Can Enterprise Cloud’s Hyper Growth Continue?

The growth of enterprise cloud, after setting a scorching pace in recent years, is showing signs of slowing down. Various surveys indicate that though the market for enterprise cloud is not anywhere near fizzling out — that is a far-fetched idea — it is surely not living up to the expectations it had generated. While surveys do somewhat confirm the slowing down, what is important are the use cases of reputed cloud players such as Rackspace and Amazon Web Services (AWS). These two companies have been struggling to generate their expected profits. Different reasons such as reduction in IT spending in developed markets, lack of trust in hosted services, change in strategy and increasing competition have been responsible for the emerging situation.

A Look at Some Statistics

Though enterprise cloud adoption is increasing, the worldwide market is projected to decrease in the next few years. The growth percentage is not matching the expectations or projections. According to the original projections of Analysys Mason — which provides analysis and advisory services on the telecommunications, media and technology market — the market for enterprise cloud was expected to grow from $13 billion in 2010 in annual revenue to $35 billion in 2015. However, according to the latest projections, the market is expected to grow from $18.3 billion in 2012 in annual revenue to $31 billion in 2017. Analysys Mason is not very upbeat about enterprise cloud’s market prospects. According to Steve Hilton, the chief analyst, “Challenges from the global economy, hesitancy to transition to hosted services and concerns about data security have impeded growth slightly.” However, that does not mean that the market is going to disappear. On the contrary, it is going to do well. Hilton added, “That being said, we anticipate continued large enterprise and SME interest in specific cloud services like UC, email/messaging, document collaboration, CRM, storage, mobile device management and remote desktop support.”

Analysys Mason tried to find some patterns in the situation. First, the domination of software as a service (SaaS) is going to diminish and give way to infrastructure as a service (IaaS). In 2012, SaaS accounted for 66% of the total revenue from enterprise cloud, but in 2017, IaaS is going to account for at least 43% of the revenue. Second, revenue growth in both developed and emerging markets is going to be an issue. In the developed markets, the revenue is going to increase from $17 billion in 2012 to $28.7 billion at a compound annual growth rate (CAGR) of 11%, while in the emerging markets the growth will be $1.2 billion to $3.2 billion during the same period at a CAGR of 20.9%. Lastly, the communications service providers (CSP) are going to be the biggest customer category for enterprise cloud offerings and will account for 12% of the total revenue.

The above statistics seem to quite clearly point towards a declining market for enterprise cloud. But is the case really so straightforward? After all, it was not so long ago that experts had projected heady growth forecasts for the enterprise cloud market on the basis of increasing geographical expansion, availability of huge private capital and an overall appetite for growth for the enterprise segment. It seems a somewhat complicated case, which is examined by the use cases of Rackspace and Amazon Web Services.

Use Case of Rackspace

Rackspace is one of the leading providers of enterprise cloud services along with Amazon, Digital Ocean and Linode. Recently, Rackspace has been experiencing a slower revenue growth. Experts have attributed the slow revenue growth mainly to two factors: strategy change and pricing.

Strategy Change

It seems that Rackspace’s clients have not really embraced its managed cloud offerings. That is why, in spite of an overall healthy growth in cloud adoption, Rackspace revenue growth has not picked up pace. Rackspace is offering managed cloud infrastructure where the cloud resources are shared by several companies. The strategy is a little different from that of other leading cloud service providers.

Pricing

See the table below. It seems that in the context of increasing competition, higher charges have been driving away prospects.

Image1: Comparison of cloud service providers
(data source: https://marketrealist.com/2015/08/rackspace-revenue)

Obviously, Rackspace’s subscription charges are significantly higher than that of its competitors. To compensate its customers for its premium pricing, the only significant differentiator Rackspace offers is bandwidth. That may not be enough to attract customers. What has added to its woes is the price war its competitors have been engaging in. It does not help to be rigid about pricing unless the offering is significantly better than that of its rivals.

Use Case of Amazon Web Services (AWS)

AWS reported lower revenue growth than the heady past years in the third quarter of 2014. In the second quarter of 2014, the revenue growth rate was 38.39% while the third quarter reported an insignificant increase of 1.58% at 39.58%. Faced with tough competition from its rivals, AWS has been doing a lot to increase its revenues, including:

• A new mobile application service
• A new T2 instance
• Zocalo file-sharing service
• A cut in price for the Route 53 managed domain-name service (DNS)

It is not that AWS’ revenue has not been going up; it is just that it is nowhere close to where it was in its golden days. It seems that increasing competition and price wars have been taking a toll.

What to Make of the Findings?

The above findings do not conclusively establish that the attraction of enterprise cloud as an offering has been diminishing. On the contrary, cloud adoption has been increasing steadily, if not at a frenetic pace. And the days of heady growth may be over because of the following factors:

• Big players like Google, Microsoft Azure and AWS have been struggling to increase revenues but still continue to dominate market share because of sheer volume.
• Smaller, medium and fringe players have entered the business and competition is increasing. Though these companies take small chunks of the pie, what they are doing is poaching customers with lower prices and more offerings. So the big players are compelled to lower their prices significantly and introduce new offerings. New offerings take time to find traction. Add to this lower prices, meaning lower revenue growth. This could be the new reality.
• Revenue is getting split across vendors. Companies are using multiple cloud solutions from multiple vendors to get their work done. In a survey conducted by the Virtualization Practice LLC, 82% of the respondents said that they would be implementing a portfolio of clouds rather than a single solution. 55% of the respondents said that they would be using hybrid or a combination of public and private clouds while 14% said that they would be using multiple private cloud platforms.

Conclusion

Enterprise cloud as an offering continues to remain useful in the market, but several factors over time will ensure that the hyper growth declines. In certain senses, hyper growth was possible in the days of monopoly by a few players. But with the entry of several new players, increasing competition and price wars, the monopoly is diminishing. Customers can now be more demanding in terms of quality, quantity and price of offerings. It is perhaps established that the era of hyper growth is effectively over for the cloud market.