2015 Industry Prediction Update: Amid fierce competition in the cloud market, players retreat including previous leaders. Despite fewer competitors, the cloud market grew rapidly in 2015. How are players differentiating their offerings? We take a closer at developments in this space.

Industry Prediction Update: Cloud Market Transformation

By Ryan Fugate and Ginny Tang 

Bigger Cloud Market, Fewer Competitors

In 2015, the cloud market grew rapidly, but competition was fierce: some of the leaders in cloud only a few years ago retreated from or abandoned the market in 2015.  Rackspace stopped selling its public cloud offering in late 2014 and announced in 2015 that it will sell and support both AWS and Microsoft Azure public cloud services as an authorized reseller.  In a similar vein, HP announced this October that it would be shutting down its Helion public cloud offering and offering cloud through a partnership with Microsoft Azure instead.

2015 Industry Prediction: Cloud differentiation continues

After making significant investments in cloud several years ago, communications service providers in the US have been retreating from infrastructure-as-a-service.  In December, AT&T announced it would be selling $2B worth of datacenters to IBM, who plans to integrate current AT&T services with IBM’s cloud services.  In October, Windstream sold its datacenter business for $575M, but has established a partnership with the buyer, TierPoint, and will be cross-selling the new cloud offering.  There have also been rumors that Verizon will sell the Terremark business it purchased for $1.4 billion in 2011.

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However, for the largest cloud providers—Amazon and Microsoft, who together account for 40% of the non-SaaS cloud market—2015 has been an exceptional year. Amazon and Microsoft each released financials related to their cloud services for the first time this year, much to the enthusiasm of public investors. Amazon reported $2.09B in AWS revenue in Q3 2015, a 79% increase over Q3 2014, while Microsoft reported that Azure revenue had more than doubled year-over-year. Judging by the huge stock bump received by Amazon this year, 2015 was the year mainstream investors embraced the idea that cloud is the future of enterprise IT.

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Enterprise IT companies have come to a similar realization. In 2015, a number of them started or redoubled their efforts to become significant players in the cloud market. IBM aggressively expanded its footprint of SoftLayer data centers, and made a number of acquisitions in private cloud (Bluebox), database as a service (Compose), cloud brokerage (Gravitant) and object-based storage (Cleversafe). Oracle has repositioned itself as a cloud company, while Alibaba’s cloud division Aliyun recently entered the US market by leasing data center space in Silicon Valley.

Hyper-Competition vs. Differentiation

The rapid pace of innovation in the cloud market has made it challenging to offer sustainable product differentiation. With AWS leading the way, the major players—AWS, Microsoft Azure, Google Compute Engine and IBM-SoftLayer—perpetually announce new services, which are quickly replicated by competitors.  For instance, after IBM’s Watson underwent a broad commercial release this year, Amazon and Microsoft were quick to respond with their own offerings in machine-learning-as-a-service.

Hybrid cloud has been one area of differentiation among the largest players due to their differing philosophies. While Microsoft has for some time positioned Azure as central to its vision of hybrid cloud, AWS has been less inclined to accept hybrid cloud, instead pushing their vision of businesses moving entirely to the public cloud. However, after years of playing down the concept of the hybrid cloud, AWS made tentative steps towards enabling hybrid cloud with the addition of on-premises server workload management to its cloud management tool Opworks.

Microsoft continued to expand its hybrid cloud offerings through 2015.  It released Azure Stack—its evolution of on-premises platform Azure Pack—earlier this year.  Azure Stack replicates not just the experience of Azure, but also the infrastructure, application, and resource manager services in an on-premises environment.  Azure Stack is designed to be similar enough to Azure that Resource Manager templates can be interchanged between the two without modification, bringing users one step closer to realizing the hybrid cloud vision of seamless workload portability and interoperability between public and private clouds.

IBM offers an array of products and services across private and public cloud. Of the quartet that Synergy Research has dubbed “the Big Four,” only Google has made no moves towards supporting hybrid cloud.

From Developers to the Enterprise

Historically, communications service providers and managed hosts entering the cloud market have sought to differentiate themselves from AWS by pushing the vision of an “enterprise-grade” cloud. This is intended to contrast with the “commodity” cloud of AWS, which traditionally served the cloud early adopters: software developers who sacrificed uptime guarantees for rapid provisioning, elasticity and lower prices.  But AWS is far and away the cloud of choice for enterprises, with 50% of enterprises in RightScale’s 2015 State of the Cloud Report reporting using AWS. At AWS Re:invent in October, systems integrator Accenture announced a new business group dedicated to AWS implementations for enterprises.

Microsoft Azure is the number two choice, and is growing fast. In Rightscale’s survey, 19% of enterprises reported using Azure IaaS, a near-doubling of their 11% adoption rate in 2014. Microsoft is well-positioned to attract enterprise customers due to its massive legacy install base and broad offering of business applications.

Meanwhile, Google signaled a new seriousness about pursuing enterprise customers with its hiring of Diane Greene—former co-founder and CEO of VMWare—to oversee its enterprise business.

Cloud Outside the US

US-based communications service providers hoped that SLA’s across cloud and connectivity would attract enterprise customers, but the big cloud providers’ expansive product offerings and solid uptime records continue to make them the number one destination for US enterprises migrating to the cloud. Outside the US, however, the more limited footprints of AWS and Azure have left an opening for communications service providers to enter the market. NTT is a major cloud player in Japan, while European telcos continue to invest in the space. These providers have typically focused on locally based customers concerned about storing data outside their home market.

Several global IT companies have organized cloud marketplaces in an attempt to provide service breadth and quality on par with the large cloud companies.  The most prominent of these marketplaces, HP’s Cloud 28+ in Europe and Cisco’s Intercloud worldwide, bring together cloud service providers, datacenter operators, and technology partners around an underlying cloud platform.  These marketplaces are relatively new, with Cloud 28+ launching in 2015 and Intercloud starting in 2014. They have yet to gain significant traction against the large cloud providers.  However, Deutsche Telekom (DT) has announced that Cisco will deploy Intercloud nodes within DT’s datacenters to create a cloud infrastructure which it intends to compete directly with AWS and Azure.  The two companies expect their partnership to continue to expand over time, as DT standardizes and scales its services globally.

Leading up to our Year End Review, read about the ten events and themes we believed would shape the technology, media and communications industry in 2015. Which ones are leading the transformation?

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> Read our industry predictions for 2015 in our December 2014 Coordinates Newsletter


Sources:

TheRegister, Fortune, Information Week, Network World, TechCrunch, Company Websites, Cartesian, Synergy Research, RightScale