Public Cloud Marketplace Credits Are A ‘Transitory Payment Mechanism’: Palo Alto Networks CEO Nikesh Arora

‘I think it’s more of a transitory payment mechanism,’ says Palo Alto Networks CEO Nikesh Arora. ‘I wouldn’t build a long-term business model around it. I think the key opportunity as it relates to public cloud is actually going to those customers as a third party partner and saying: Can I accelerate your cloud journey?’

Palo Alto Networks CEO Nikesh Arora said he views the widespread use of public cloud marketplace credits as a “transitory payment mechanism” that should not be viewed as long-term business model by partners.

“I think as companies start to get up to the spend that they’ve committed to the public cloud partners their marketplace currency will shrink,” said Arora.“I think it’s more of a transitory payment mechanism. I wouldn’t build a long-erm business model around it. I think the key opportunity as it relates to public cloud is actually going to those customers as a third party partner and saying: Can I accelerate your cloud journey?”

Arora made the comments in a 45-minute Best of Breed (BoB) virtual interview with CRN Executive Editor Jennifer Follett and Executive Editor News Steven Burke.

The cloud credits have become a popular form of currency for customers seeking discounts for multi-year cloud consumption agreements with public cloud providers.

“That’s just currency that customers use,” Arora said. “I don’t know that’s a long-term sort of disintermediation of the market. I think it’s just just a short-term event because it’s being used as currency or credits that have not been consumed for what they were bought for.”

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The unused cloud credits have become a “liability” for public cloud providers who are, in effect, holding credit swaps that have yet to be consumed, said Arora.

“I think a majority of the customers have been over optimistic in their ability to transform to the public cloud,” he said. “So what you’re seeing is if you look at the balance sheets of all the public cloud providers, they’re sitting with a lot of liability, which has not been fully consumed and they need to get their customers to consume it.”

Arora said he sees “a bit of a slowdown in commitment” for public cloud. “I don’t think that means that the consumption is going to slow down, but I think the commitment has slowed down because people are saying, ‘Do I need to commit to these big numbers?’ which the cloud providers were encouraging them to do. I can make due with a lot less for now because I’m not moving that fast.”

The cloud credits model has accelerated with more customers looking to do business via the public cloud, said Ethan Simmons, managing partner of AWS life sciences services superstar Pinnacle Technology Partners (PTP), which is also a Palo Alto Networks partner.

“We’re seeing more adoption of it, customers are used to consuming that way,” he said. “The adoption of the marketplace is being accelerated by the cloud credit conversation. The customer buying motion is moving more and more towards a marketplace consumption model. There is a large amount of the marketplace that is driven by customers trying to satisfy their enterprise purchasing agreements. When ever we walk into a meeting with a CIO the CIO will often ask us if they can buy through the marketplace.”

Pinnacle Technology Partners even offers its own AWS cloud services in the AWS Cloud marketplace. “We have our own 12 PTP offers on the AWS marketplace,” said Simmons. “For us it is frictionless commerce, being able to execute with us at cloud speed so that customers can engage with us without having to go through a traditional statement of work. You can just go to the marketplace, engage with us and we deliver those services directly. The customer gets that put on their AWS bill and AWS cuts us our margin on the deal.”

Worth Davis, senior vice president at Calian Group, a global IT and cybersecurity provider, said the cloud credit model, which amounts to a discount for a multiyear public cloud agreements, is being driven by customers demanding consistency and predictability in cloud consumption pricing. “The bottom line is a CFO doesn’t want price variability,” he said. “They don’t want a surprise bill. So it is really the industry’s answer to stabilizing the cloud model. It’s just the reality of the cloud.”

The cloud credit phenomenon has resulted in customers using cloud credits for third party products and services, said Davis. “Clients are typically in a situation where they have to consume these credits for other things so it has become a route to market,” he said.

Bob Venero, the CEO of Future Tech Enterprise, Fort Lauderdale, Fla., No. 95 on the 2022 CRN SP500, said he sees more customers pushing back on the cloud credit model, which is aimed at driving up cloud consumption and utilization.

“Customers are increasingly seeing that public cloud does not always mean safe, secure and inexpensive,” said Venero. “So the public cloud providers are trying to do everything they can with cloud credits and cloud marketplaces to drive utilization. A couple of years back everyone wanted to go 100 percent public cloud. That public cloud first model has absolutely been retracted. Now customers are looking at what they can put in the public cloud that is less risky. Also remember the hyperscalars don’t make it easy once you are in the public cloud to come back down.”

Venero said he is seeing more adoption of on-premise cloud-based consumption with offerings like Dell Technologies Apex and Hewlett Packard Enterprise GreenLake. “We feel the on-prem cloud-like offerings give the customer the best of both worlds. It gives them the consumption utilization model, the use of opex versus capex in an on premise, secure model.”