The time is ripe for cloud services with 43% year-on-year growth projected in 2011, writes Steve Hilton
The global market for enterprise cloud-based services will grow from $12.1 billion in 2010 to $35.6 billion in 2015 (see Figure 0.1). The year-on-year growth rate will be 43% in 2011, but will decrease to 13% over the next five years. Software-as-a-service (SaaS) will account for 70% of revenue in 2010, while 30% is related to infrastructure-as-aservice (IaaS). This revenue split will change over the next five years, with IaaS’s share increasing to 40%.
Enterprise cloud-based service revenue by sales channel, worldwide, 2010–2015 [Source: Analysys Mason, 2010]
By 2015, registered IT and application partners – such as one-tier agents, two-tier agents, systems integrators (SIs), dealers and direct market resellers (DMRs) – will account for 39% of this end-user-generated revenue. IT and application vendors will generate 36% of the revenue, either through web-based sales or dedicated account representatives. Fixed and mobile telecoms operators, and cable TV operators, will take a 23% share, and managed service providers (MSPs) will account for the remaining 2% of enterprise cloud-based services revenue.
Service providers must embrace cloud services and bundle them into their enterprise and small or medium-sized enterprise (SME) solutions. The business model behind cloud services is similar to the business model behind established communications network services. A service provider amortises its upfront data-centre-related capital investment over a period of months and years, coinciding with the monthly fees charged to end-user enterprises for the use of the infrastructure. For a service provider, this model of business should be very comfortable. Less comfortable is the unregulated nature of the business – there is no guaranteed return on investment – and the non-telecoms-centric services they will be required to market and sell.
Recommendations
Network operators should bundle cloud-based application and infrastructure solutions with core connectivity.
Positioning a traditional network operator as a supplier of IT and applications is a long-term proposition, but will yield impressive add-on margin to the business if done correctly.
Network operators should focus on the SME segment, rather than large businesses.
Offering cloud-based solutions to the more than 1.5 billion SME employees around the world is a lucrative venture. Some of a network operator’s sales of cloud solutions will be directly to these employees, bypassing SME IT departments (where they exist). Mobile network operators (MNOs) are quite familiar with this approach when offering individualliable mobility solutions that employees charge back to their employers as expenses. Network operators should offer easy-to-implement, high-value-add, reasonably priced cloud solutions. These solutions should seek to increase the average customer life with a network operator, thereby benefiting the network operator’s underlying broadband access business. Offering cloud services to large enterprises will require planning, design, integration and configuration services that network operators will be hard-pressed to provide at competitive prices. The traditional IT and applications indirect channel of registered partners and cloud vendors themselves are better equipped to provide cloud services to these enterprises.
Traditional IT and application partners (that is, registered partners) must embrace cloud solutions to avoid missing out on more than $14 billion in revenue by 2015.
Cloud-based solutions are a competitive threat to partners whose businesses are based on on-premises application sales and support. However, partners have the benefit of a unique relationship with their clients, and can provide ancillary wraparound services in addition to a cloud solution. Enterprises need careful planning before and during implementation of cloud solutions. In addition, these solutions need to be configured and integrated with other elements of an enterprise’s technology environment. Unless the enterprise is a start-up, it will already have some legacy technology that will need to be integrated with a new cloud solution, and registered IT partners are positioned to help with these integration, implementation, configuration and customisation services.
IT and application vendors should seek out the particularly high cloud-based revenue opportunities in the developed regions of North America, developed Asia–Pacific and Western Europe.
Suppliers of cloud-based solutions will find willing buyers for enterprise-grade solutions at competitive prices in the emerging markets of the world, as broadband Internet access continues to increase and economies blossom in these regions. Maintaining on-premises hardware in developing countries is often fraught with security challenges. Businesses in emerging markets can use cloud-based solutions and minimise potential equipment loss as a result of theft and other security issues. Nevertheless, cloud service providers should actively participate in the distribution of devices capable of spurring cloud adoption. Such devices include laptop PCs, desktop PCs and thin-client devices, such as netbooks and smartphones.
Emerging markets
The emerging markets in the Asia–Pacific region and Central and Eastern Europe hold fair potential for cloud services, but we believe that the greatest opportunities for the next five years will be in the three developed regions of North America, developed Asia–Pacific and Western Europe. By 2015, we expect these markets to account for 88% of worldwide cloud services revenue. In emerging markets, the extremely low rates of broadband internet adoption among enterprises and the relatively low proportion of information workers stifles the success of cloud solutions.
SMEs will account for 38–44% of cloud services revenue worldwide. Many SMEs will use cloud-based solutions rather than on-premises solutions as their first forays into enterprise-quality technology solutions such as CRM, SFA, FFA, back-up or storage, inventory management, document management, collaboration, email and messaging. These SMEs will require additional services and support from vendors, network operators and traditional IT and application partners as they implement, configure and possibly integrate these cloud-based technology solutions.
In North America, we forecast that enterprise cloud services revenue will grow by 177% growth from 2010 to 2015. With $4.0 billion in cloud services revenue in 2010, the region is the currently the largest market for SaaS and IaaS. Approximately 40% of the cloud services revenue in North America is from SMEs (see Figure 2.1). The market has led the world in terms of cloud-based service adoption, especially of software solutions from companies such as NetSuite and salesforce.com, as well as hosted infrastructure solutions.
Enterprise cloud-based service revenue by enterprise size, North America, 2010–2015 [Source: Analysys Mason, 2010]
In developed Asia–Pacific (DVAP), we forecast 147% growth in enterprise cloud services revenue from 2010 to 2015. With $3.2 billion in cloud services revenue in 2010, DVAP is a steadily growing market for cloud services. Approximately 15–20% of the cloud services revenue in DVAP is from SMEs – a much smaller percentage than that in other regions. Large enterprises account for a higher proportion of the total employee base in DVAP markets than in other regions.
Enterprise cloud-based service revenue by enterprise size, developed Asia–Pacific, 2010–2015 [Source: Analysys Mason, 2010]
In western Europe, we forecast 217% growth in enterprise cloud services revenue from 2010 to 2015. With $3.9 billion in cloud services revenue in 2010, this is a high growth market. SMEs account for about 60% of the cloud services revenue, which is a larger percentage than that in other regions. The region also has a higher preponderance of smaller-sized enterprises than other regions as a percentage of the total employee base.
Enterprise cloud-based service revenue by enterprise size, Western Europe, 2010–2015 [Source: Analysys Mason, 2010]
We forecast 430% growth in enterprise cloud service revenue in the emerging markets combined (that is, Central and Eastern Europe, Central and Latin America, emerging Asia–Pacific, the Middle-East and North Africa, and sub-Saharan Africa). With $1.0 billion in cloud services revenue in 2010, the emerging markets are veryhigh-growth markets, albeit from a lower revenue base than the developed regions (see Figure 2.4). SMEs account for about 30% of the cloud services revenue in emerging markets in 2010, although this percentage will grow to 47% in 2015. We expect adoption of broadband Internet access among small enterprises to foster increases in the penetration of cloud solutions. GTB
Enterprise cloud-based service revenue by enterprise size, emerging markets, 2010–2015 [Source: Analysys Mason, 2010]
Steve Hilton is lead analyst with AnalysysMason