TBR 2015 Cloud Predictions: Fragmented Capabilities
By Allan Krans, Practice Manager; Matt Healey, Principal Analyst; Jillian Mirandi, Senior Analyst; and Cassandra Mooshian, Analyst
Cloud stands at a tipping point between the broad horizontal public platforms that drove the market and the fragmented private and hybrid capabilities that will form its future. The market is shifting to provide services that are customizable for the individual end customer, whether adding security, performance, features or management. These shifts will have implications for competitors across public, private and hybrid clouds and associated services in 2015 and beyond.
Over the past few years, there have been several trends that changed the way IT is consumed. TBR believes the following trends will continue in 2015:
- Private cloud will lead adoption and spending growth;
- The enhanced security and functionality of private cloud will continue drawing investment; and
- Private cloud revenue growth of more than 20 percent year-to-year.
The shift in availability of services and desire from customers for more customized, private cloud solutions will continue in 2015. While public cloud offerings from leaders like Amazon Web Services (AWS) and Salesforce drove the first stage of cloud adoption, vendors like IBM, HP and smaller cloud service providers are meeting customers’ needs for single-tenant private cloud solutions.
The drivers of this shift toward private cloud solutions are numerous. On the supply side, both third-party vendors and internal IT departments expanded the number and maturity of the offerings significantly from a private cloud perspective.
In the case of internal IT, many customers have taken a proactive approach over the past year to address the desire for their internal departments to have greater access to the IT resources they need to drive the business. Instead of going to an external public cloud vendor, line-of-business (LOB) users and LOB IT departments now have faster and easier access to IT resources delivered on a private basis by their internal IT organizations.
Similarly, from an external vendor perspective, what was once a very traditional buy-and-build sale is transforming into a flexible pay-as-you-go model hosted by the provider but delivered on a single-tenant back end. It took some time to develop, but options for customers to consume cloud from a private back end are key enablers of the continued growth in private cloud we expect in 2015.
From a customer demand side, the dynamic that makes private cloud so ripe for growth in 2015 is the renaissance that reinforces the role of internal IT departments. While much has been made of the rising control and influence of the LOB decision makers for IT and cloud decisions, for many customers the IT department has never been more important.
As the scale and complexity of cloud service use has grown within organizations, so too has the need for IT integration and management. LOB purchasers do not have the expertise to manage and integrate these different cloud services and are going to traditional IT departments asking for help to solve their current issues and guide future cloud service strategy.
Particularly for hybrid cloud and core applications using cloud services, IT will play a larger role moving forward and will enable focus on the solutions, security and performance to drive offering selection.
Based on the results of the 4Q14 Private Cloud Customer Research report, Figure 1 shows the current and planned private cloud adoption intentions for customers ranging in size from midmarket to large enterprises. The preference for private cloud solutions among larger customers is clear, but the planned adoption across customers of all sizes illustrates the growing appeal in 2015 and beyond.
Cloud services picture
For the thousands of ISVs worldwide struggling in an overall flat software market, the transition to cloud delivery is one of the clearest growth opportunities in 2015. However, the challenges in making that transition successfully are huge, as even the largest and most well-funded software providers continue to struggle. The choice is simple for any new startup, but for the majority of ISVs that rely on the traditional software license and maintenance business model, there are technology and business barriers to a cloud subscription model.
The good news for ISVs is there are more vendors looking to help than ever before. From AWS and Google to Dell, NEC, and Microsoft, the number of participants in the cloud development, deployment, and monetization provider spaces is vast. Drawn by the opportunity to grow their businesses in cloud enablement, traditional IT vendors will provide solutions that enable a wider swath of traditional ISVs to offer cloud services to their customers in 2015.
The opportunity to retain customers and expand to reach new customers will entice ISVs to take the risk and make the transition. The opportunity to retain customers is minted by the largest applications providers, from Microsoft to Oracle and SAP. Including cloud subscriptions as a way to extend traditional solutions and tapping maintenance annuity revenue streams to fund cloud services can form the bridge for smaller ISVs to cloud delivery.
To reach new customers, cloud delivery enables more transactional usage of the intellectual property that ISVs are creating as their core value proposition. As seen with larger cloud vendors like ServiceNow, being able to sell smaller deployments within organizations can lead to more institutional usage of cloud services, which drives more significant revenue streams.
Consolidation among IaaS providers
The trend toward commoditization has been ongoing in IT infrastructure for some time. With the rise of industry-standard servers and virtualization, differentiation in the infrastructure space has been migrating to systems management software. However, with the move to cloud and IaaS, that differentiation becomes less critical and pricing becomes the main differentiator.
