EDS buys Loudcloud hosting service

EDS and Loudcloud's recent announcement is one of the most exciting developments in the hosted services market so far this year. It's a win-win situation for both companies.
Written by Marc Jacobson, Ovum, Contributor
EDS and Loudcloud's recent announcement is one of the most exciting developments in the hosted services market so far this year. A conservative, blue-chip IT services company has established a close relationship with an innovative and unproven start-up. Will this relationship bear fruit for both companies?

EDS' recent announcement took many in the hosted services market by surprise. The company is acquiring Loudcloud's entire managed hosting business, which includes 50 enterprise Web hosting clients at a cost of $63.5 million. The deal is expected to close in September this year. Loudcloud will re-brand itself as Opsware Inc. and move exclusively to a licensed based business model.

EDS will license Loudcloud's Opsware Internet infrastructure automation software (and deploy Opsware in EDS data centers) for the next three years at a cost of $52 million.

Opsware is an automation platform that was developed by Marc Andreessen and his "dream team" of software engineers (many of whom moved to Loudcloud from AOL, iPlanet and Netscape). The software platform "automates the complete IT lifecycle including provisioning, deploying, changing, scaling, securing, recovering, consolidating, auditing and reallocating servers and business applications."

Both companies will benefit

Loudcloud had already been moving very clearly away from its managed service business, and towards a business model reliant upon license fees for Opsware. The company was finding it increasingly difficult to win new business contracts in a turbulent market environment. This was partly driven by the fact that most enterprises are seeking stability from their outsourcers, and they perceive Loudcloud to be an unproven start-up.

As a primary benefit for Loudcloud, this is a major validation for the value-proposition of the Opsware platform. EDS is a company with a rich history of providing IT services that spans forty years. Their decision to license Opsware and deploy it in their data centers is a boon to Loudcloud's message that many manual tasks associated with maintaining an Internet infrastructure can be automated. These tasks include, but are certainly not limited to, server provisioning, deployment of security patches and the deployment of business application versioning updates.

For EDS, the immediate benefit is the acquisition of 50 new Web hosting clients. Loudcloud's client base was highly regarded and included companies such as Adidas, Cablevision, Estee Lauder, Fannie Mae, Juniper Financial and Orbitz. These clients will all be transitioned into EDS data centers upon completion of the deal. A secondary benefit for EDS is the productivity gains that the company expects will be associated with deployment of Opsware within its data centers.

Potential conflict for Loudcloud

As part of the deal, EDS will become an official Opsware reseller. The major question surrounding this deal regards the potential channel conflict this presents for Loudcloud. The EDS sales team is much more robust and extensive in comparison to Loudcloud's. This in turn could yield sales into markets in which Loudcloud did not previously have a presence. However, Loudcloud does not want to compromise on profit margins by losing out on direct deals to EDS.

Ultimately, this is a win-win situation for both companies. EDS has shown that it is emerging from the hype of the previous few years and has solidified its position as a premier web host ready to rival start-ups with even the strongest value propositions. In addition, if deployment of the Opsware platform does prove as successful in productivity gains as the company expects, EDS will continue to bolster the profit margins of its Web hosting business.

Despite the fact that Loudcloud is taking a step back, the company is wise in recognizing where it really delivers value. From the beginning, Loudcloud has been more of a software company than anything else. Now it will be able to exclusively focus on developing, selling and supporting Opsware.

Marc Jacobson is an analyst at Ovum, North America.

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