Infrastructure-as-a-Service Business Model
Infrastructure-as-a-service providers (IaaS) give users the ability to configure processing, storage, networks, and other fundamental computing resources provisioned through the cloud, saving cost and complexity.
IaaS vs. PaaS vs. SaaS
IaaS sits at the core of three of the most powerful cloud service digital business models, next to Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS). IaaS gives users all the benefits of on-premise computing resources without the cost and complexity overhead. The IaaS companies provide virtualization, storage, the network, and servers.
The following chart describes the difference – please see IaaS and SaaS models for comparison.
Compared to PaaS, IaaS offers complete control over all cloud services but relies on you to install, configure, secure, and maintain software on the cloud-based infrastructure yourself, whereas PaaS provides a platform for software creation.
Compared to SaaS, IaaS provides a platform for software creation but does not provide the software, which is SaaS.
The concept of virtualization is key to understanding IaaS. Virtualization relies on software technology to simulate through the cloud the kind of functionality you would get from having hardware on site. Technologists can then run multiple virtual systems, operating systems, and applications, on a single physical server.
Virtualization is as old as the Internet. In the early version, ARPANET was used by universities and scientific organizations that typically had only one mainframe computer as they were expensive in hardware cost and administrative complexity to own. Users therefore connected to mainframes via terminals without any real processing power of their own.
Early mainframe providers like IBM and their CP-40 created “time-sharing” solutions, the predecessor to the pay-per-use or pay-per-gigabyte model pioneered by AWS, Google Cloud, and Microsoft Azure. Virtualization permits the IaaS company to create a new instance of the operating system for each user, assigning memory and resources.
The result: before the IaaS model, creating web apps, phone apps and e-commerce sites required large investments in hardware services and the technical capabilities to maintain and update. This cost shifted from “capital expenditure” to “operating expenditure.” A startup can now spin up an instance of their App for approximately $50-90 per month and have access to world-class computing power over the cloud.
Business Models in Use
Alibaba Cloud | AWS Amazon Web Services | Cloud Sigma | Digital Ocean | Google Cloud | Green Cloud Technologies | IBM Cloud | Microsoft Azure | Oracle Cloud | Rackspace | Red Hat Openstack (IBM) | Togglebox | VM-Ware
Infrastructure-as-a-Service Evaluator
Valuable to Customer
Benefits
- Lower cost of buying hardware and maintaining infrastructure
- Shift costs from capital expenditure to operating expenditure
- On-demand scalability (scale costs with your user growth)
- Maintain flexibility from the startup phase to growth, access more data without having to spend time and energy on setting up new systems
Challenges
- Misconfiguration of authentication or security standards
- Changes in visibility: not in control of all infrastructure
- Risk managing security in cloud-based data
- Integration across multiple SaaS and on-prem solutions
Key Performance Indicators
- Speed to market
- Cost of ownership and maintenance vs. usage - priced per # of CPUs and GBs of memory
- Uptime, run time
- Higher ROI as development costs are more aligned to revenue and profit outcomes
Valuable to Business Offering IaaS
Benefits
- High-margin business with strategic benefits for building developer ecosystems
- Accelerate industry migration to the cloud
- For PaaS providers, strengthens their position to offer underlying IaaS (Microsoft started Azure as PaaS, then offered IaaS)
Challenges
- IaaS has cost structures that are more difficult to predict and manage
- Challenging unit economics to offer pay-as-you-go pricing
- Highly competitive market with the 3 of the most valuable tech companies in a race for share dominance
Key Performance Indicators
- Service availability
- Response time
- Scalability - ability to handle volume and surge of users
When it Works Well
Accelerates Cloud Transition
The overall shift driving uptake for IaaS solutions is the shift from hosting servers on-site or on-premises to cloud-based solutions. Most IaaS providers now offer the ability to integrate with on-premises and off-premises environments.
