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Digital marketing companies: The new competitor in the cloud era

Line-of-business managers are contracting for cloud services through a relatively new type of channel partner: digital marketing agencies.

Cloud computing has had a significant impact on the IT channel, transforming how value-added resellers (VARs) and IT solution providers conduct business and deliver services. But we may never know the true extent of this impact, as the industry continues to feel the cloud's ripple effects. One of those comes in the form of a new competitor: digital marketing companies.

In March 2014, managed cloud services provider Rackspace announced the launch of its digital services practice. Rackspace Digital provides application and infrastructure hosting for Web content management systems, e-commerce products, and mobile and critical application services. Rackspace sells these hosting services directly and through digital marketing companies, a relatively new type of channel partner.

"Rackspace Digital was built from the ground up, and our agency relationships are core to the foundation of the practice area. We work with nine out of the top 10 digital agencies," said Adrianna Bustamante, senior manager of channel sales at Rackspace. Even though the practice was formally announced a year ago, Bustamante said the focus on digital marketing companies isn't new. "These are customers and partners that we've worked with for eight to 10 years, in some of these cases. The focus around looking at agencies as an untraditional channel started in 2006 [and] 2007 for us," she said.

So, what does Rackspace's increased focus on digital agencies as channel partners mean for IT solution providers?

"They are absolutely a new form of competitor," said Ryan Morris, principal consultant at Morris Management Partners Inc. "If I'm an infrastructure reseller, anybody who does anything at the app layer is my competitor, because they are trying to move the [infrastructure] decision out of my hands and into theirs. They are trying to co-opt that decision into other decisions."

Morris explained that many of the decisions associated with infrastructure are dictated by the application running on it. If the marketing department chooses an application before getting the IT organization (or solution provider) involved, then IT is charged with building an infrastructure that supports that specific application. "The key has always been, when do you get involved in the decision-making process with customers? Are you early enough that you can dictate standards, or are you late enough that you have to meet standards?" Morris said.

Rackspace's Bustamante, however, doesn't see a direct conflict between traditional IT solution providers and digital marketing agencies. "Agencies have led us into the shift of talking to the marketing side of the house. Oftentimes other partners are talking to the tech side of the house, so while there might be shared clients, it's not shared workloads," she said. "Channel conflict exists in lots of areas, but what we're finding is more agencies [are] competing against each other for the same business [rather than] a more traditional partner going after the same client, because it will be a different workload."

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Morris disagrees. "When a digital agency says, 'We work on a different workload,' what they're saying is, 'We're a tiny piece. You go focus on the great big piece.' … There once was a day where everything was an IT workload. Now they are specializing the infrastructure purpose-built for that particular workload. That's the reason why it's essentially a competitive question for the IT reseller. Your pie is just getting smaller and smaller," Morris said.

Paul Do Forno, senior vice president, global commerce lead, for digital marketing agency Razorfish, acknowledged that his company competes with IT solution providers. "We go up against traditional IT providers all the time. The biggest thing that differentiates us is that we were born digital. We've always been user-centric. The Deloittes of the world did business process or back-office systems. We were born focusing on the customer experience," he said.

If I'm an infrastructure reseller, anybody who does anything at the app layer is my competitor, because they are trying to move the [infrastructure] decision out of my hands and into theirs.
Ryan Morrisprincipal consultant, Morris Management Partners

"Digital transformation is a big thing happening in the commerce and content space. Having partnerships with vendors and platforms in addition to partnerships with hosting providers is critical, because customers want to go to a company that can walk them through the whole process," Do Forno said. In addition to Rackspace, Razorfish also partners with Amazon.

"I like to think that [with] this business with the agencies, the hosting is the least sexy part of this. It's like plumbing. You don't want the toilets to explode," Rackspace's Bustamante said. "The agencies come to rely on us for standardized pricing, our roadmap and innovation, and we've built programs tailored specifically around what agencies are desiring, so it frees them up to focus on the client, the project and additional projects and stickiness."

Most of the initial inquiries for Razorfish's services come from marketing departments that have had limited success getting their needs met by internal IT organizations. "If you think about externally focused systems like Web and commerce, it's very different than how IT is run. With a batch update, it's OK to be a couple hours off. But a website can't be down. IT's not used to the on-demand, always-on world of the Web. There's been a lot of push-and-pull where marketing has been frustrated that [internal] IT can't move fast enough, and the realization has come through that … there are partners they can work with a little more," Do Forno said.

Unfortunately for solution providers, this is a trend that won't be changing any time soon. "The future is in the application layer, not the infrastructure layer," consultant Morris said. "That shift in competition has the potential to render most infrastructure decisions moot and therefore to commoditize the people who only provide infrastructure decisions."

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