{"id":10628,"date":"2022-02-07T16:58:53","date_gmt":"2022-02-07T16:58:53","guid":{"rendered":"https:\/\/mailinvest.blog\/index.php\/2022\/02\/07\/what-to-expect-in-cloud-computing-in-2022-and-beyond\/"},"modified":"2022-02-07T16:58:53","modified_gmt":"2022-02-07T16:58:53","slug":"what-to-expect-in-cloud-computing-in-2022-and-beyond","status":"publish","type":"post","link":"https:\/\/mailinvest.blog\/index.php\/2022\/02\/07\/what-to-expect-in-cloud-computing-in-2022-and-beyond\/","title":{"rendered":"What to expect in cloud computing in 2022 and beyond"},"content":{"rendered":"

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We\u2019ve often said that the next 10 years in cloud computing won\u2019t be like the last 10.\u00a0Cloud has firmly planted its footprint on the other side of the chasm with the momentum of the entire multitrillion-dollar technology business behind it.<\/p>\n

Both sellers and buyers are leaning in by adopting cloud technologies and many are building their own value layers on top of cloud. In the coming years we expect innovation will continue to coalesce around the big three U.S. clouds, plus Alibaba in Asia-Pacific, with the ecosystem building value on top of the hardware, software and tools provided by the hyperscalers.<\/p>\n

Importantly, we don\u2019t see this as a race to the bottom. Rather, our expectation is that the large public cloud players will continue to take cost out of their platforms through innovation, automation and integration. Other cloud providers and the ecosystem, including traditional information technology buyers, will leverage hyperscale clouds and mine opportunities in their respective markets. This is not a zero-sum game.<\/p>\n

In this Breaking Analysis we\u2019ll update you on our latest projections in the cloud market, share some new\u00a0Enterprise Technology Research<\/a>\u00a0survey data with some surprising nuggets; and drill into the important cloud database landscape.<\/p>\n

What\u2019s the buzz in cloud?<\/h3>\n

Let\u2019s take a look at what people are talking about in cloud and some of the recent news.<\/p>\n

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Google Cloud<\/h4>\n

With the exception of Alibaba Group Holding Ltd., all the large cloud players have reported earnings.\u00a0Google Cloud continues to focus on growth at the expense of profitability. Google LLC parent Alphabet Inc. reported that its cloud business, which includes applications such as Google Workspace, grew 45% to $5.5 billion, but it had an operating loss of $890 billion. Since Thomas Kurian joined Google to run the cloud business, Google has increased headcount in its cloud business from 25,000 to 40,000 in an effort to catch up. But playing catch-up is expensive.<\/p>\n

To put this in perspective, Amazon Web Services Inc.\u2019s revenue in the first quarter of 2018 was $5.4 billion, almost exactly the same size as Google\u2019s current total cloud business. And AWS was growing faster back then at 49%. Remember, Google includes in its cloud numbers a big chunk of high-margin software. AWS had an operating profit of $1.4 billion that quarter, about 26% of its revenue. So it was a highly profitable business \u2013 about as profitable as Cisco\u2019s overall business, which is a great business.<\/p>\n

This is what happens when you\u2019re No. 3 and didn\u2019t get your head out of your ads fast enough.<\/p>\n

Now in fairness, Google still gets high marks on the quality of its technology. According to Corey Quinn of the Duckbill Group, Amazon and Google Cloud are \u201cneck and neck with regard to reliability,\u201d with Microsoft Corp.\u2019s Azure trailing because of significant disruptions in the past. These comments were made last week in a Bloomberg article despite some recent high-profile outages on AWS.\u00a0Not surprisingly, a Microsoft spokesperson says that the company\u2019s cloud offers \u201cindustry-leading reliability\u201d and that it gives customers payment credits after some outages.<\/p>\n

Microsoft Azure<\/h4>\n

Microsoft\u2019s overall cloud business surpassed $22 billion in the December quarter, up 32% year on year. Like Google, Microsoft includes application software and software-as-a-service offerings in its cloud numbers and it gives nuggets of guidance on its Azure infrastructure-as-a-service business. We estimate that Azure comprises about 45% of Microsoft\u2019s overall cloud business, which we think hit a $40 billion run rate last quarter. Microsoft guided in its earnings call that recent declines in Azure growth rates will reverse in Q1 and show sequential growth.<\/p>\n

