Understanding Infrastructure as a Service (IaaS) Business Model
Sep 23, 2022
IaaS is the most complex offering of the cloud computing three, but it allows the user the most personalisation of any of the other offerings. So how does one capitalise on this user benefit, as a provider?
Back in 2017, Amazon totally dominated the market share for Infrastructure as a service (IaaS), with Amazon Web Services (AWS) owning a whopping 49.4% of the total market. This had only decreased to 47.8% in 2018 with rivals Microsoft, IBM, Google and Alibaba stealing back some of the ground Amazon had taken with their early implementation of the Infrastructure as a Service model (source).
Jeff Bezos, the Amazon CEO explained this as “The greatest piece of business luck in the history of business so far as I know”. This, from a man who has had some pretty successful enterprises. saying there was no like-minded competition for seven years.
The revenue for Amazon's IaaS offering in 2018 was $15.5 Billion, a figure which is only increasing with the continuing proliferation and adoption of cloud computing services.
IaaS offers users the benefits of cloud computing and is the foundational underpinning of the three “as a Service” offerings; Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).
End users of Infrastructure as a Service are given freedom to establish a network of computing services, configured as they wish, benefiting from increased performance, security, scalability and support.
Even reaching as far back as 2017 (in internet technology terms a long time!), an outage for Amazon Web Services took down Spotify, Netflix, Reddit and Pinterest and a host of other huge internet names. All of their platforms were created and deployed, using IaaS provided by Amazon, and the use of cloud computing only continues to grow.
Yet in spite of the 2017 outage of major platforms, we have seen that AWS only increased its revenue and continues to dominate the market for the IaaS business model. Likewise, many companies still rely on Infrastructure as a Service to provide the networking, storage and virtualization of hardware to deliver their platforms to the public.
So what is IaaS and how does it work as a model for a business wishing to provide Infrastructure as a Service?
Sitting in the same category as the topics of our last two pieces on cloud computing, PaaS and SaaS, IaaS is the most complex for a system admin to set up and maintain, but also confers on the user a greater ability for customisation and configuration of settings than the other two offerings.
IaaS offers essential computing, networking and storage resources as demanded by the user. This is usually billed on a pay as you go basis by the provider.
Utilising IaaS bypasses the cost and difficulty of buying and managing on site physical assets like data centers and servers, virtualising the computing needs of the business it serves. This has a few benefits, alongside the ones immediately offered by virtualisation of resources.
Place in The Cloud
Understanding the IaaS business model means assessing it in terms of where it sits with the other cloud computing offerings, PaaS and SaaS.
We have already written about Platform as a Service, where end users receive a configured platform from which to launch their application or business. We can consider PaaS the middle of the three offerings, providing less customisation than IaaS but more than Software as a Service (SaaS).
PaaS gives users the platform to create software, but everything is configured for them. In IaaS, users must configure and set up their own platform.
Software as a Service (Saas) sits at the top of the cloud computing offerings in terms of its simplicity and usability for the end user, and the ease of setup it offers. In SaaS, end users simply access the software from the provider via browser, mobile app or desktop software.
In this sense, SaaS provides the end product, The Software, whereas in IaaS, the end user is provided with all the necessary computing power to create their own software for purpose.
We have seen that even as far back as 2017, many of the big internet brands were utilising IaaS as end users to offer their platforms to the public. This is because IaaS has a multitude of benefits, especially for large businesses and brands.
Using IaaS reduces expenditure and optimises costs. Obviously there is the consideration of the cost of physical assets, but it also spares the customer the manpower and time resources for their business to set up the physical hardware too. This has the benefit of shifting expenditure from capital outlay to operating costs.
Likewise, cloud computing solutions for Infrastructure are scalable, meaning users of IaaS don’t have to worry about growing their business and platform on their existing hardware.
This maintains flexibility for businesses as they scale up. It’s one of the reasons many of the internet leading platforms hit by the AWS outage of 2017 have not shifted from cloud computing IaaS, despite their reliance on infrastructure from elsewhere.
That Amazon continues to be a leading supplier of IaaS is testament to their understanding of the demands of the IaaS business model, so let's examine what IaaS means for providers and businesses wishing to use this model.
For providers looking to utilise the IaaS business model, there are some valuable aspects to the business which IaaS presents, but there are also some associated considerations to be taken into account.
Companies providing IaaS are responsible for security and maintenance of their servers. Likewise, the cost of the physical hardware is saved by the end user of the product, which means it is borne by the provider. This means high startup costs and the pay-as-you-go revenue structure also means it can be hard to forecast revenue with accuracy.
However, once established as a provider, it is clearly a lucrative venture.
Advantages to IaaS business model
We’ve discussed how the initial outlay costs for setting up an IaaS provider business will be high, but once the initial expenditure is outlayed, it is a high margin business.
By adopting the IaaS offering, companies can take advantage of the continued move to cloud computing, further establishing the “as a service” model as the go-to provider for computing requirements.
Likewise, IaaS as the most complex of the cloud offerings will place the provider in a good position to offer SaaS and PaaS to users as well, with the linked benefits and similar business structure. This is how many of the cloud computing providers started, with just one of the three offerings.
Considerations for IaaS
Providers of Infrastructure as a Service should also be aware that there are some challenges presented by this unique business model.
The margins can be high for IaaS providers, but this also has some unpredictability to it, as pay-as-you-go pricing presents a difficulty in accurately forecasting revenue.
Furthermore, we have spoken earlier about how the big tech companies like Microsoft, IBM and Amazon all offer cloud computing services. Breaking into their market share when they are so established in the industry will present a challenge.
The big market providers all have their name and reputation on their side, meaning a provider of IaaS should look to establish themselves early as a trustworthy, reliable brand for users who want to make the move to cloud computing.
Considering the large costs of offering IaaS, and the potential for large outages if something goes wrong, it is worth carefully planning and modelling the proposed offering for an IaaS business.
Providers should also consider what their unique value proposition is to end users, given the established power and brand trust which the tech market leaders enjoy.
However, more and more businesses look to move to the cloud, especially with accessibility improving and usability on the increase, an ever growing number of small and medium enterprises are looking to migrate their business to the cloud.
This means there are still many market opportunities for an IaaS provider to capitalise on, without going head to head with the industry leaders.
WQA provides supercharged digital product development for growth driven companies around the world. Working with Startups, Scale-ups and Enterprise, we design, build and scale digital products, experiences and platforms used by millions of people.
If you want to learn more about how to implement an IaaS business model, or upscale and improve your current one, you can chat to us or email us for a conversation and assessment of your unique digital context.