The Economics of an In-country Cloud Business

 

Based on global data from multiple service providers in emerging markets, here are a few impressive figures for you:

• Cloud business can provide a five year IRR of up to 80-90%
• With a payback period of 18-20 months for capital investment, a cloud business is one of the most lucrative in the telecom industry
• A well-executed business plan can achieve an operational break-even in 11-13 months and cash break-even in 23-25 months.
• Minimum revenue outlook in 5 years would be:
  1. For small ISPs – USD 5-6 million
  2. For large ISPs and Telcos – USD 10-12 million

If these numbers are interesting to you read further as we explore the high-level economics of building a cloud business.

Understanding Costs

Setting up an in-country cloud business is a complex project, and it starts with listing various elements that are required to understand the economics involved and also ascertain the long term returns that you can generate from the cloud business. In this blog, we help you understand all the elements involved in building the business case.

• Capital Expenditure (CAPEX) – The general assumption is that setting up a cloud requires up to USD 1,000,000, based on the commercials involved in procuring proprietary stacks for leading vendors. However, if you follow our advice of deploying an open architecture, you can start with a CAPEX of as low as USD 150,000 dollars with our modular cloud design. Our modular cloud design is a reference architecture for any telco or ISP who wants to start small or run a pilot (to gauge the market potential) before building a large cloud setup. This architecture will give you a production-grade cloud with minimal investment.
• Datacenter/Hosting Costs – Here, we have to look at two scenarios:
  1. You are operating a commercial datacenter: In this case, you need to allocate the rack charges plus power charges as per actuals.
  2. You do not operate a commercial datacenter: As a Telecom service provider, you would already be having datacenter sites built out to cater to your core businesses. You need to examine these sites and figure out the ones where you have spare rack capacity of at least two racks. Herein, you also need to ensure that these sites have:
     1. No history of downtime, due to power-related issues.
     2. No history of frequent equipment failure due to air quality issues (should be verified with an air quality test).
     3. Multi-path fibre connectivity, ideally from different service providers, to ensure 100% internet and local network uptime.
     4. Easy 24×7 access in case of an emergency.
  3. Once you have identified the best site, you need to ascertain the rack space and power cost and add it to your business case.
• Software & Service Management Fees – Next, you need to determine the software licensing, support and Service management fees that are required to run the cloud service. In a typical scenario, this would be an arduous task as you would need to speak to multiple software vendors and system integrators to create a budget. At IndiQus, we offer a turnkey solution that bundles all the required software and services together into a single monthly pay-as-you-go price.
• Additional L1 Support Staff Cost – Since you would already have an L1 support desk, you can launch your cloud services while using the same support desk. We will provide user management training to them to handle basic customer issues. As your cloud business grows, you would need to budget for additional human resources. As a benchmark, budget for an additional resource for every 200 cores sold.
• Marketing Cost – Being a new business line, budget for some marketing spends to create product awareness and induce customer trials. Over time, the marketing objectives would evolve more towards lead generation.

Understanding Revenues

After considering the cost aspects we can move on to the revenue side of the plan. This can again be a complex process given various configurations that can be sold along with different services but can be simplified by using a single SKU to develop a baseline plan.

• Revenue Forecasting – To simplify revenue forecasting, you should take a baseline VM configuration that you are most likely to sell. We recommend a baseline configuration of 4vcores, 8GB RAM and 100 GB disk space. After that, benchmark the selling price of this VM with your primary local competitor and the global cloud providers prices for your nearest region. We have an online tool here to help you with the pricing for global cloud providers. It would be best if you also assumed annual price discounting, driven by competition.
• Sales Forecasting – This is the most critical part of creating the business case and should be done in consultation with the sales team leads. Based on our experience, if you have a dynamic sales team, you can take a conservative estimate of selling around 10 VMs per month in the first year, going up to 30 VMs per month 3rd year onwards.

Creating the Business Case

Armed with the above data, now comes the difficult part of putting all this together on an excel template to build your business case. If you need help with this, reach out to us, and we can provide you with a business case. Reach us at [email protected] and we will help you create the business case and also partner with you to achieve the same.