Cloud computing is boosting the share price and revenues of service providers such as Amazon, Microsoft and Apple, not to mention the fortunes of chip-making companies like Nvidia. So what exactly is cloud computing? Who uses it and how are companies making money from it?
It seems like forever ago that software had to be bought and either carried around or downloaded from a server to a physical computer. Now cloud computing in untethering that physical requirement has revolutionised the way we all work with computers.
For more than a decade now we’ve had the ability to gain swift access to computer resources via the Internet anywhere, at anytime.
On a personal level working away in the background when you send email; watch movies online; save your photos; edit your documents is cloud computing.
For businesses though the move to cloud computing is transformative; so many facets of IT business services that used to be a physical component are now available as a resource in a cloud including: servers, storage, databases, networking, software and analytics.
Who are the key cloud computing providers?
There is intense competition among the companies able to supply these cloud resources to individuals and businesses. There are others companies that are also benefitting tangentially from the revolution – such as companies that make software for mobile and cloud computing deployment.
The biggest names in the technology sector the almighty Apple, Amazon, Facebook, Microsoft and Google are at the top but by no means the only players in the sector. Old hands such as HP, Dell, Intel, Cisco Systems and IBM have had to change their business models to adapt to the new way of doing business and have done it with varying levels of success.
To underscore just how competitive the marketplace, for the past five years IBM has been busily shifting its old-line computing business model from a focus on just supplying software and business solutions to the business of the cloud and it has hit several air pockets along the way.
The Big Blue finds its way in the Cloud
IBM is trying to find territory within the cloud. It has shifted focus and money towards a greater share to the cloud. In May 2017, when IBM announced profit margins were under unexpected pressure in the first quarter, investors worried, in particular Warren Buffett’s Berkshire Hathaway which cut its holding following the news and cited the reason as IBM’s “big strong competitors”.
IBM has had to spend to keep up with its larger competitors with their deeper pockets. The company has seen consecutive declines in revenue and similar slide in share price.
However, there is still optimism for the tech company in the area of what is termed ‘public cloud’ where centralised services over the Internet can save companies from the expense of on-premises hardware and application infrastructure with more flexibility and efficiency.
International Data Corp (IDC) in its research shows that worldwide spending on public cloud services and infrastructure will reach $122.5bn in 2017, an increase of 24.4% from the previous year. It forecast overall public cloud spending will increase by 2020, to reach $203.4bn worldwide.
Public cloud can be a boon for IBM because as Glenn O’Donnell, an analyst at Forrester Research said in the FT: “IBM can’t fail [in the cloud] because it’s so central to everything they do,” adding, “It has to work. But it’s going to be painful for them.”
IBM’s existing clientele such as bigger companies and government will want to utilise the ‘public cloud’ and link it to existing infrastructure. Total revenue for the second quarter this year was $19.29bn. Cloud revenue, including cloud delivered as a service, for the quarter was $3.9bn, a 15% increase from the previous year.
Ginni Rometty, IBM chairman, president and chief executive officer said, "In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world's leading companies to the IBM Cloud." Still IBM’s share price since the start of the year has fallen over 15%.
IBM’s path may not be as straightforward as companies with a built-in advantage where there is the natural affinity of providing consumer services through the Internet. But as the FT pointed out recently that companies like Microsoft and Intel may come from different eras of computing but ahead of reporting earnings one thing in common unites them: “how well they are adjusting to the disruption – and opportunities – from cloud computing.”
Companies like Amazon and Google have the scale helped by very deep pockets. Amazon is worth $495m and Alphabet, Google’s parent company has a market cap of $649bn.
Amazon Web Services is seen as one of the leading cloud computing companies as well as Alphabet’s Google Cloud platform. Amazon Web Services is seen as a cloud computing leading provider as well as Alphabet’s Google Cloud platform. The competition is swelling. Alibaba, Oracle, Dell and HP all compete in cloud-computing arena.
Silicon Valley startup, Dropbox, is a smaller niche player that could go public. This cloud storage company began in 2007 and reached a milestone of over 500 million users worldwide, 200,000 business customers and in January it said it reached $1bn in revenue.
Dropbox is rumoured to be readying for an IPO. Although growing rapidly, it is up against the bigger players in the arena and its ambitions may be hampered by limitations of its size.
