There’s an old saying that “you can’t manage what you can’t measure.” Unsurprisingly, this applies to SLA management.  A buyer that doesn’t have access to the right measurement for a performance metric can’t manage the vendor in reaching that metric.  Yet measurement is an often-overlooked portion of an IT service level agreement whose absence can negate any potential of service credits or other remedies for non-performance. Just as a sampling, we’ve seen contract boilerplates that prevent measurement by:

• Not having an SLA or metric altogether
• Saying that there’s a certain target for SLA up-time, latency or other performance metric without specifying how it will be measured
• Explicitly stating that the SLA measurement will be left to the vendor’s discretion
• Measurement delayed to when it’s convenient for the vendor.  For example, requiring the vendor to receive notification from the client and acknowledge that an outage exists before the clock starts ticking on downtime (in which case, acknowledgment can be timed to coincide with resolution).
• Measuring only sub-components of the vendor’s responsibility with the highest resiliency and leaving the items that actually take effort to maintain unmeasured (e.g., we guarantee that there won’t be a failure at the core power systems, but power distribution units (PDUs) are not covered).

If your CDN, data center, or managed services vendor over-promises on its SLA (e.g. the 100% SLA up-time guarantees that are made to be broken — even Tier IV data centers can’t hit five nines), there are probably a few pennies on the order of $2K-$20K in a $1M annual contract that are lost.  If the lost service credits are material to your business then your relationship probably has bigger problems than measurement.  And that is actually the crux of the problem — failure to effectively measure can leave you without the data you need to terminate for cause when something seriously goes haywire. That’s when the true business impact of a poor vendor relationship — and failure to accurately measure the deficiency — is actually material to your business.

I’ve been involved with digital music for a very long time. I began with digital music in 1993 when I was a lead QA and Support Engineer for the Sonic Solutions digital audio mastering products, which were the first generation of professional audio tools that ran on a desktop computer- a Macintosh back then. These systems were used by top music, movie, and film studios around the world and were, at the time, a primary platform for producing the master CD used by the factory for replication. The sale of CDs was a mature business, but the technology used to create them was still in its infancy. I was very fortunate and go to help support this new technology for musical heroes such as Peter Mew (engineer of the Beatles), Bob Ludwig (Gateway Mastering), and [XXX] of David Bowie’s engineering team.

Many years have passed since those pioneering days, and I’ve seen many businesses come and go in the field of digital music technology. The Digital Music Forum addressed topics focused on the future of music in the digital age. The speakers, who ranged from top music company executives to heads of leading online music services like Limewire and Vevo seemed to come down on one of two sides of a viewpoint about the future of music in the digital era:

• The light side: the massive access of billions of hits online to music and music related content via downloads, video, social networking, e-commerce, games, and a million other methods represents a huge new revolution in the music industry with all kinds of opportunities for traditional music businesses and entrepeneurs alike.
• The dark side: sales of music are collapsing by double digits year over year. The music companies continue to want exorbitant fees for the licensing and syndication of music and music videos- if you are lucky enough to be able to negotiate the dense labyrnith of rightsholders and lawyers.  These old world practices will cause the death of the big music company and therefore the death of new music from both small bands (who see no future in it) and superstars (who can’t be superstars without the marketing and business power of the big music companies).

Some notable quotes that came out of the conference included some lines that sounded like this:

“Music companies, if they want to survive, need to hire consumer marketing people from companies like Proctor and Gamble who understand how to package and market lots of small retail type products.”

“Out of over 100 online music startups that rely on music licensing as part of their business, maybe 5 or less have produced a return on investement for their funders.”

“There has never been a profitable business built on the licensing of music videos. Google gave up trying to do this and gave it all away, for free, to Vevo to give it a try, since they weren’t able to monetize music videos on YouTube.”

“Vevo is able to support billions of views of music, thanks to the largess of its sponsor [Google paying for all the bandwidth and technology costs.]

I’m a lifelong musician and fan of music, and a lifelong supplier of technology to the music industry. I see the future of music, digital or otherwise, this way:

Where there is demand, there will be supply. Where there is demand of a product with a cost to its creation and distribution, there will be a markup and possibility of profit, therefore incentive to take risk on the business. Therefore the business of music has a future. The music business may not have a future, if it can’t participate in the business of music anymore, but the business of music does have a future.

