inter- net and the hardware and systems software in the data centers that provide those ser- vices.”

All major research and consultancy firms had also published their definitions of Cloud Computing. For example, Forrester Research (2008, p. 3), a well-known IT research company, refers, based on observation of market use of the phrases ‘cloud’ and ‘Cloud Computing’, to the following definition:

“A form of standardized IT-based capability - such as Internet-based services, software, or IT infrastructure — offered by a service provider that is accessible via Internet pro- tocols from any computer, is always available and scales automatically to adjust to de mand, is either pay-per-use or advertising-based, has Web- or programmatic-based control interfaces, and enables full customer self-service.”

However analysts at IDC (2011, p. 1) understand the term Cloud Computing as:

“Technologies and deployment models, with which products, solutions and services for businesses or consumers are provided and used via internet in real time.”

In addition, Gartner (2009, p. 1), the leading IT research and advisory company, de- fines:

“Cloud Computing as a style of computing in which scalable and elastic IT-enabled ca- pabilities are delivered as a service to external customers using Internet technologies.”

The views are so different - from what Cloud Computing actually is - that agreement among the scholars and experts (including Gartner, Forrester Research, IDC analysts and experts of the individual providers) to formulate a comprehensive and unambiguous definition of Cloud Computing is challenging, if not impossible task at the moment. The Cloud Computing paradigm is still at its infant stage and develops continuously as the industry launches and enhances cloud services. Illustratively, the NIST⁵ definition of Cloud Computing is already going through its 16th revision and its authors expecting it to evolve and change over time (Mell, Grance 2011). The definition of Cloud Compu- ting paradigm has already changed many times and will definitely undergo refinement also in future.

2.2 Taxonomy of Cloud Computing

The most promising description about the taxonomy of Cloud Computing comes from the comprehensive and widely accepted work of Mell and Grance (2011) from the Information Technology Laboratory of the NIST. The following definition considers a brief concept summary of Cloud Computing phenomenon:

“Cloud Computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”

Based on the definition and work of NIST, a commonly accepted view on Cloud Com- puting taxonomy consists of essential characteristics, deployment models and service models.

In the subsequent theoretical framework about the characteristics, deployment models and service models this paper is based primarily on the work of Mell and Grance (2011), and is extended by meaningful supplements to best understand the nature of Cloud Computing. In the following subchapters the three in-depth categories of Cloud Computing will be break down in more detail.

2.2.1 Characteristics

The generally accepted work of Mell and Grance (2011) defines five essential characteristics of Cloud Computing:

1. On-demand self-service: Consumers can provision computing capabilities (e.g. network bandwidth, storage, memory, processing and virtual machines) on- demand basis. Capabilities can be provided independently and automatically without human interaction with services providers.
2. Broad network access: Capabilities can be accessed over network through stand- ard mechanism with various thin or thick client platforms such as personal com- puters or mobile phone.⁶
3. Resource pooling: Cloud service provider pools those computing capabilities to serve multiple consumers using a multi-tenant model. The provided resources are shared among the consumers (tenants) to achieve economies of scale.
4. Rapid elasticity: Capabilities can rapidly and elastically provisioned and released in any quantity at any time, even automatically. The supply of capabilities appears for the tenants to be infinite.
5. Measured service: Cloud service provider automatically control and optimize re- source usage by providing an appropriate metering capability to the type of ser- vices. Resource usage can be monitored and reported for providing transparency for both provider and tenant.

