451 Research Insights on Cloud Computing

The following are sections from the recent 451 Research articles on “2013 Preview: Cloud Computing” parts 1 and 2 by analysts William Fellows, Agatha Poon, Rory Duncan, and Katy Ring.
I’ve selected the parts most relevant to the AIS audience.
Emphasis in red added by me.
Brian Wood, VP Marketing

2013 Preview – Cloud Computing

Cloud computing is the norm, not an exception
The use of public cloud computing by enterprises is no longer an exception – it’s a norm. Cloud computing continues to make headway in the enterprise and is in danger of becoming a first-class citizen.
In our latest ChangeWave survey, more than a third of corporate respondents (34%) report their company uses public cloud-computing services – up two points from the previous survey in July, and a full 12 points higher than one year ago.
Amazon believes all of the Fortune 500 companies are using AWS is some way, shape or form.
Figure 1: Corporate Public Cloud Usage

A total of 1,190 respondents involved in their company’s IT buying decisions participated in the October 10-29 survey, including 402 whose companies are currently using public cloud.
Cloud perception continues to be outsized vs. its market share
Cloud adoption is growing fast; cloud computing is being used quite widely (>50% for SaaS), and the cloud market in general continues to punch above its weight. It’s having a profound and disruptive effect on the way IT is procured and used. Amazon’s EC2 – where all of this effectively started – celebrated its sixth birthday in 2012.
However, it’s important to recognize that in absolute economic terms, the market remains relatively small today, even if it’s growing fast. That cloud computing is benefiting from a rudely outsized market perception and generous M&A valuations – and boasts a tremendous number of new market entrants –is all coming off what is a relatively small revenue base.
The cloud computing as-a-service market in 2012 has been worth some $5bn (excluding enterprise SaaS apps) across 270+ vendors we cover; 51% of this value is IaaS (computer and storage as a service), SaaS infrastructure is 28% and PaaS 21%.
Figure 2: Cloud Market Revenue – Overview ($bn)

When we consider IaaS cloud computing relative to the cart it is seeking to overturn – namely, traditional hosting, managed services and colocation – the delta between the ‘propaganda and the reality’ is stark (see Figure 3). But while the cloud’s future place is clearly within our industry’s ken, this won’t be a straightforward ‘David and Goliath’ encounter.
The incumbent market owners have as much opportunity – if they’re bold enough – to tackle this market with cloud services on their own. In 2013, we’ll see a new wave of managed cloud services from telcos and services providers, which will take more aggressive advantage of commodity server/storage and open source (OpenStack, CloudStack, etc.) to achieve economies of scale and cost benefits.
Figure 3: Cloud IaaS vs. Hosting Revenue

Enterprise cloud spending is small, but strategic
Spending on cloud services – however it’s sliced and diced – remains a relatively small part of overall enterprise IT spending. In the overall workload estate, the cloud occupies just a small – but strategically crucial – place. Even if some 30% of companies are now using cloud services (Figure 1), our TIP Wave 3 Cloud Survey (Figure 4) shows that the public cloud is used for just 3% of enterprise workloads. More than the technology, however, the cloud has a dramatic cultural and organizational impact on its users. It brings with it a baked in process change.
Figure 4: Service Delivery Platforms

Private clouds provide the on-ramp to the public cloud
For many organizations, the move to the public cloud will begin with the implementation of an internal private cloud. Data from the same TIP Wave 3 Cloud Study shows that many organizations appear to be implementing their internal private clouds (42%), while assessing their move to the public cloud (27%).
By implementing core internal private cloud-enabling technologies – which include orchestration and automation – enterprises are in essence building on-ramps to the public cloud. While only 9% of respondents said they have an orchestration stack currently implemented, 31% of respondents said they plan to adopt the technology over the next 18 months.
Figure 5: Top Projects for Cloud Adoption

Q: What are your organization’s top two cloud-related projects in the next 12 months?