I think that most businesses who try to enter the field of online music services aren’t truly profit seeking- they are enamored with music and like so many startups (and so many musicians) seek to make it big by being acquired by larger company or even more wishfully, by shareholders via an IPO.

Someone in the audience asked my panel if the music companies seek to be like those “greedy and profitable telcos”. My response was that most telcos have gone bankrupt in the last 20 years- and that the music companies understand exactly why: the telcos had no marginal cost, competed via rates, lost their ability to generate profit, and therefore lost their businesses.

The music companies work in the opposite direction, intentionally keep pricing strong for licensing, because, as I said on the panel, in the words of a former business partner of mine in Brazil Carlos de Andrade once said to me, its best to “sell expensiveness.”

So the thread throughout the conference, behind all of the questions about labels, rights, music services, buyers, markets, and subscribers was easy to detect: money. How to make money from music. It seems to be an endlessly perplexing question throughout these shows- from the indie producers to the music start-ups to the massive and now unprofitable music companies. They are all looking towards the future and the ability to build success.

My answer? Build a business based on per-unit profitability… and the rest will follow.

They didn’t have any bands play during the networking breaks at the conference.

Steve Lerner is a Practice Leader at RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact Steve at steve@ramprate.com

Where do these rantings come from? The screen shot below tells a pretty clear story (click to enlarge it).

There are many companies, maybe hundreds or thousands, that are shills for vendors that pay people to write reviews. It’s beyond my time availability to research how deep this goes – but I imagine it involves things more expensive than restaurants and books. It seems that even the tech reviews written by web sites dedicated to technology are just paid advertising. At least with products and restaurants the actual item can be touched and felt, unlike, say, a network connection or software management service. These exist only on paper until they are actually in use.

This is why I always hesitate to believe any free public information about the quality of anything. I’m in the business of sourcing advisory, where we encounter a similar problem for the datacenters, IP transit providers, infrastructure management providers, and content delivery networks we deal with. Where do our customers get reviews about vendors? From friends? From accurate testing of multiple services? From internet reviews? It varies greatly. I feel that the best way to make decisions about IT spend is by using data – properly collected, scored, and matrixed.

I just wish I could get the same thing for restaurants.

Steve Lerner is a Practice Leader at RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact Steve at steve@ramprate.com

The concept of consequential damages is simple — if a vendor directly and measurably costs me revenue or profit, it is responsible for making up the difference.  For example, if I’m a gaming company with a $10 monthly subscription fee and a network outage forces me to credit my million users for 3 days of playing time, there is $1M in direct provable business losses due to the failure of my network provider.  With a consequential damages clause (or for that matter a lack of explicit limitation to the contrary), the buyer can feel justified in asking for these costs to be borne by the responsible party such as a hosting or bandwidth provider in order to mitigate the risk in their part of the IT outsourcing contract.

Let’s take IP transit as the party responsible in this example of it outsourcing risk. According to the SPY Index, a 10Gbps pipe for this number of users can cost as little $15K-$40K per month with the most price-competitive providers and buyer profiles. It can be up to $200K+ per month with a provider that bases its fortunes on premium network services and SLAs for online gaming — a more appropriate profile for someone with a revenue per user of $10.  Even for this premium supplier, paying off a $1M credit can take up 3-5 months of revenue, to say nothing of margin.  A credit of this magnitude effectively kills all revenue for the life of a 3-year contract. Since no provider is immune to outages – not Tier 1 networks or Tier IV data centers - the risk is real.

As mentioned earlier, these clauses are rare because they’re something that many different parties that are (or should be) part of your contract review process are trained to find and eliminate. That being said, there are situations when the buyer holds all the cards and will insist that their liability become the provider’s.  If the incremental revenue means the difference between surviving and closing up shop, you may have no choice but to accommodate the demand – but if it only means hitting a quarterly target, being willing to walk away might still be the better choice.