Higher Performance with no Capital Expenditure
IaaS tend to perform better than in-house infrastructure, all while providing the opportunity to shift costs from upfront capital expenditures for servers and configuration to pay-as-you-go. IaaS tend to perform better than in-house infrastructure, all while providing the opportunity to shift costs from upfront capital expenditures for servers and configuration to pay-as-you-go.
Reduces Time to Innovation While Future Proofing
Without having to spend scarce developer resources on infrastructure, customers can speed their time to innovation and work on high-value-creating apps that are core to the business. The IaaS provider is responsible for investing in the latest state-of-the-art data centers, hardware, and operating systems. The availability of IaaS has given startups a level-the-playing field advantage as they do not need heavy investment upfront to get access to world-class infrastructure.
Increased Security
Backup plan in the event of a natural disaster; cloud access in the event of a global pandemic and protection from data loss.
Challenges to the IaaS Model
Big 3 Competition Intensity
Tech giants Amazon AWS, Microsoft Azure, Alibaba and Google Cloud are investing heavily in R&D, growing their share of the market, and generating substantial profits; smaller companies are frequently outbid by these larger full-service cloud and hybrid solutions and their PaaS offerings.
Constant Technology Upgrades
Leading IaaS providers are responsible for upgrading to the state-of-the-art data centers and managing the cost curve as capitalize hardware while providing a pay-per-use pricing model
Reputation Built on Reliability
Uptime alone does not tell the full story of reliability. Incidents that impact customers like data center outages, multi-factor authentication challenges, and DNS maintenance issues can negatively impact customers’ business operations and threaten the entire IaaS model.
Complex Business Operations
Cloud infrastructure providers must have a clear view of the complex ways in which factors such as operational processes, architectural designs, hardware issues, software flaws, and human factors can align to cause service incidents.
Customers Still Want On-Premises
Full cloud migration is not feasible for many industries. While customers want the benefits of a public cloud PaaS and IaaS, there are still many who will pay a premium for on-premises dedicated cloud services.
Trends in IaaS
Taking Swings at AWS
The trends are driven by consolidated players with AWS at one point owning more than 50% of the public cloud market. Look for competitor tech giants to position themselves as all vendors reach feature parity across data centers.
Key IaaS Mechanisms to Test
Warning. IaaS is now a developed later stage technology funded by three of the most valuable companies of all time. Pricing is in a race to the bottom. If you believe you serve a niche untouched by Amazon AWS, Microsoft Azure, and Google Cloud, then make sure you future-test your assumptions with your customers.
Before You Consider IaaS
- Can we offer a cloud service to a relevant customer segment not addressed by major providers?
Testing the Model
- Is the IaaS solution differentiated enough?
- Can our IaaS solution be used by developers, or by business users with no or low code skills?
More on IaaS
Microsoft’s Most-Dangerous Challenge in 2020, Bob Evans, Cloud Wars, 2020
Success-Driving Business Model Characteristics of IaaS and PaaS Providers, Floerecke, Computer Networks and Communications, 2018.
Resource scheduling for infrastructure as a service (IaaS) in cloud computing: Challenges and opportunities, Hamid et al, Journal of Network and Computer Applications, 2015.
IaaS Cloud Benchmarking: Approaches, Challenges, and Experience, Iosup et al, Cloud Computing for Data-Intensive Applications, 2014.
Cloud Computing – Business Models, Value Creation Dynamics, and Advantages for Customers, Siemens.
The Prospects of Cloud Computing in Supply Chain Management (A Theoretical Perspective), by Bahjat Aljawazneh, Journal of Management Research, 2016 (academic paywall).
Towards a Generic Value Network for Cloud Computing, Böhm, et al, Conference: Economics of Grids, Clouds, Systems, and, 7th International Workshop, GECON 2010.
Storm Clouds Rising: Security Challenges for IaaS Cloud Computing, Hay, UC Davis Published Works, 2011.
