Cloud Computing represents the third iteration of computing frameworks in which the delivery of on demand computing services (from applications to storage and processing power) typically occurs over the internet and on a pay-as-you-go basis. Gartner estimates that the global public cloud opportunity is slated to grow at a five-year CAGR of 16.3% to USD383bn by 2020. Amongst the different types of cloud services, Infrastructure as a Service (IaaS) is projected to grow the fastest at a five-year CAGR of 29.7%.
Across the space, we believe that Amazon (AMZN US) and Microsoft (MSFT US) as the most attractive investment opportunities with the strongest ability to lengthen their leads over the remaining cloud vendors and increase their already strong competitive positioning. Other key players within the public cloud include Alphabet (GOOGL US) and Alibaba (BABA US) while SalesForce (CRM US), ServiceNow (NOW US) and Workday (WDAY US) see strong positioning in the Software as a Service (SaaS) space. IBM (IBM US), Oracle (ORCL US) and SAP (SAP GY) all have opportunities and potential to become strong players within cloud computing.
Key Cloud Computing Players
|AMAZON.COM INC||AMZN US||Buy||45.1%|
|MICROSOFT CORP||MSFT US||Buy||19.2%|
|SALESFORCE.COM INC||CRM US||Buy||26.7%|
|SERVICENOW INC||NOW US||Buy||31.3%|
|WORKDAY INC-CLASS A||WDAY US||Buy||19.4%|
|INTL BUSINESS MACHINES CORP||IBM US||Buy||9.7%|
|ALPHABET INC-CL A||GOOGL US||Buy||16.5%|
|ORACLE CORP||ORCL US||Buy||16.8%|
|SAP SE||SAP GY||Buy||13.9%|
|ALIBABA GROUP HOLDING-SP ADR||BABA US||Buy||22%|
Evolution of computing frameworks
In order to better understand why the cloud represents the future of computing frameworks, it is essential to understand how computing frameworks have evolved overtime to changing needs, improvements in technology and the challenges faced by the different frameworks which can broadly be divided into 3 main eras: Mainframe, Client-Server and Web-Device.
In the beginning, there was the Mainframe. The first era began over 70 years ago with the introduction of the mainframe computers. Using ‘dumb’ terminals (where terminals were merely an interface to the mainframe which contained the computing capabilities), multiple users were able to access the mainframe computer to process data batches, store data sets and run applications. However, mainframes were traditionally expensive (to buy and maintain), large and immobile computers. They were neither practical nor economical for an organisation to have one for every employee. Providing shared access to the mainframe was the solution that made economic sense.
Next, PCs drove the second Industrial Revolution. As technology advanced with Moore’s Law, chips/processors became less expensive to produce, smaller in size and had increased computing power. This led to the birth of the Personal Computers (PCs) which delivered the ability to run stand-alone applications and eventually led to the wide-spread deployment of the client-server model (second era of computing) in the 1980s-2000s. The client-server model is a distributed application structure that allows clients to dispatch data requests over a network to a server, which processes the request and returns the data to the users. Servers are characterised by the dedicated function which they are meant to carry out (web, email etc). Despite these technological advances, mainframes failed to become extinct due to their robustness. Today, they remain crucial for heavily transactional process and these uses are primary limited to high-volume batch processing such as billing and transaction processing for financials, telecommunications and government organisations (IBM still generates significant revenue tied to mainframes and related software).
Shortcomings of the Client-Server model gave birth to Cloud Computing. Alongside the rapid improvement of software offerings in the 1980s-2000s, enterprises embarked on a server buying spree as they found that they could develop and deploy more software applications which helped drive business forward. However, this rapid deployment created its own set of challenges ranging from increasingly complex IT systems (applications run on different software stacks/OS added IT complications, application development required specialized environments), underutilisation of servers (applications accessed sporadically/by a handful of employees rarely hit peak server loads) as well as the sheer increase in the number of connected devices collecting data (laptops and phones) as computers became more mobile (Gartner estimates there will be 21bn connected devices by 2020 and it will be virtually impossible to capture, process and store all the data efficiently without hyperscale cloud data centers) resulting in increased cost via increased investment outlays and inefficiencies.
These factors highlight some of the key shortcomings of the client-server model and have contributed to the rise of the cloud computing market, which is characterised by enterprises offloading the deployment and maintenance of IT infrastructure, development environments, data, and applications into massive data centers operated by large vendors that allow for greater computing and storage capacity, at much higher degrees of scale efficiency.
Cloud Computing – More than just hype, a US$383bn opportunity
Gartner defines cloud computing as a style of computing in which scalable and elastic IT-enabled capabilities are delivered as a service using Internet technologies. Cloud Computing represents the third iteration of computing frameworks in which the delivery of on-demand computing services (from applications to storage and processing power) typically occurs over the internet and on a pay-as-you-go basis. Cloud Computing was born out of the shortcomings of the client-server era and is characterized by enterprises offloading the deployment and maintenance of IT infrastructure, development environments, data, and applications into massive data centers operated by large vendors that allow for greater computing and storage capacity, at much higher degrees of scale efficiency.