It’s had to spend money to grow and invested in its own cloud and building its own data centres and to compete with the tech giants. However, as founder, CEO, Drew Houston, put it recently, the company is focused on a new reality: “Warren Buffett better be able to look at our business and say, ‘This lemonade stand makes money.’ ”
The market of potential
The scope of the potential market is plainly huge with the US generating more than 60% of worldwide revenue however, growth is seen worldwide.
Serena Da Rold, senior research manager, IDC expects growth in Western Europe with the public cloud market growing around 23%. Da Rold said, "European companies have been slower in the adoption of cloud when compared to their U.S. counterparts, but now the market is maturing and it is the right time for cloud providers to target and capture the untapped segments."
IDC says the majority of industries (18 out of 20) will see double-digit growth in public cloud spending over 2015-2020. Those with the greatest growth expected are professional services (23.9%), retail (22.8%), media (22.5%), and telecommunications (22.1%).
Over 50% of public cloud spending will come from businesses with more than 1,000 employees, while medium-sized businesses those with between100 and 500 employees will account for more than 20% throughout the forecast.
These businesses will require cloud services for customer relationship management, enterprise resource management (ERM) applications as well as hardware for server and storage.
In search of the Wow!
Given the size of the market, the intensity of competition, the size of the players and even the different product offerings of cloud services how are customers choosing? Loyalty, brand, innovation take your pick.
If we look at AWS, it has the Amazon ethos running through it time and money has been invested on building its customer base and services. In April 2013 Jeff Bezos sent out his annual shareholders letter where he discussed his customer-centric as part of Amazon’s culture and strategy. He devoted space to AWS and wrote:
“In 2012, AWS announced 159 new features and services. We’ve reduced AWS prices 27 times since launching 7 years ago, added enterprise service support enhancements, and created innovative tools to help customers be more efficient…
"All of this progress comes in the context of AWS being the widely recognized leader in its area – a situation where you might worry that external motivation could fail. On the other hand, internal motivation – the drive to get the customer to say “Wow” – keeps the pace of innovation fast."
Super computing war chest
Other companies are also looking to build innovation and are paying to develop it or acquire it. TheStreet.com outlines the increase in capital spending by the super companies with much of it towards building cloud computing infrastructure. Spending that trickles outward to hardware and chip-making companies supplying the hardware to build the data centres.
In Q2 2017, Amazon’s annual capital expenditure increased 92% (with much of it related to AWS) to $2.7bn. Alphabet Inc./Google grew 33% to $2.8bn. Microsoft Corp. spent $3.3bn on capex in its June quarter after factoring capital leases, up from $3.1bn a year ago.
Facebook Inc. has forecast its capex will rise to around $7 billion in 2017 from $4.5bn in 2016. Apple Inc. forecasts its fiscal 2017 (ends in September) capex will total $17bn, up from fiscal 2016's $12.8bn.
There’s also a collaborative approach as well with bigger companies working with smaller technology companies to develop and advance cloud-computing technologies too. The NYTimes highlighted a recent and “unusually broad partnership” with container product called Docker which allows companies to store and share software securely, and would be available from Amazon’s AWS, IBM and Microsoft.
In addition, other companies, including Cisco Systems, Hewlett-Packard, Intel, Google and start-ups in the Docker competitive space also announced they were forming a group that would create common operational standards for containers.
Cloud 2.0, the evolution
The NYTimes said the collaboration “means that software built specifically for mobile and cloud computing deployment will most likely move around even more easily across the networked world. This is likely to create even more demand for that kind of computing.”
The rise of cloud computing and centralised supercomputer centres feels like the future is here and the trend is for the continuing evolution in digital data transformation through to super computing. The more businesses buy in to cloud services it begets more cloud and improved services. Its a driver of growth for many of the big tech companies.
Frank Gens, senior vice president and chief analyst at IDC said: "As cloud adoption expands over the next four years, what clouds are and what they can do will evolve dramatically – in several important ways.
"The cloud will become more distributed (through Internet of Things edge services and multicloud services), more trusted, more intelligent, more industry and workload specialized, and more channel mediated. As the cloud evolves these important new capabilities – what IDC calls 'Cloud 2.0' – the use cases for the cloud will dramatically expand."