Finally, it was announced that the Federal Trade Commission, not the Department of Justice, will review Microsoft\u2019s $75 billion acquisition of Activision Blizzard Inc.\u00a0It appears FTC Chair Lina Kahn wants to take this one on herself. She has been very outspoken about the power of big tech companies and in a recent CNBC interview suggested that the U.S. government\u2019s actions were a meaningful contributor to curbing Microsoft\u2019s power in the 1990s.\u00a0We found that a bit dubious. Just ask Netscape, Wordperfect, Novell, Lotus and SPC how effective the government was in curbing Microsoft\u2019s power.<\/p>\n

Generally, our belief is that the U.S. government has had a dismal record regulating big tech companies\u2013 most notably IBM Corp. and Microsoft. In our view, market forces, company hubris, complacency and self-inflicted wounds, not government intervention, were far more effective than the government at leveling the playing field. Now, of course, if companies are breaking the law, they should be punished. But the U.S. government hasn\u2019t been very productive in its actions and the unintended consequences of regulation could be detrimental to U.S. competitiveness in the race with China.<\/p>\n

AWS<\/h4>\n

Lastly in the news, Amazon.com Inc. announced earnings on Thursday and the company\u2019s value rose $191 billion the next day, a record single-day increase in valuation for U.S. stocks. AWS grew revenue 40% year-over-year in the quarter. It closed the year at $62 billion and a $71 billion revenue run rate. AWS is now larger than IBM, which without Kyndryl is at a $67 billion run rate. IBM revenue was $107 billion in 2011.<\/p>\n

There\u2019s a conversation going on in the media and social that in order to continue this growth and compete with Microsoft, AWS has to get into the SaaS business and offer applications. We don\u2019t think that\u2019s the right strategy for Amazon in the near future. Rather, we see them enabling developers to compete and build out SaaS offerings.<\/p>\n

Finally, Amazon disclosed that 48 of its top 50 customers are using Graviton2 instances. Why is this important? Because AWS is well ahead of the competition in custom silicon chips and is on a price performance curve that is far better than alternatives based on x86. This is one of the reasons why this business is not a race to the bottom.\u00a0AWS\u2019 moves in silicon are being followed by Google, Microsoft and Alibaba and this will continue to drive down their internal cost structures and deliver price\/performance equal to or better than historical Moore\u2019s Law curves.<\/p>\n

Big 4 hyperscaler revenue surpasses $120B<\/h3>\n

Let\u2019s take a look at how the year ended for the big 4 hyperscalers and look ahead to next year.<\/p>\n

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The table above shows revenue estimates for worldwide Iaas and platform-as-a-service generated by AWS, Microsoft, Alibaba and Google. Remember, Amazon and Alibaba share clean IaaS figures whereas Microsoft and Alphabet only give us nuggets that we have to interpret. We then correlate those tidbits with other data we gather.<\/p>\n

We\u2019re one of the few outlets that actually attempts to make these apples-to-apples comparisons.\u00a0Synergy Research is another firm that tracks this data and makes it public, but we can\u2019t map to their numbers.\u00a0Synergy\u2019s GCP figures<\/a>\u00a0look high and Azure appears somewhat overestimated. And it includes other sectors such as hosted private cloud services, but it\u2019s another datapoint you can use.<\/p>\n

Coming back to the table above: We\u2019ve slightly adjusted our GCP figures downward based on comparing some of Alphabet\u2019s statements in recent quarters and other survey data that caused us to be less sanguine. Only Alibaba has yet to announce earnings so we\u2019ll stick to a 2021 market size of about $120 billion at a 41% growth rate relative to 2020. We expect that figure to increase by 38% to $166 billion in 2022.<\/p>\n

These four companies have created an opportunity for the ecosystem to build\u00a0what we\u2019re calling superclouds<\/a> on top of this infrastructure. We\u2019re seeing it happen. It was increasingly obvious at AWS re:Invent and we feel it will pick up momentum in the coming months and years. More on that later.<\/p>\n

AWS gains share in Q4 \u2013 four sequential quarters of accelerating growth<\/h3>\n

The chart below shows a graphical view of the quarterly revenue shares for these four companies.<\/p>\n