Gartner estimates that the global public cloud opportunity is slated to grow at a five-year CAGR of 16.3% to USD383bn by 2020. Amongst the different types of cloud services, Infrastructure as a Service (IaaS) is projected to grow the fastest at a five-year CAGR of 29.7%.
Companies do not adopt Cloud Computing just for the hype but do so to achieve a better business outcome, through innovation, more efficient business processes, or improved cost management. The following table summarises the three main motivations for businesses to migrate IT systems to the cloud:
1.Moving away from internally developed IT and software systems
- In-house systems result in heavily underutilized IT infrastructure
- Proprietary apps are also more complex and difficult to maintain
- Vendors can afford to spend more on IT security
- Cloud allows for fully automated and dynamic scaling to meet real-time demand
- Shifting to Cloud allows IT resources to be downsized/repurposed to work on value-added projects vs maintenance
2.Way to improve business processes
- Companies are eager to digitally transform business but IT typically bogged down by maintenance of legacy systems
- On-premise development and testing environments require a large array of virtual machines that represent a massive cost center
- Shifting legacy systems to cloud frees up vital IT resources while offloading development and testing makes the business more agile in the way they develop, test, refine, and deploy new software applications
- Cost-savings are a crucial motivator for migrating workloads or deploying new projects to a cloud based environment
- Evidence suggest that customers can save 20-60% on IT spending depending on the scope of the project, the number of servers being downsized, and the improved deployment of existing IT infrastructure and human capital within the remaining on premise data center environment
Like clouds in the sky, Computing Clouds have layers too
IaaS (Infrastructure as a Service), PaaS (Platform as a Service) and SaaS (Software as a Service). The key difference between the three services is the level in which the IT stack-management responsibility is transferred to the cloud vendor. The further a customer moves up the cloud value chain, responsibility is transferred from full customer responsibility in an on-premises environment to a vendor in a SaaS solution.
Due to the scalable nature of the cloud, cost (initial outlay and on-going maintenance) typically decreases as a business moves up the cloud value chain. However, moving up the value chain also results in lower flexibility (and control) over solutions as the vendor typically manages the entire stack (in a SaaS solution), while the customer is responsible for more rudimentary processes, such as access control. These different layers and the dynamic between the services are summarized in the following table:
Different services also bear different competitive advantages. Competitive advantage within IaaS is primarily driven by cost advantages and intangible assets, though it is difficult to attain and limited to the few vendors that can gain massive scale and high utilisation. Vendors must be able to generate sufficient scale efficiencies on the input costs that are included with running a data center: technology hardware, infrastructure software, land, power, cooling, networking and IT staffers to manage the infrastructure. This requires significant initial investment to build out large enough data centers to meet customer service-level agreements, clear governance, data sovereignty, and regulatory hurdles, in addition to providing enough supply in the event of outages or spikes in demand. With significant investments already made and continued on-going outlay of capital to increase their IaaS capacity footprint, we see Amazon, Microsoft and Alphabet as most competitively advantaged within IaaS.
In general, the more the IT stack is outsourced, the stickiness of customers increases as they become increasingly ingrained in the solution over time, especially with the addition of new users or modules. As previously highlighted, PaaS and SaaS solutions are often cheaper and more efficient than on-premises solutions but offer less flexibility (and control) as vendors are typically responsible for most of the IT stack (including the application and data in SaaS) which typically features proprietary components such as internally developed languages or custom-built software stacks. This results in a high switching cost for business driving the competitive advantages for PaaS and SaaS. We see companies like Microsoft (Azure), Alphabet (App Engine) and Salesforce (App Cloud & Quickbase) as key players within PaaS and Salesforce, ServiceNow and Workday as key players within SaaS. Oracle and SAP have opportunities to create compelling PaaS offering based on the database expertise and growing SaaS prowess but these solutions remain a smaller portion of their broader businesses today.
Key cloud players
Across our coverage, we have identified key players within cloud computing. Amazon (AMZN US) and Amazon Web Services will remain the most dominant vendor based on its multiyear head start and vast service offering. Microsoft (MSFT US) with its Azure offering is a compelling secondary player that will likely succeed by attracting existing enterprise customers and new businesses alike to its growing platforms.
While the offerings and adoption of Alphabet’s (GOOGL US) Google Cloud Platform are still in its infancy, we believe Alphabet will eventually emerge as the third-largest vendor given the firm’s prowess in data analytics and artificial intelligence. Alibaba’s (BABA US) AliCloud is likely to emerge as the industry standard in China given the competitive landscape and their current leading position.
IBM (IBM US), Oracle (ORCL US) and SAP (SAP GY) all have opportunities and potential to become strong players within cloud computing but we believes there is a lower likelihood of an outsized success for the public cloud business largely because these firms remain several years behind from an investment perspective and lack a clear road map for providing a broad set of value-added premium services. Lastly, SalesForce (CRM US), ServiceNow (NOW US) and Workday (WDAY US) stand out as prominent SaaS vendors with strong leadership positions.
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