Cloud Hosting
Moving on up: service providers move further up the stack
The increasing diversity of cloud service offerings is being driven in large part by managed service providers moving up the stack, away from a focus on networks and datacenters. While today’s network infrastructure service providers have a varied heritage – Web hosting, systems integration, network carrier – many are converging toward a common point, enabled by cloud technologies and associated service opportunities. This convergence is enhanced by ongoing M&A activity, resulting in expanded offerings.
Despite the growing opportunities that cloud represents, the business climate in Europe is still challenging, and going into 2013, most service providers will remain focused on retaining existing customers, and there are plenty in the hosting community that are still walking away from anything that is more complex than pure self-service. Few can afford to turn their backs on the more traditional end of the business, whether that is around colocation, network services, datacenter infrastructure or basic Web hosting.
While long-term business transformation projects are the goal for many, the short- to medium-term reality is that migration of legacy infrastructures and services will still be the most pressing concern. Despite this, most service providers understand that cloud technology and services can help in this regard, and there are two strategies that will be increasingly evident, depending on whether the customer is an existing client or a new one.
For existing customers, migrating clients’ on-premises legacy systems via private cloud infrastructures hosted at the service provider will continue to be key, and for those customers already using a virtualized infrastructure, supplementing their core managed services with more complex requirements – e.g., hosting a key revenue-generating application, providing SaaS offerings for managed desktops, running scalable e-commerce platforms – will enable retention of a client eager to build out its infrastructure as its own business grows.
Although such organic growth largely favors the installed base, new customers will increasingly be gained via inorganic growth – from the acquisition of new cloud-specific technologies (e.g., SaaS or PaaS) to supplement core offerings, to new service portfolios that address specific industries (e.g., retail, public sector) or market segments (e.g., SMB). In both cases, new market opportunities are created and will be an increasingly popular option for those service providers that are seeing static growth in their traditional business, and that have the capital.
In addition, increasing awareness of the importance of go-to-market models will see service providers leveraging existing partner sales channels (acquired or developed) in order to reach niche sectors. This will result in licensing deals with ISVs for SaaS applications, reselling and distribution agreements with more vertical-focused providers, and opportunistic partnering on specific deals, particularly where complementary skill sets are evident. They could become erstwhile PaaS providers. More service providers will dedicate resources to developing such sales channels, and will see their businesses benefit with careful planning.
As a result of all this activity, we can expect to see an increase in those service providers offering a full portfolio of offerings – from datacenter to desktop – to a wider audience. The key messages, however, will need to be around transparency, security and availability, rather than technology or brand. Our research suggests that, for example, the ability to provide a HA service at low cost in a secure and simplified manner is what users find most important. Inner workings of service delivery appear far less important.
SMEs increasingly receptive to managed service ‘wrappers’
While the SME market remains cost-conscious, 2013 will see an increase in demand for managed service offerings that enable smaller companies to implement more robust scale to better compete with enterprise-sized companies. SMEs are increasingly asking a lot more from their service providers: faster speed of delivery of key services and innovation, but at an increasingly lower cost. Some hosting providers are still competing on price, but ‘value’ is increasingly a perception, not a product feature: just because it is cheap doesn’t mean that the SME customer will want to buy it, especially when functionality or service deployment options do not increase.
When it comes to ‘vanilla’ hosting, the self-service ethos is still strong for certain hybrid and public cloud models: being able to set up, control and monitor data and other content using basic tools remains a strong selling point for the sole trader and smallest of businesses. However, where e-commerce is concerned, or where a more complex sales operation is required, it is increasingly clear that additional service management layers will be sought by the midsized business sector. The most ambitious of SMEs want to scale their businesses on-demand but lack the internal IT capabilities of the larger enterprises, and therefore need more options for service deployment and management.
Managed hosting providers will increasingly supply a range of additional management services and tools. For the start-up phase of a project, there will be further tools for planning and provisioning. For ongoing projects, there will be monitoring tools, integrated views of multiple application environments, security and disaster-recovery services, etc. For ongoing management, there will be options for commercial aspects such as cost optimization and service integration across the business environment.
While none of these individual services and tools is particularly unique, the way in which they will be packaged, and how they are sold as an add-on or ‘wrapper’ will be key. We are already starting to see such wrappers for public cloud offerings, and others will emerge that help bridge the gap between fully managed private cloud infrastructures and hybrid environments, where key applications need to be hosted in a dynamic way, with more customer control.
Charging models will be increasingly tailored to existing SME-level offerings, with pay-as-you-go and variable volume-based options being popular, but there will also be demand for more traditional project-based services for limited time periods. Service providers will also increasingly provide one-stop-shop models to provide cost management for SMEs that would otherwise need to deal with multiple providers. If done correctly, such investments by hosting providers in additional service options will bring additional revenue streams.
Going forward, there will be a significant opportunity for the managed hoster to tailor a range of packages to the SME market that match the aspirations of this customer sector, and we will see the competitive aspects of this market increase.
SMBs accelerate cloud adoption with help from IT service providers
While often seen as late adopters in cutting-edge technology areas, SMBs are accelerating their adoption of cloud services, aided by targeted offerings from IT service providers. In the SMB sector, the need to drive down costs while maintaining business momentum has pushed many companies to virtualize key functions and look at alternative ways to go to market. While print and Web servers have typified the non-core functions that have been moved to the cloud in the recent past, SMBs are increasingly looking to take critical systems – including e-mail, databases and key applications – in the same direction.
Service providers will respond with increasing specialization in SMB cloud offerings by relevant vertical industry (e.g., media/entertainment, agriculture, engineering), as well as for horizontal functionality (e.g., inventory management, payroll, CRM). Types of cloud service offerings for SMBs will also continue to diversify: managed SaaS for the small business sector will continue to mature, while communication as a service (CaaS) becomes more prevalent, and other niche as-a-service offerings gain ground (security, backup, etc).
Some kinds of services will not be able to be offered by a single provider, so will be offered in conjunction with others via partnerships between distributors (supplying a platform), ISVs (providing an application) and systems integrators (consulting and infrastructure). This will continue to include provision of local-language SaaS for specific industries, e.g., fishing/forestry management.
Although many service providers aiming at the top of the midmarket are prepared to walk away from deals if the size is too small, those supplying the bulk of the SMB market realize the potential. As the opportunity continues to expand, those service providers that can formalize a partner network – complete with incentives, referral fees, training and co-marketing – will increase their penetration of cloud services to SMBs.
Alternatively, those service providers without the scale to have their own formal programs will continue to benefit from strategic alliances with IT vendors, working with a subset of partners in their specialist areas. The results will be mutually beneficial if the service provider puts resources in place to manage the relationships.

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