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Commentary: Loudcloud's sensible move

The company's switch from a focus on managed hosting to software gives it a chance to become profitable, but it still needs to overcome many challenges.

By Ronni Colville and Donna Scott, Gartner Analysts

Divesting its managed hosting business and concentrating instead on being an independent software vendor gives Loudcloud a chance to become profitable. However, the company will need to overcome many challenges as a new entrant in an emerging market.

Loudcloud switched from focusing on managed

See news story:
Loudcloud leaning on EDS deal
hosting to software in part because it recognized a growing trend: Businesses wanted to improve the efficiencies of server deployment, configuration management, and asset and license tracking.

After the service provider and hosting movement began in 2000, providers quickly realized they needed a better, more efficient way to provision and deploy servers. Therefore, many developed custom configuration and deployment plans to differentiate their services. Loudcloud has 50 large companies as customers of its managed hosting business, but like other service providers such as ProTier, Loudcloud found that many others were more interested in its software than its services. Its hosting business lost $200 million in 2001.

However, many factors could potentially inhibit Loudcloud's success in moving from services to software:

• Finding the right product to satisfy the different needs of customers can be costly and requires changes to business models--especially difficult for public companies.

• The different buyers and competitors in the software market will make it challenging to retrain the sales force.

• Loudcloud must set up a customer support infrastructure suitable for an independent software vendor.

• Despite Loudcloud having brand recognition as a service provider, its new name, Opsware, could diminish its recognition in an emerging, crowded market.

• Loudcloud offers a comprehensive solution in Opsware, but it costs significantly more than others in this market.

Despite these challenges, Loudcloud has some significant advantages over other newcomers in server configuration management, including these:

• $65 million in cash and no debt.

• A proven product already used by 50 customers (in the service model).

• Five customers, including Electronic Data Systems, using its Opsware product.

• A management team with experience running a software company.

(For related commentary on the Loudcloud-EDS deal, 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.