The ongoing transition to cloud computing has created a massive opportunity for a reallocation of corporate IT budgets. As dollars chase this new computing paradigm, technology providers are disrupting the natural order of the ecosystem. This will have a massive, and long-lasting, impact on the industry.
That’s critical for businesses across the tech industry, whose futures now hinge on their ability to adapt to and participate in the massive cloud and cloud-infrastructure buildout now underway. It also opens up rich opportunities for investors.
Revenues for public and private cloud hardware, software and services amount to about $180 billion, or 16% of the $1.1 trillion enterprise IT industry, according to Bain. Through 2020, Bain projects cloud demand to account for 60% of related IT market growth.
To put that into perspective, $180 billion dollars is larger than the projected 2017 annual GDPs of Qatar and Algeria and greater than the annual GDPs of Puerto Rico and the Dominican Republic.
That’s a lot of growth potential and investors and corporates are paying attention.
As we’ve seen in recent years, and expect will continue in 2018 and beyond, cloud will underpin an active deal market. One major driver will be the convergence of once discrete network, compute and storage technologies.
We expect a second major driver will be the tech giants continuing to augment their existing solutions and capabilities with adjacent solutions and newer technologies in an effort to become a one-stop shop for IT procurement. Add on top of this emerging (and increasingly commercial) technologies such as artificial intelligence and blockchain and you have the ingredients in place for a massive consolidation opportunity.
Cooperation and Competition in the Cloud Battle
The continuing battle for cloud dominance among the tech behemoths will remain fierce in 2018. Amazon is at the forefront of this but others are playing catch-up at a feverish clip. And none of these vendors will be satisfied with only owning one fluffy piece of the cloud; rather, they will put their R&D budgets and extensive cash war chests to work to build out entire stack solutions, spanning the three traditional components of the “cloud” (e.g., IaaS, PaaS, and SaaS) as well as software for management, automation and orchestration, technologies for allowing application and networking visibility and monitoring and, of course, security.
Combined, Forrester predicts that Amazon Web Services, Google, and Microsoft will capture 76% of all cloud platform revenue in 2018, expanding to 80% by 2020.
A recent expanded partnership between Microsoft and SAP demonstrates just one route companies are taking to increase their market share — cooperation. As part of the deal, the companies will cross-promote each other’s products internally, while encouraging joint customers to run SAP software on Microsoft Azure.
The giant cloud corporates are also exploring other ways to grow their operations and build stickiness among customers. They are pursuing ways to help businesses of all sizes migrate to their platforms and, once there, help them to manage their workloads and data, and provide ongoing services.
Google, for example, has increased the number of managed service providers (MSPs) it is partnering with, including Accenture, Cloudreach, and Rackspace and leading cloud provider AWS is on a continual search for employees with ProServ skill-sets. While partnering with MSPs isn’t a new trend, expect it to grow over the next several years.
Strategics Return to Their Dominant M&A Position
There will be no shortage of money from both the corporate and investing sides to fund the next generation of disruptors for the cloud. Following a modest year for M&A in 2017, we expect 2018 will be the year when money that was held back, as a result of high valuations and competition, will surge into the market. Virtually everyone is flush, including private equity, venture capital firms and, of course, the strategics. Private equity led the market in 2017 and its interest will not wane.
But, the large strategics will return to the market and become increasingly active in driving consolidation opportunities. This will augment their existing internal R&D efforts and accelerate the chess match that is well underway. How can it not? The market is too large and too important to sit idly by staring up.