The best way to mitigate this particular IT outsourcing risk is to find a reasonable cap on damages. An agreement to negotiate in good faith on a settlement is something that’s a surprisingly effective compromise (generally “agreements to agree” are not particularly useful in a contractual sense but they can fill trust gaps). And if you’re feeling truly adventurous, you can ask to participate in some of the upside via a revenue share to offset the participation in potential losses. Even earnback provisions can serve as a small buffer.  But being completely blindsided by the consequential damages play can be a career-ending mistake for anyone at an IT services provider – all the way up to the CEO.

Alex Veytsel is a Principal Analyst at RampRate where he is the lead architect of business and financial analysis models. Alex can be reached at alex.veytsel@ramprate.com

So, do you know how much a rupee is worth in US$?  If you missed this trick play from the outsourcing vendor, get ready for it to become an area of top concern around budget crunch-time next year.  If the contract’s signing authority was at the CFO level, you may at least know how to hedge the risk.  If you’re in IT, it’s just a pain.

The below graph shows how your bill for a “constant rate” would look with an Indian rupee currency adjustment included over the last 10 years.  There is an upside — if you signed at the right time (2008), your costs could go down by 20% in a year.  But if you time it wrong, your bill can go up by the same amount or more. If we see a return to 2008 rates, buyers who signed a $10M outsourcing contract with this provision in 2009 will be paying $12.6M.

A true multinational like an offshore outsourcer usually knows the costs of hedging currency risk.  The best thing for them to do is to buy the appropriate financial instrument and build the cost into your ongoing rates.  You get cost certainty, they get protection against having to pay their staff in real money if the US turns into the Weimar Republic in terms of currency strength.  That’s a win-win.  The win-WIN for you is to get that clause waived altogether.

Alex Veytsel is a Principal Analyst at RampRate where he is the lead architect of business and financial analysis models. Alex can be reached at alex.veytsel@ramprate.com

To download this DVD via the internet at $.01/GB, the cost will be $.04 for the DVD. So for a cost of $10,000 per month, a content provider can deliver 250,000 DVDs to consumers.

To get a sense of the media industry scale of this, let’s consider a recent movie: Sherlock Holmes, that grossed $62,390,000 in its first week. Assuming a ticket price of $7.50, this means 8,318,666 people saw the film in the first week.

If that entire first week  gross was spent on delivery of a fully loaded DVD of Sherlock Holmes, that first week could see delivery of 1,559,750,000 DVDs.  Be careful – I’m not comparing revenue to cost here. I’m simply giving a sense of scale of what $.01/GB means to the industry. I can remember when, while working at leading CDN provider Speedera Networks, we were afraid that pricing would fall to $1.00/GB. This was in about 2002.

One penny per GB may be the true tipping point for allowing mass availability of content via the internet. But beware – the bandwidth cost is only a small part of total cost required for content delivery. Operations, testing, content management, web performance services, application acceleration, and many other costs come into play with large scale content delivery.

And $.01/GB will not be available to everyone. I’m sure many of the small content providers are salivating over this number – but for now you’ll still have to deal with the higher prices for lower commits. For now… in the end, today’s $.10 at quantity is tomorrow’s $.01 at quantity but we still have to wade through today. But smaller content providers have many great free options like YouTube and MetaCafe to tide them over till $.01 is available to all.

So before you craft your business plan for the new internet Goldfish Romance channel, make sure you do your research to understand the full spectrum of costs involved.

Steve Lerner is a Practice Leader at RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact Steve at steve@ramprate.com

In the recent Green Grid White Paper, “Impact of Virtualization on Data Center Physical Infrastructure“, there’s an interesting discussion about the impact of virtualization on data center density, capacity, and power waste.  However, most of the findings apply to in-house environments where the same entity that virtualizes has to deal with right-sizing the UPS, building a floor layout, etc.  But in the world of outsourced data centers, most of the time the responsibility resides outside of your business, and the implications shift accordingly.  Specifically

1. Footprint right-sizing becomes someone else’s problem – if you have the right contract (which you should anyway
2. Virtualization may lead to a slight uptick in density, but we haven’t seen one as big as implied by the Green Grid team
3. However, density certainly does lead to proportionally lower facilities costs – within reason

Footprint Resizing Implications

For those who outsource data centers, footprint resizing is a contractual flexibility issue.  One of the most important assets you can have in a co-location agreement is not the space itself, but options on that space – including options to buy additional adjacent space and divest yourself of space that you no longer need. We would hope factors such as virtualization be the drivers of this trend, but nowadays business downturns are just as much a factor in making scale-down options valuable.

