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Commentary: Loudcloud's risky transition

Since Loudcloud went public, the company's good products, ownership of assets and experienced, high-profile management team have made it an attractive acquisition target.

By Ted Chamberlin, Gartner analyst

Here are the scoreboard results for Loudcloud's exit from the service business: EDS wins, Qwest loses and Loudcloud ties.

Since Loudcloud went public, Gartner has said that the company's good products (Opsware), ownership of assets and experienced, high-profile management team have made it an attractive acquisition target--especially to a telephone company or an IT outsourcer that didn't have much infrastructure and expertise in operations automation. Long a prime candidate for the purchase, Electronic Data Systems will gain Loudcloud's 50 high-profile Web hosting customers.

See news story:
Loudcloud passing on hosting business

For EDS, known as a slow-moving provider, implementing Opsware technology will reduce costs and improve efficiencies in its data centers. Opsware will help the company move toward providing on-demand computing services such as large-scale provisioning and scaling. EDS doesn't consider hosting solely as a means to lead customers to larger contracts for data center outsourcing. The 140 employees and the client base that it will acquire from Loudcloud show EDS's significant commitment to the hosting market. And with EDS's financial stability, customers can safely consider signing contract extensions with the company--as long as they find its terms of service agreeable.

However, Gartner believes that Loudcloud, now adopting the name of Opsware, takes a risk by making the transition from service provider to software provider:

• Despite the Opsware product providing an identifiable name, the company loses the mind share and publicity gained under the Loudcloud name.

• Typical software providers must provide help desk support for their products and have large direct sales forces. Loudcloud doesn't have the latter.

• Unlike most software providers, Loudcloud's proprietary software, Opsware, was designed to run in service providers' data centers, where the steady-state environment can be carefully monitored. Loudcloud is taking the product to the client environment, which can vary substantially.

• Loudcloud enters a crowded market for infrastructure provisioning and automation (15 to 20 companies) that includes IBM, Terraspring and Hewlett-Packard.

• Loudcloud will shift its business model substantially because the software revenue model differs significantly from the service model on which it was based. (However, the company's founders came from Netscape and have experience with the software revenue model.)

The EDS/Loudcloud agreement also affects network service provider Qwest Communications International. The companies had a joint selling and marketing agreement in which Loudcloud offered high-level management, while Qwest provided the data center and network. The two companies had announced a few joint customers.

Gartner stated that although it was a smart move overall for Loudcloud, the arrangement was somewhat risky for Qwest. The main reason: If Loudcloud exited the agreement, Qwest, which is ill-equipped to fully support the needs of mission-critical sites, would have to assume the role of a co-location provider. Now Qwest finds itself in that unenviable position.

(For a related commentary on the Web hosting market, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.