Few scholars [Pearson, Benameur 2010, p. 696] and the ISACA⁷ and the Cloud Security Alliance⁸ consider a sixth essential characteristic for Cloud Computing, the multi tenacity. Consumers might utilize a service as a single instance on vendor’s servers, served for multiple client organizations. They share the same infrastructure, but the virtual application instance might be customized for the tenant. This characteristic is less accepted among scholars, because it only covers a part of the variety of Cloud Computing services, the application provision.⁹

Besides the commonly accepted five essential characteristics through the work of NIST, more scholars make attempts to find characteristics of the Cloud Computing paradigm. For example, Vaquero et al. (2009) created not only an own definition by analysis of 22 expert definitions, they also carries out ten key characteristics of Cloud Computing:

1. User friendliness
2. Virtualization
3. Internet centric
4. Variety of resources
5. Automatic adaptation
6. Scalability
7. Resource optimization
8. Pay per use
9. Service SLAs
10. Infrastructure SLAs

A more critical and economical view of Durkee (2010) describes circumstances with high cost of computing and highly specialized labor in the IT industry, therefore he comes up with the following essential characteristics of Cloud Computing that addresses these considerations:

1. On-demand access
2. Elasticity
3. Pay-per-use
4. Connectivity (High-speed network)
5. Resource pooling
6. Abstracted infrastructure
7. Little or no commitment

In addition and at least a vendor-driven view of Iyer and Henderson (2010) comes up with seven capabilities which emerged from their work of analysis of various descriptions of Cloud Computing to encounter a Cloud Computing ecosystem:

1. Controlled interface
2. Location independence
3. Sourcing independence
4. Ubiquitous access
5. Virtual business environments
6. Addressability and Traceability
7. Rapid elasticity

Not only the finding of a unified definition of Cloud Computing paradigm is complicat- ed, also to find agreed characteristics of it is almost impossible. But a second look on the preceding listed characteristic enumerations shows that the NIST catalog with its five essential characteristics, on-demand self-service, broad network access, resource pooling, rapid elasticity and measured service is a holistic view on the basis of the Cloud Computing paradigm.

2.2.2 Deployment Models

The deployment model of Cloud Computing is divisible into four types [Khajeh- Hosseini 2010b, p. 1; Iyer, Henderson 2010, p. 119], which seems again affected through the work of NIST (Mell, Grance 2011). The categories differ primarily by their level of trust between the provider and tenant and how the consumer can access the Cloud Computing services and use them. Armbrust et al. (2009, p. 4 f.) introduces therefore the three actor groups within the Cloud Computing paradigm, first SaaS¹⁰ Us- er, second SaaS Provider / Cloud User and least Cloud Provider. In Figure 2 an illustra- tion of their work is given, it describes the separation of the deployment and usage by the three actor groups and the differentiation of hardware (utility computing) and soft- ware (web applications) in the Cloud Computing paradigm. The key fact of this figure is that “the top level can be recursive, in that SaaS providers can also be a SaaS users” (Armbrust et al. 2009, p. 5).

illustration not visible in this excerpt

Figure 2: Users and Providers of Cloud Computing (Armbrust et al. 2009, p. 5)

This recursive effect leads to another view on the usage of Cloud Computing services, the users can be separated into two groups: internal and external user (Armbrust et al. 2009, p. 5; Leimeister et al. 2010, p. 3). Internal users are part of the organizational structure of the company, which provides Cloud Computing services. In the subsequent description of the deployment models this will be called internal managed Cloud Com- puting services. External users are those who use the services of a Cloud Computing provider, but are not part of its organizational structure, described as external managed Cloud Computing services.

The four deployments models are the following:

1. Private Cloud: The provision of the cloud service resources (hard- and software) is exclusive and system-bounded for the user (organization). These resources are internally managed and owned by the organization itself or a third party and may exist on premise or off premise.
2. Public Cloud: The cloud service resources are accessible for the general public (pri- vate users and organizations) by subscription to the externally managed and owned cloud of a selling organization (servivce provider).
3. Community Cloud: The cloud service resources are shared among several organiza- tions, which are obsessing the same specific concerns (e.g. mission, security re- quirements, policy and compliance consideration). These resources may be managed by the organizations itself or a third party and may exist on premise and off premise.
4. Hybrid Cloud: The resources of a hybrid cloud are a composition of two or more clouds (private, public, or community) that remain unique entities but are bound to- gether by standardized or proprietary technology that enables data and application portability. Especially large organizations with their “legacy systems and unique needs will mandate a hybrid solution” (Iyer, Henderson 2010, p. 120.).

