Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Cloud Based Computing: Equipment Leasing Challenge

by Jim Plautz


Cloud Based Computing, also known as software as a service, above property, or Web-based software, is the current craze; the number one trend at HITEC 2010 in Orlando according to one industry analyst. It is also become popular due to the low cost of storage where at one time Sun Microsystems did not have a main frame but computers connected to a main base, just as today Facebook, Google, MySpace, and Yahoo allow users for free to maintain email, web sites, and other material. There are also applications for wireless telephones to share music, photos, from your own private “cloud,” meaning off site storage. This also has other commercial applications for telephone systems as well as other communication for corporations, hotels, and industry, connection at very low costs from around the world via the World Wide Web.

Cloud based computing is here to stay and it’s imperative that the leasing industry adapts in order to participate in its growth. Lenders must view Cloud Based Computing as an opportunity.

A very good example comes from hoteliers to enter into ‘Managed Service Agreements’ for triple play services; voice, data and video. Hoteliers are demanding a "No Cap-Ex, Sign and Drive" product offering for up to 60 months. “Service providers around the globe see triple play services not merely as a means of increasing top-line revenue, but as a means of self-preservation”, says a new study by Infonetics Research. Network operators are redefining and realigning themselves to be the one-stop shop for all things digital for residential and commercial subscribers. Forty percent of capital expenditure budgets are going into triple play service infrastructure. They believe triple play services will give them the competitive edge they need to succeed. Cloud Based Computing is an integral part of this trend and further emphasizes the need for the equipment leasing industry to adapt to this evolving service model.

Let’s take a look at the new challenges offered by Cloud Based Leasing, using a phone system for a 100 room hotel as our example. The hotel has decided to purchase a Cloud Based System and will receive a monthly license fee covering the cost of the services they use. However, the telephone vendor wants to be paid for the equipment up front to avoid cash flow problems; vendors are not accustomed to financing the purchase of their system. They want to be paid up front by the hotel owner or by the equipment leasing company. This begs the following questions.

1. What can be leased? Traditionally, the hotel would lease hardware, software installation and training expense. Some leasing companies allow you to roll in the cost of the service contract. Now, it’s unclear as to what the hotel owns and what they can lease. Certainly they can lease the telephones, console and other on-site equipment, but what about the rest? On-site equipment might be only 30% of the total system. How will the hotel finance the remaining 70%?

2. Where’s the asset? Leasing documents normally specify a location for the equipment and require notification if the location changes. Where does the PBX reside? Lenders are leery about leasing equipment that is spread out among multiple locations, particularly in situations where the location of the PBX is fluid.

3. What can the lessor repossess if the lessee stops making lease payments? Traditionally, the lessor takes the entire PBX, including software, and can resell the software to a 3rd party. Will the license transfer? What if the 3rd party wants a traditional PBX?

4. Who will host the Cloud Based System? What are their qualifications? Today, lenders want to know about the vendor. How long have they been in the business? Will they be around to provide hardware and software support? Lenders will still want to look at the vendor, but now they might have an additional party involved, particularly for Hosted services. What are the qualifications of the company hosting the service? Have they done this before?

5. What if the central system crashes, for whatever reason? Equipment failure, software glitches, storms, virus, whatever; what if the system doesn’t work for an extended period of time (as defined by the lessee)? The lessee purchases a new system and stops making lease payments. This can happen today, but there are more culpable parties with a Cloud Based System. Either way, the lessor is left holding the bag. They can sue, but even if they win, they lose if they are forced to go to court. There is also a higher likelihood courts will side with the customer.

6. What happens when the lease expires? The client currently owns the entire system and is entitled to service and maintenance as long as he upgrades to current software levels. Is this true with Cloud Based System? What about the portion of the Service contract that covers trunk charges? Who pays for future software upgrades?

7. What type of lease is appropriate for Cloud Based Systems? Most leases today are Capital Lease; 36-60 month $1.00 or 10% buyout at lease expiration. This means that the asset appears on the balance sheet for tax purposes, the lease term is 75% of the equipment life and the lessee owns the equipment for tax purposes. Is this still true? If not, are Fair Market Leases more appropriate? If so, how does the lessor calculate residual value?

Conclusion: The purpose of this article is to identify some of the issues that must be addressed if equipment leasing is to successfully adapt to challenges and seize the opportunities created by Cloud Based Computing. Successfully meeting these challenges is important to both the leasing industry and growth of Cloud Based Computing. The author is currently working with major vendors to develop programs that address these issues as well as the functional issues of Cloud Based Computing. These issues are solvable, particularly if the vendor’s delivery model is initially established with these leasing issues in mind. There is nothing more beautiful than cirrus clouds forming a halo around the setting sun. It can be that way for the leasing industry.

Jim Plautz is president of Greenman Funding, involved in construction loans and permanent financing and Gemco Leasing since 1994,specializing in leasing telephone and computer systems to the Hospitality market. For twenty years he owned and managed large telephone systems. Prior he was was responsible for corporate computer and telephone systems for Blount. Jim has authored three fiction novels, each with three themes; suspense, business and sports (Golf, Tennis & Basketball).

Disclosure: no position