Decoding the Role of Pay-as-You-Go Commercial Model in Hyperconverged Infrastructure Market

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2Q 2023 | IN-6981

More and more infrastructure contracts will be tied to usage and/or customer success. Customers can still buy a specific component of the overall tech stack and basic maintenance services, and many will want to do that. But that is not where growth will come from and where consumption will be optimized.

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Hybrid and Multi-Cloud Extend to Edge


There is market momentum from enterprises to extend their on-premises hosting to a public cloud and eventually to hybrid and multi-cloud architectures. For example, according to Red Hat, the open hybrid cloud is a US$1 trillion opportunity. Now, there is market activity to broaden multi-cloud hosting to edge infrastructure. With adoption of edge architectures, enterprises inherently move beyond the four walls of their virtual or physical Data Centers (DCs) to place compute, networks, and apps as close to their customers as they can. In the distributed edge cloud market, tech suppliers begin to diversify their “value-add” from offering just a piece of technology to offering a broader set of solutions available on a subscription or an as-a-Service model. For example, increasingly, hyperconverged infrastructure vendors like Canonical, Red Hat and VMware are offering their customers flexibility in terms of consuming their technology as cloud services offered on demand. This marks a significant change in terms of business and support models. But it is critical to the ongoing viability of their business. In this market, tech suppliers will need to innovate around a different objective, consumption of value, and driving end-user success.

Red Hat's Business Model


As an infrastructure supplier, Red Hat, for example, is a pioneer and a leading vendor in commercializing Open-Source Software (OSS) innovation. Red Hat was acquired by IBM in 2019, but it continues to operate independently. Red Hat’s early success began in the late 1990s with the “Linux plus Intel” architecture as the basis for private DC buildouts. Over 3 decades, and at a time when the pace of innovation was slow, industrial-strength computing was Red Hat’s foundation for growth. Red Hat’s growth is attributed to business model innovation. There are three parts to Red Hat’s business model: OSS, the value-added software, and support as a further means of monetization. Red Hat generates revenue based on a subscription model, typically monthly or annually. Red Hat provides access to software, support, lifecycle maintenance, and more. In this model, at first, Red Had has one stress point: get as big an upfront customer commitment as they can. Though Red Hat must actively deliver value to the customer to guarantee their renewal, broadly speaking, the customer takes on the risk of making the investment pay-off.

Red Hat is an industrial-strength component provider at the infrastructure layer. Red Hat’s industrial-strength portfolio is anchored on Red Hat Enterprise Linux (RHEL). RHEL is a widely deployed Linux Operating System (OS) available on multiple cloud substrates. Red Hat OpenShift, a Kubernetes app development platform, builds on RHEL for hybrid hosting and the development of cloud-native apps. Add to that the Ansible Automation Platform (AAP), and there is a set of open-source tools on offer to drive cloud adoption. With RHEL, OpenShift, and RHAAP, Red Hat offers cloud components that include testing and hardening, integration, support, and lifecycle management. Further, Red Hat aims to provide industry-specific environments of supporting products and interfaces, often co-developed with partners. These environments address complexity and yield value around security, manageability, and consistency across a private DC, a public cloud, a multi-cloud, or closer to the edge. Red Hat builds these components around the subscription model.

Red Hat is investing in Pay-as-You-Go (PAYGO) cloud consumption models both for its managed services and for its traditional software portfolio. In fact, Red Hat notes that it has reached US$1 billion in Annual Recurring Revenue (ARR) with Red Hat OpenShift running on hyperscaler clouds. Gradually, more contracts will be tied to usage and/or the customer’s success. In fact, with history as our guide, industrial-strength tech attributes will appear in low-cost software over time. This is the cloud, where tech access is the thing of beauty. This is a different business model with different stress points and different economics. For example, the cloud represents a large-scale model that shifts the risk squarely from the customer to Red Hat and other vendors like Canonical and VMware. The risk is for these hyperconverged infrastructure vendors to drive usage and value from their product. But these vendors may not be well suited to drive a high-volume, low-priced product business.

Invest in a Consumption Model


Canonical, Red Hat, and VMware have profitably spent the last 3 decades implementing functionality in private DCs. Sure, they can profitably spend the next 5 to 10 years taking it all back out as they ride the hybrid, multi-, and edge-cloud growth waves. What next? Now, there is no silver bullet here. Customers can still buy a specific component of the overall tech stack and basic maintenance services, and many will want to do that. But that is not where growth will come from and where consumption will be optimized. In the new normal, Canonical, Red Hat, and VMware must diversify their value-add by executing a “do-both” model. They must run their current product playbook and layer in a new consumption commercial model. With the latter, infrastructure suppliers have their revenue largely determined by the customer’s consumption of value. Consequently, Canonical, Red Hat, and VMware Red must take responsibility for proactively driving customers to obtain value in ways that they cannot do on their own. These vendors must learn to love micro-transactions in the way they build products.

Canonical, Red Hat, and VMware should take a (unique) position by both defending and protecting their existing (open-source) business model and fulfilling a market requirement in their cloud scale positioning. One move, the re-missioning of their existing assets, can potentially solve both of those critical challenges. The responsibility for making that happen lies with Canonical, Red Hat, and VMware. That will take time and money in a market that is approaching past peak service. The overall cost of DC infrastructure is falling on a regular basis. As discussed in this ABI Insight, DC capital outlays stand to be avoided in favor of variable costs over time. Infrastructure, whether it is at the edge or in a central DC, is layered with a broad-ranging component stack—everything from servers to routers, to app software. To conclude, a PAYGO consumption model does not mean that there is less water in the profit pool. It just means that the pool’s rules change significantly. Hyperconverged infrastructure suppliers must prioritize and differentiate around consumption as a complement to the predominant subscription business model to embrace that change.