Density Implications

One area where we have not seen the paper’s conclusions coming true in an outsourced environment is a link between density and virtualization.

There’s actually not a huge reason to link the two – most of the builds we’ve dealt with use peak power for density definition, and at real peaks (usually boot-up) a virtualized server will not draw any more than a comparably configured non-virtualized one, making peak usage equal.  These peaks may be sustained longer, but we’re still probably talking about a 1/3 bump at most (from 75% peak to average to 100%), which is not what takes you from low density computing to high density.

What we’ve typically seen with our clients going down the virtualization path is a conversion of some higher-end 3U-4U server used for databases into a host for virtual machines.  But even if you fill a full rack with nothing but HP DL580s, you’re still likely to wind up at 8kw per rack at most, which in our book is mid-range density. You might wind up leaving 2x the space for that rack, but you probably don’t need 100 square feet of empty space or water cooling projects (both of which we’ve seen for “really high density”)

Typical enterprise virtualized environments have nowhere near the 15kw, 20kw, or even 30kw some clients have been putting in since 2006. These footprints usually involve blades or some other latest and greatest hardware configuration specifically optimized for fast I/O among the devices, which we’ve seen for gaming, custom apps, and other compute-intensive uses, but much less so for the first step in virtualization.

Price Implications

One last interesting note is the price relationship between density and cost per kilowatt. Most deals do fall in the low-mid density category (i.e. under 8kw / rack), and according to the SPY Index space cost data there is a definitive linear trendline downwards there – the higher the density, the lower the cost per kilowatt. 

Whether it continues into ultra-high density is more dubious – provider choice drops off a cliff, non-recurring costs can increase, etc. This makes the polynomial curve shown below slightly more accurate – eventually the cost of cooling the equivalent of a small bonfire of bits gets to be disproportionately high.  I would suspect that the trough actually lies a bit further to the left, but if virtualization does lead to slightly higher density, it would seem that overall cost picture of outsourced providers would provide an extra boost to the bottom line.

Alex Veytsel is a Principal Analyst at RampRate where he is the lead architect of business and financial analysis models. Alex can be reached at alex.veytsel@ramprate.com

For as long as I can remember, I have used a shared hosting site for my web projects. The company is called site5.com. As of this writing, they are offering web hosting with “unlimited web space, bandwidth, domains, email” for $4.95 per month, with a 30-day free trial. My account on site5.com is similar. I can run any kind of web site, web application, or database. I’ve been online with them for years. My account access is on a shared Linux box. I can easily add more.

But would anyone call this cloud computing? Many probably would -  many consider Hotmail and Salesforce.com to be cloud computing. Some probably wouldn’t – because I can’t auto-provision “instances” of a virtualized computer, and I can see (but not access) the other shared users on the same box.

The bottom line though, is that I can quickly provision a virtual server for my use. Vendors have offered this service since the year 2000 and well before that.

So why all the hype about cloud computing? Why is it such a big deal that business can have access to shared hosting? Yes, modern virtualization and provisioning methods make for a much more robust server. Yes, billing can now truly be performed “per CPU cycle” turning the entire computing rental into a utility model.

But will this really make a difference for the majority of people who need shared hosting?

I don’t think so. I do think that a few new business models that have very spike-prone utilizaton rates such as data analytics and modeling could possibly have access to more CPU at a better cost. But shared hosting for small projects and businesses has been around forever – I don’t see cloud computing creating an entire new storm of IT demand.

Steve Lerner is a Practice Leader at RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact Steve at steve@ramprate.com

Content is king right? Almost…the ability to monetize content is king. MGM owns tons of content including a library of 4,100 motion pictures and 10,600 television episodes. But MGM made a critical mistake when projecting forward looking revenues: it relied too heavily on projections of DVD sales. Even in the early 2000s the writing was on the wall for the future of physical media. Did MGM execs use the internet back then? Did they go to NAB or the Streaming Media conference to see what the future looked like? Revenue from MGM’s operations, which were financed based on projected DVD sales, have not been able to feed the other hungry maw: the gaping mouth of creditors. So up for sale it goes.