When a market becomes mainly price-driven, reductions become commonplace. In the IaaS market this trend started with AWS cutting pricing on its offerings.
TBR believes vendors that are trying to use IaaS as a profit driver in response to aggressive price cuts will exit the market by either discontinuing their offerings or selling the business units to a competitor.
This does not mean, however, that all IaaS providers will exit the market. There are a variety of providers that are using IaaS offerings to drive sales of higher-value SaaS and PaaS offerings. TBR believes these vendors will not exit the market, as they will be able to use the profits from higher-value offerings to subsidize IaaS offerings. Additionally, they are less likely to cut pricing of their IaaS offerings as they do not differentiate on the basis of IaaS.
New trends for 2015
Managed services has been a highly fragmented industry for a very long time, but as IT moves from a traditional on-premises model to a cloud model, the need for classic managed services declines. However, this does not mean that the customer does not need IT managed services.
As the migration continues, customers will need channel partners that can migrate them from their on-premises solutions to cloud solutions effectively. Further, these same customers will need these channel partners to continue to assist in the integration of cloud offerings and legacy on-premises solutions. While cloud is growing very quickly, it will be a long time before most SMBs have fully migrated to cloud offerings.
TBR believes the vendors that will be the most successful in this segment will be the ones that understand the role the channel plays in the migration. It remains largely undetermined what role traditional channel partners will have in a cloud delivery model.
The traditional value proposition of designing, implementing and selling on-premises solutions erodes as more customers host and subscribe to cloud offerings. The need for a more customized cloud solution experience is one that channel partners are well positioned to deliver.
However, for many cloud vendors, interacting with the channel is not one of their core strengths. They have grown up on the direct-sale-to-consumer model. As they grow, they will need to build programs that can ensure channel partners can migrate customers to their cloud offerings and continue to thrive financially.
The IT industry has a long history of developing horizontal solutions and then trying to customize those solutions for a particular industry. From an applications software perspective this gave rise to large horizontal applications like CRM, SCM, and accounting and finance. The reason for this is the economics of building software on an industry-by-industry basis are not practical.
The solution was for ISVs to develop industry-specific solutions that worked with large horizontal applications. TBR believes cloud will follow a similar trend, with community clouds outgrowing large horizontal clouds. Community clouds use technology from large horizontal applications; combine it with industry-specific technology to create a cloud that addresses the needs of a particular vertical.
From a vendor perspective, TBR believes the applications vendors that can embed their software in the most community or industry clouds will be best positioned to thrive. This will mean using the knowledge they have acquired through years of building industry templates, integrating with industry-specific solutions and working with partners that are industry-focused to customize their could offerings.
One of the value propositions of OpenStack is standardization for internal and external cloud services. Through this standardization, the best practices for how to implement and manage cloud services can now be available to customers, removing uncertainty and inefficiency. While the benefits of OpenStack remain quite clear, it remains a framework and not a clear set of solutions for most customers. While a significant number of vendors are providing OpenStack-compliant solutions, full-scale adoption is rare for most customers, even at the enterprise level. Although we expect more evaluation by customers in 2015, an increase in the levels of skill, training and experience to support broader adoption of OpenStack solutions will not occur this year.
TBR expects some trends to begin in 2015 but not have a significant impact on the industry for several years. The early leaders of public cloud retain sizable revenue and customer bases, but their positions are now far less secure. The barriers to entry for cloud are by definition very low, but the barriers to exit persisted for customers or ISVs that have invested in cloud services.
The cost and risk of migrating off cloud services either to on-premises or other cloud platforms remained a barrier that protected early cloud providers and hindered early cloud adopters. The number of options available for customers to transition off cloud platforms is growing and will have a significant impact on leading vendors moving forward. Migration specialists and technologies like Docker will change the landscape and enable more portability for end customers and ISVs for cloud services.
In the beginning phases of any market, the early adopters experience dramatic revenue growth based on a lack of competition. This situation provides the early movers with the ability to price their solutions in a way that captures as much profitable market share as possible. The problem is that as the market moves from nascent to emerging to mature, the number of competitors that enter the market increases. As these competitors enter the market, the ability of the first movers to gain market share simply by being the only game in town declines. Additionally, more competitors introduce increasing price competition. TBR believes these two forces will combine to slow the rate of revenue growth of the early cloud providers.
Over the long term, the early movers that built a business that is truly innovative and differentiated from the crowd will survive, and the remainder will not. This effect is not limited only to the early movers. Established vendors in the space also need to be able to differentiate due to the increased competition.
Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. For more information please visit www.tbri.com.