Watch this installment of This Week in Cloud Computing to get a better sense of what cloud computing is all about and how you can better understand where cloud computing fits within your greater IT infrastructure and services.

If a new report from IT consulting firm RampRate (not your usual savvy analysts of showbiz, but bear with us) is right, Silicon Valley’s biggest company might be taking just the opposite approach.

http://latimesblogs.latimes.com/entertainmentnewsbuzz/2009/06/report-youtube-losing-less-money-than-thought-and-happy-that-hollywood-doesnt-know-it.html

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

Rather than looking to compete broadly with the phone and cable companies that provide most Internet service today, analysts say Google is trying to goose the industry to more quickly develop faster Internet networks that can more easily accommodate video — and the video ads Google and others sell.

The much-faster network could show businesses that’s it’s easy and desirable for them to use Google free productivity software via the Internet, rather than buying Microsoft’s packaged offerings, says Alex Veytsel, an analyst at consulting firm RampRate.

The superfast fiber network could “prove that Web-delivered applications and software as a service — and not desktop-based applications — is the future,” Veytsel said.

Then there’s what Veytsel calls Google’s “nuclear option.” It could use the tests for a much bigger plan to someday go head-to-head with cable and telecom firms in Internet services. “They might say, ‘if you don’t play nice we can spend $20 billion (to bring fiber to the home) and put you out of business,’” he said.

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