Entrepreneurs need open cloud, not protectionism

South Africa desperately needs to encourage entrepreneurship as a means to addressing the country’s job creation targets. A report issued by FNB and the Gordon Institute of Business Science (GIBS) states that “the most competitive nations are those that have the highest level of entrepreneurial activity.”

The Total Entrepreneurial Activity (TEA) is a measurement of the percentage of the active population in a country (people aged between 25 and 64) who are entrepreneurs. According to International Entrepreneurship, South Africa’s TEA in 2010 is 8.9%. This is higher than in previous years and significantly higher than our average TEA over the past decade: 6.7%. If South Africa wants to be a meaningful player in the global economy, we have to shape education, society and legislation to encourage, rather than stifle, entrepreneurship.

Marc Benioff, the chairman and CEO of salesforce.com says “Cloud computing has already spawned a significant number of new companies… In the coming decade, thanks to the proliferation of cloud services, ubiquitous, low-cost bandwidth, and cheaper access devices like smartphones, tablets, and netbooks, there are fewer obstacles than ever to turn an idea into a business.”

Cloud-based Software-as-a-Service (SaaS) represents a great opportunity for South African entrepreneurs. The much lower barriers to entry and simplicity of launching cloud-based services open up international markets to local businesses. This allows local businesses to generate revenue flows into the country.

Analyst firm IDC expects the worldwide SaaS market to reach more than US$40 billion by 2014, while ABI Research expects the global market for hosted services to reach US$34 billion in 2012. This trend is reflected in the South African market where interest in SaaS is growing rapidly.

Cloud services offer reliability, almost effortless scalability and substantial cost savings. However, South African hosting is not a competitive option. The largest local players are, quite simply, charging too much for services that can easily be sourced overseas at a much lower cost.

How much lower?

While the base fees charged for cloud hosting may be comparable, the real test of a service provider’s offering is the data transfer costs on offer. Currently, data traffic for South African hosting options costs between R15 and R85 per GB (some charge more), depending on the level of service required. Foreign cloud service providers charge as little as R1 per GB (depending on the exchange rate) for data transfer.

South African service providers simply can’t compete with the cloud offerings of Rackspace, Microsoft Azure or Amazon EC2. It’s a question of scale. Foreign cloud service providers can afford to build a much larger server farm because they have a potential pool of hundreds of thousands of customers. Because they have a much larger customer base, they can also charge each customer less. Local cloud service providers are forced to charge more because they have a smaller pool of potential customers, and are dependent on bandwidth providers that charge exorbitant prices.

In our experience, the argument that local hosting is far quicker than foreign hosting does not hold water. As long as the foreign hosting site is chosen to capitalise on the new undersea cables, the average user will not notice any slow-down in service for software hosted on foreign servers.

The Protection of Personal Information Bill (PPI) is another potential spanner in the works. The PPI Bill is intended to offer South Africans protection of their personal information, and places the onus on companies collecting such information to ensure that that information is collected with consent, and is stored and used in a secure and responsible manner.

The PPI bill places stringent requirements on personal information that is sent outside of South Africa. If an entrepreneur chooses to use foreign hosting he has to ensure that:

1. The country the data will be stored in is subject to similar legislature as the PPI Bill in South Africa,

2. He has explicit consent from each of his customers to store their information outside of South Africa, and

3. The transfer of personal information is only done when it is necessary for him to deliver on the contract he has with his customer and is for the benefit of the customer.

South African entrepreneurs should be able to focus on creating Value Added Services. Legislation such as the PPI Bill could force entrepreneurs to choose a far more expensive cloud service provider in order to simplify the contract and reduce risk. This is an unnecessary throttle on our development.

“The global information economy, including cloud computing, works best when information flows freely across borders in a responsible way with appropriate privacy and security protections. Efforts to lock data within a particular country or region will not only undermine the benefits of the global information economy, but also disadvantage local enterprises that want to take advantage of the tremendous cost, productivity, and innovation advantages that cloud computing enables,” says Benioff.

A South African entrepreneur who offers SaaS using cheaper, more reliable offshore hosting will be able to offer products at a lower cost. New businesses will be able to sell more products to more people and, in turn, will be able to grow his business more effectively. While I don’t advocate for irresponsible use of personal data, I do feel that we need a legislative environment that is sensitive to the globalisation of IT that is taking place, and takes steps to make it easier for South Africans to benefit.

Local cloud service providers face an uphill battle in their attempts to compete with foreign providers. To make matters worse, the PPI Bill is a step closer to protectionism that will shackle us to uneconomic, unreliable, expensive options when there is, literally, a world of possibilities out there for us to choose from.

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