What is the lesson in this? Keep an eye out for the future. You don’t need to consume industry buzzwords all day long to notice clear and obvious trends. Even back in 2000 it was clear that consumers weren’t going to buy an entire library of 4,100 movies – but wouldn’t it be nice if they could access it digitally? Wouldn’t that be where technology would innovate so that the demand would be met with a supply? So wouldn’t it be smart to organize your company based on rights alone and be ready for a major change in distribution formats and its associated revenue? James Bond would have done well to investigate further.

Steve Lerner is a Practice Leader at RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact Steve at steve@ramprate.com

Dave listened to our pitch, and responded with these exact words, “We don’t think there is a future in streaming video, but we do think there is a future in streaming MIDI”. MIDI is the language used to communicate musical notes between one device and another – such as between a computer and a synthesizer or drum machine.

Does it sound like he was wrong? Think again.

Apple QuickTime was one of the first video ecosystems for computers. Yet it never became a standard across the world. Windows machines use Windows Media and Flash. Hackers use VideoLan. Media servers are also either Flash, Windows Media, or simply HTTP. Video formats are usually Flash, Windows Media, or a flavor of MPEG. Not QuickTime. But the QuickTime family of software did give rise to something else very compelling: iTunes. Dave wasn’t so much interested in moving the actual video in a real time stream. He had something more visionary in mind- whether he knew it or not. Delivery of entertainment data from a source to a destination where it could be rendered and played back properly by the user.

Many years after our pitch, the QuickTime ecosystem’s descendent, iTunes, would completely and totally alter the business of media. Not in the technical sense so much – but in something more important: the dollar sense. QuickTime holds the media industry captive in a way unlike any other technology before it. iTunes needed a device to complete the experience: the iPod. And the iPod evolved into something far more sophisticated – the iPhone. It all makes perfect sense, looking backwards – it was a trek towards a new computing appliance – and it would succeed. Even the Japanese love the iPhone - and they are the hardest to please in terms of user interface and devices.

The iPad comes out with all kinds of punditry slinging mud. An $829 iPhone? A huge expensive fragile screen? No video camera? No Flash? The pundits aren’t looking at the history. The iPad is the first step in a long sought desire of computer and operating system makers worldwide: the end of the “computer” experience. The end of cables. The end of the SysReq key. The end of ugliness. The end of fixing the operating system.

Just take the tablet a little further… just a small bit further… and the potential becomes clear. The iPad comes with a built-in microphone and bluetooth support. This means that you can make “phone calls” on it – via 3G / VOIP, etc… So you can make phone calls on a device that you can also write on… and share notes and diagrams without a cumbersome keyboard / mouse / jumble of cables… Getting interesting. And you can type on it, business style with a virtual keyboard, and I’m sure many traditional peripherals will arrive eventually as well – such as wireless mice.

So, you have a primary computing device that can be a phone, has no cables, has strong battery life, can be used with gestures, can be used as a tablet for medicine, education, general communications… And as a book. And a magazine. And a movie player. And a computer. And it has no cables. Hmmm. Imagine adding an optional bluetooth camera… setting the whole thing on a counter and its a video conferencing device as well.

I don’t see the immediate device release via punditry. I see it like Dave Singer saw his QuickTime ecosystem – as the underpinning of something much further reaching, much more sophisticated- that can enable new and more efficient use of technology.

The technology industry should begin looking at ways to partner with and enable tablet devices. And the content industry should make sure to finalize distribution strategy and rights partnerships, to make sure their gems are not left out of this jewelbox of media access. Getting left behind during platform evolution can now be fatal to rights owners.

I, however, am interested in starting an insurance company to write policies against dropping the thing on the floor.

Steve Lerner is a Practice Leader RampRate and works with media companies on digital distribution technology sourcing and operations analysis. Contact steve@ramprate.com