3 Cloud Computing Landscape & Value Drivers

3.1 Cloud Value Proposition

The adoption of Cloud computing has proved to be a significant value driver by addressing key concerns of CIOs/CTOs. Cloud computing has brought in much-needed resiliency, availability, and optimum usage of existing IT infrastructure. It is able to scale up to the increasing demand for servers & storage space by optimally utilizing the IT infrastructure. This is accomplished by building in much-needed redundancy in the infrastructure landscape by quickly provisioning for additional hardware/storage requirements from Cloud service provider. At the same time by using server consolidation and virtualization features of existing infrastructure, Cloud computing is able to increase the ROI of the infrastructure. This leads to reduced Total Cost of Ownership (TCO).

3.2 Cloud Computing Value Chain

An understanding of cloud computing value chain is needed to grasp the potential of the cloud computing opportunities in markets, and in which space major cloud players play their game. The traditional linear value chain for IT services starts from consulting, and extends to design, implementation, and operation/maintenance of IT infrastructure and applications. The same value chain model can be applied to cloud computing business.

At the top of the value chain, we have the cloud advisory services and System Integration. The next layer is the service delivery, application management, service brokering, and customer support. This is the space where SaaS providers & system integrators focus on. The cloud applications are built on Cloud platform and Application services – the domain of PaaS & SaaS providers. The bottom layer is occupied by Infrastructure & Hosting services. This is where major IaaS hardware vendors such as Dell, HP, IBM, Oracle, etc. dominate the market. The last mile – network connectivity layer – is left to Telcos, ISPs and HW vendors to service.

Figure: Cloud Computing Value Chain

Because of the segregation of capabilities at each step of the Cloud computing value chain, a number of new, innovative and independent players have entered the market choosing the segment where they are likely to achieve competitive advantage. They are able to launch their IT service offerings on the market with minimal capital expenditure and controllable operating costs. This resulted in a rich ecosystem of IT service providers who choose to play at any step of the value chain according to their capabilities and long term strategies.

3.3 Predicted Market Growth

According to Gartner, the overall cloud computing market size is expected to touch $220 billion by 2016.

Figure: Public Cloud Services Market by Segment, 2010–2016 (Gartner)

From Cloud services standpoint, a significant amount of growth is expected in Cloud Infrastructure Services. Gartner’s Public Cloud Services Forecast predicts that IaaS is expected to grow at 41.7 percent CAGR between 2011 and 2016, followed by PaaS at 26.6 percent and SaaS at 17.4 percent.

Figure: High Growth Expected in Cloud Infrastructure Service (Gartner)

According to Research and Innovation Estimates, the Cloud computing spending is forecast to grow at a rate of 36.6 percent during 2008–13 to $55.2 billion in 2013–14. By 2020, the percentage of on premise spending replaced by cloud computing is likely to be 14.5 percent – up from 0.36 percent in 2008.

3.4 Competitive Landscape

More than a technical solution, Cloud computing has brought in tremendous changes in the way of doing business. Since cloud computing is built on a dynamic environment where the cloud service is expected to be provided on-demand, self-provisioning, and pay-as-you-use model, it opened up a plethora of opportunities for players in the market to offer new ways of doing business, offering services in new ways, and making the supply chain more integrated and cohesive.

The advent of Social, Mobility, and Analytics, combined with the power of Cloud computing, has made the world heavily connected. This connectivity has led to emergence of new companies that develop new applications, services, and the next generation of platforms.

Apart from the traditional Cloud Service providers, the competitive landscape is gradually bringing into its fold new players in the markets. The competitive advantage may be shifting from traditional players who concentrated on offering infrastructure capability to new players who offer infrastructure, application, and data services on cloud. In coming days, we will increasingly witness the co-existence of traditional Cloud players (such as Oracle, HP, or Dell) with non-infrastructure players (such as Amazon and Google). We are going to see a new and constantly-evolving battleground in Cloud computing competitive landscape.

3.5 Cloud Computing Adoption Factors

There have been host of factors that led to the increasing adoption of Cloud computing.

The primary reason for the rapid increase in Cloud adoption is the growth in demand for virtual machines, memory, and storage. According to a study conducted by Verizon in 2013, the use of cloud-based storage has increased by 90 percent during the time period studied (January 2012 and June 2013), and cloud-based memory by 100 percent; this has been driven largely by the shift of business-critical applications to the cloud.

Another key factor is the independence the firms get from investing in capital expenditure for costly IT infrastructure. The pay-as-you-go model provides the much needed economic flexibility to invest solely based on business demand. The overhead of procuring, implanting, operating, maintaining, and upgrading of the infrastructure frees up the bandwidth of the firms which can be better utilized for core business activities.

The other factor that led to the growth in adoption of cloud computing is the declining cost over the years. Due to the network effect (declining per unit cost with growth in the number of consumers), the cost of Cloud technology has been significantly coming down. Firms have the bargaining power to procure right solution and services at a price affordable to them. They also have the upper-hand to negotiate on the right Service Level Agreements (SLAs) advantageous to them.

Another factor is the availability of cloud skills in the market. Early adopters of Cloud faced significant challenges in implementation and support. The lack of adequate consultants with right skills and the limited support capability of Cloud service providers had led CIOs to spend sleepless nights trying to figure out solutions to the technical challenges. Nowadays there is ample availability of consultants with Cloud computing skills. There is also marked improvements in vendor’s customer support capability.

The Cloud technology maturity has also been another growth factor in Cloud adoption. Due to the increased reliability of cloud technology, the user confidence around Cloud adoption is on her rise. Cloud service providers and vendors are able to tailor the product according to consumer needs. Cloud consumers now know better how they want to use Cloud for their business needs. According to a Verizon study, organizations have moved beyond testing and development in the cloud and are now running external-facing and critical business applications.

Security is still one of the major impediments to Cloud adoption. While the industry has seen marked improvements in addressing the security risks, the larger security concerns around data privacy still remains.

In conclusion, according to the Verizon study, “Enterprise cloud has reached a tipping point. Organizations have seen the benefits cloud can provide – both in efficiency and cost – and are ready to move an increasing number of mission-critical applications to cloud-based infrastructure. However in order for this to happen, cloud service providers must deliver to enterprise-grade availability and security.”