Cost optimization drives consolidation in the cloud management market

Over the past few years, several pure-play cloud cost management companies have been acquired by cloud providers. Other pure-play vendors have been displaced by competitors that offer cost control as part of broader management capabilities. Cost optimization, not cost management, is where the market is heading.

The 451 Take

Cloud cost management is no longer a compelling proposition in itself. Cloud providers have gotten better at spend reporting, and as such many enterprises don't feel they should pay a third party for a service they can get for free from their own supplier. Furthermore, cloud management suites are now bundling cost management into broader capabilities that include governance, workload placement and security – why pay for cost management separately when it's included in an integrated suite? Much of the pure-play cloud cost management market has consolidated. The players that remain will need to move beyond purely cost management to survive – there is a new trend of cost optimization that they need to get involved with.

Context

In the early 2010s, cloud cost management tools were not high on users' concerns. Enterprises were just getting started on employing the cloud, and it was technological and cultural challenges that they primarily wanted to resolve with cloud providers' help, rather than business ones.

But over time it became clear that the cloud was creating challenges few expected – who was responsible for paying, how would consumption be audited, how was consumption tied to a specific department, and how was the use of the cloud to be controlled? Soon enough, there were rumors and stories of 'bill shock' – as CIOs opened their invoices at the end of the month, they were sometimes confronted with a bill that wasn't just unexpected, but not necessarily budgeted for.

Cloud providers were initially slow to react to this problem, prompting the arrival of a slew of cloud cost management vendors. CloudVertical, Sensible Cloud, CloudRows, Cloudability, Newvem, Cloudyn, Cloud Cruiser and others all jumped into the breach promising to give more transparency and control to enterprises employing the cloud.

But there was a huge threat dangling over these entities: if cloud providers got better at reporting themselves, how would the cloud cost management firms add value? Multi-cloud, analytics and audit were claimed to be the key differentiators – the cloud cost management providers said they offered an independent view of aggregated data sources from multiple cloud suppliers. They felt this was an area where cloud providers wouldn't look to target themselves. We agreed. But we didn't believe that multi-cloud cost management was so desired that users would pay for it, instead of using suppliers' own free reporting capability... when that capability eventually came.

As expected, the cloud vendors improved their reporting, most notably AWS, which launched tools including Budgets (Budget Manager), Consolidated Billing, Trusted Advisor, Cost Explorer, Tagging and Price API – giving enterprises the ability to forecast their consumption, pay for it up front, allocate it to teams, and control spending over time. With so much of the IaaS market dominated by AWS, this naturally had an impact on the cloud cost management scene. AWS accelerated way past its competitors when it came to cost management, creating a situation where cost management providers needed an exit and cloud firms needed more cost reporting. At the same time, broader cloud management platform vendors realized that they would have to control spending, as well as workloads, if they wanted to stand out. Consolidation was inevitable.

Prior consolidation

First to fall was CloudVertical in August 2013. Acquirer Copper.io was trying to develop a suite of cloud management capabilities, and it believed that a cloud cost management vendor could not survive without being a single component of a broader portfolio. We agreed, and there are several companies that offer cost management alongside other capabilities such as governance, security and workload management – including CloudCheckr, CloudHealth, RightScale, Scalr and Cloudamize. These vendors diversified beyond cost management, knowing that multi-cloud management and control would be needed by enterprises long before multi-cloud cost management. Some of these firms have been purchased as well, including CliQr by Cisco, Orbitera by Google, Ensim by Ingram Micro, Cloudamize by Cloudreach and UShareSoft by Fujitsu. But the key motivation for these deals wasn't cost management – it was unified general cloud management.

Next to fall was Israel-based startup Newvem in September 2013. Datapipe bought the company for an undisclosed amount as a means of adding value to its managed service capabilities. The acquirer provided managed services on top of third-party clouds, including AWS. With Newvem in the fold, it could now manage costs and consumption on behalf of its clients on the likes of AWS. Datapipe was acquired by Rackspace in September to bolster the cloud provider's cost management capabilities. Rackspace has never been brilliant at cost management, but by reaching for Newvem, it obtained skills in managing third-party clouds, as well as IP and software for more effective management.