2.2.3 Service Models

The level of abstraction of Cloud Computing services determines the service models of Cloud Computing paradigm and addresses a specific business need (Youseff et al. 2008, p. 2 f.; Leimeister et al. 2010, p. 3f.). Currently widely accepted is the categorization of Cloud Computing Services in three primary service models (Vaquero et al. 2009, Durkee et al. 2010, Mell, Grance 2011). In the following the different service models will be described in more detail:

1. Infrastructure as a Service (IaaS): IaaS take place on the most basic level of the cloud service models (Durkee 2010, p. 63.). Cloud service provider provision specif- ic infrastructure services such as storage, networks, processing or virtual machines, that focus on providing enabler technologies as basic components for the higher lev- els (SaaS, PaaS), to deploy and run software, which can include operating system and applications. The tenant may not manage or control the underlying cloud infra- structure, but has limited control over operating system, storage, deployed applica- tion, and other selected networking components (Mell, Grance 2011).
2. Platform as a Service (PaaS): PaaS describes the next higher level of abstraction among Cloud Computing services. This level allows developers to build application
onto the cloud, the deployment environment with a programming language may be even on top of the bare-bones infrastructure (Durkee 2010, p. 63; Iyer, Henderson 2010, p. 118). The tenant does not manage or control the underlying infrastructure, but has control over the deployment environment and the deployed application (Mell, Grance 2011).
3. Software as a Service (SaaS): SaaS is the top level, also called the application level, and allows the tenant to use applications running on provider’s infrastructure. SaaS user can access the application through thin clients such as a web browser. The ten- ant does not manage or control the underlying infrastructure, but may control limited user-specific application configuration settings (Mell, Grance 2011).

Leimeister et al. (2010, p. 4) promotes the idea that those service models can also be classified along different layers into a stack. Youseff et al. (2008) were among the first who suggest a unified ontology of Cloud Computing and introduces a five layer model: application (cp. SaaS), software environment (cp. PaaS), software infrastructure (IaaS), software kernel, and hardware. Also Lenk et al. (2009) promotes a wider and more complex stack model, they added Human as a Service (HuaaS) as a cloud service model, and supporting services such as billing or metering. Moreover Iyer and Henderson (2010) defined their own cloud stack and added to SaaS, PaaS, and IaaS the two interfaces of collaboration and consulting and integration services, which shows that there is no widely accepted cloud stack model among scholars.

Prior describing the evolution of the Cloud Computing paradigm, it is necessary to make a final comment for the on-going comprehension of the Cloud Computing phenomenon. In Figure 3 the comprehensive view of the three categories essential characteristics, deployment models and service models of the NIST (Mell, Grance 2011) is depicted. This overview will be the underlying comprehension of Cloud Computing and its services for the following work.

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¹ http://www.guardian.co.uk/technology/2008/sep/29/cloud.computing.richard.stallman.

² 1. Survey of ENISA - European Network and Information Security Agency, An SME perspective on Cloud Computing, November 2009. 2. Survey of Hosting.com, 2009 Cloud Computing Trends Report, February 2009.

³ More explanation about this key characteristic will be given in the chapter 2.2.1.

⁴ Cp. Website Princeton EDU, weblink: http://www.princeton.edu/~ddix/cloud-computing.html.

⁵ National Institute of Standards and Technology

⁶ In the precedent chapter 2.1 this characteristic was already mentioned to describe the simplified func- tionality of Cloud Computing.

⁷ Information Systems Audit and Control Association, an international professional association of IT auditors.

⁸ Cloud Security Alliance is a non-profit organization, which promotes the use of best practice for securi- ty assurance within Cloud Computing.

⁹ At this point the multi tenancity will be not closer examined. But a more detailed view will be given in the chapter 2.2.3 with the description of the service models.

¹⁰ Software as a Service: This term will be explained in more detail in the subsequent chapter 2.2.3.