Copper.io was abandoned soon after starting, probably as a result of it being too late to market against the aforementioned rivals. CloudVertical was scooped up by Cloudability in March 2015, the aim being to bring IP and skills to the acquirer's growing operation. Two years later, Cloudability bought CloudMGR, a cloud management startup. More on Cloudability later.

In January, HPE snagged Cloud Cruiser. Integrated with HPE's Flexible Capacity pay-as-you-go private cloud, Cloud Cruiser should enable the company to track, bill and control consumption across hybrid cloud environments – this gives it much more flexibility to make new billing models, and to add value to users consuming both public and private clouds.

Throughout all this consolidation, other providers disappeared from view – CloudRows and Sensible Cloud ceased operations. By early 2017, there were only two pure-play cost management companies left: Cloudyn and Cloudability. There simply wasn't enough demand from enterprises for a market full of pure-play cost management providers.

Apptio played in the same circles during this time, but its capability was far greater than just the cloud – its software could aggregate and analyze financial data from a whole IT estate, not just the cloud parts. VMware vRealize also provided broader private cloud business management throughout this period. As a result, neither Apptio nor VMware really vied with the likes of Cloudyn and Cloudability. But it's interesting that Apptio launched a SaaS cost management platform called Apptio Express as early as 2012 – perhaps it was too early to market, as it soon disappeared from sight.

Microsoft's cloud economic story has been lacking for some time – as AWS and Google introduced new exotic pricing models, variable price spot instances and tools, Redmond appeared to sit back. Over the past few months, Microsoft Azure has rapidly improved this story, introducing new flexible advance purchase instruments, as well as a recommendation engine. The missing part of the story was cost management and reporting – Cloudyn was scooped up by Microsoft in June for an estimated $55m, according to 451 Research's M&A KnowledgeBase. Microsoft is primarily employing Cloudyn to manage its own Azure cloud service, but it will also be able to manage its rivals' clouds – for a fee. Google has been battling in the cloud price war as well, adding new financial features and models faster than Microsoft – but its reporting is still far behind AWS'. IBM has been almost silent on the matter.

Potential M&A

With Cloudyn now acquired, Cloudability is the major independent cost management firm in the market today. The company is very tight-lipped about revenue, but it appears to be the most successful of the pure-play cost management vendors – we estimate its revenue at about $10m, and it has raised funding of $43.5. We think there is demand for a pure-play cloud cost management provider, but it won't last forever – now that cloud management suites are more prevalent, users will ask why they should pay separately for Cloudability's service, especially considering that cloud vendors themselves are getting better at reporting. The company always claims that its ability to manage multiple clouds – which cloud suppliers won't want to do themselves – is its differentiator. This is fair, but how many enterprises are really in a position to need single reporting across multiple clouds – and how many are willing to pay for Cloudability's pure-play service instead of a bundled one?

There is a new trend of cloud cost optimization in the market. Spotinst, cmpute.io (formerly known as Batchly), GorillaStack, ClusterK (acquired by AWS in April 2015), FittedCloud, BidElastic and ParkMyCloud aren't looking to manage costs, they're looking to broker financial instruments to gain the lowest price for the customer, often based on variable price 'spot' instances. Cloudability is already working with cmpute.io. Perhaps Cloudability could add greater value to its proposition by buying some of these startups. We'll cover this trend in a future Sector IQ.

An alternative is for a service provider to acquire Cloudability for the same reasons HPE bought Cloud Cruiser and Microsoft nabbed Cloudyn. Google and IBM stand out as cloud vendors with less cost management capability compared with Microsoft and AWS. Cloudability could be a target for these companies, as could more traditional players looking to differentiate around hybridity such as Dell EMC.

There are smaller firms specifically focusing on OpenStack cost management, namely Amysta and Talligent. We don't view these as competing with Cloudability, but we do see M&A potential. Those offering OpenStack services such as Mirantis, SUSE, Rackspace, Canonical and Red Hat could purchase one of these companies to add value to their managed service offerings.

New Alert Set

"My Alert"

Failed to Set Alert

"My Alert"