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Notice that AWS has reversed its share erosion and is trending up slightly. AWS has accelerated its growth rate four quarters in a row now. It accounted for 52% of the big four hyperscale revenue last year and that figure was nearly 54% in the fourth quarter. Azure finished the year with 32% of hyperscale revenue in 2021, which dropped to 30% in Q4. And you can see GCP and Alibaba are neck-and-neck fighting for the bronze medal.<\/p>\n

Notably, in our recent\u00a02022 predictions post<\/a>\u00a0we said Google Cloud Platform would surpass Alibaba this year, but given the recent trimming of our numbers, Google has some work to do for that prediction to come true.<\/p>\n

Quarterly cloud growth rates are converging<\/h3>\n

To tie up the Wikibon market data, let\u2019s look at quarterly growth rates in the chart below and you\u2019ll see the compression trends.<\/p>\n

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The data above tracks quarterly revenue growth rates back to Q1 2019 and you can see the steady downward trajectory and the reversal that AWS experienced in Q1 of last year. Now, remember Microsoft guided for sequential growth in Azure, so that orange line should trend back up. And given GCP\u2019s much smaller and big go-to-market investments, we\u2019d like to see an acceleration there as well.<\/p>\n

The performance of AWS is remarkable in that the company is able to accelerate growth in a $71 billion run-rate business. Alibaba is a bit more opaque and is likely still reeling from the\u00a0crackdown of the Chinese government<\/a>\u00a0on big tech. We\u2019re admittedly not as close to the China market, but we\u2019ll continue to watch from afar, as that steep decline in growth rate is a concern.<\/p>\n

Survey data shows big clouds have big momentum<\/h3>\n

Oracle shows surprise uptick in the latest survey data<\/h4>\n

The chart below shows\u00a0time series data on some of the select cloud platforms that are showing spending momentum in the ETR data set. ETR uses a metric called Net Score to measure that spending velocity of products and services. Net Score basically asks customers are you spending more, less or the same on a platform? And it subtracts the lesses from the mores and that yields a Net Score.<\/p>\n

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This chart shows Net Score for five cloud platforms going back to January 2020. Note the table that we\u2019ve inserted. It shows Net Score and Shared N. The latter indicates the number of mentions in the data set and all the platforms we\u2019ve listed here show a strong presence in the survey. The red dotted line at 40% indicates spending is at an elevated level.<\/p>\n

You can see Azure, AWS and VMware Cloud on AWS, as well as GCP are all nicely elevated and bouncing off their October figures, indicating continued cloud momentum overall.<\/p>\n

But the big surprise in these figures is the steady climb and the steep upward momentum from Oracle Corp., which came in just under the 40% mark. Of course, one quarter is not necessarily a trend but going back to January 2020, the Oracle peaks keep getting higher and higher. So we definitely will keep watching this.<\/p>\n

On-prem and hybrids show respectable momentum but well behind the leaders<\/h3>\n

The chart below shows the same time series view for some of the other cloud platforms in the ETR survey.<\/p>\n

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In the chart, we\u2019ve now brought in some of the big hybrid players, notably VMware Cloud, which is VCF and other on-prem solutions. Red Hat OpenStack is still popular in telcos that want to build their own cloud. We\u2019re also starting to see Hewlett Packard Enterprise Co. with GreenLake and Dell Technologies Inc.with Apex show up more. IBM, which years ago acquired SoftLayer,\u00a0which was largely a bare-metal hosting company, has\u00a0leveraged that platform to cobble together its own public cloud. Having largely missed the cloud wave, IBM is now racing after hybrid cloud using Red Hat OpenShift as the linchpin to its strategy.<\/p>\n

What this data tells us is that, first of all, these platforms don\u2019t have the same presence in the data set as do the previous players. VMware Inc. is the one possible exception with a Shared N of 110. Other than VMware, these players don\u2019t have the spending velocity shown in the previous chart and most are below the red line.<\/p>\n

HPE and Dell are interesting. They\u2019re transitioning early private cloud businesses to GreenLake and Apex, respectively. And finally, after years of staring at their respective navels in cloud and milking legacy on-prem models, they\u2019re building out cloudlike infrastructure, services and pricing models for their customers.\u00a0They\u2019re leaning into the cloud and marketing it in a more sensible and attractive fashion. As such, we expect these figures to bounce around for those two as they transition installed bases and finally settle into a groove swing. We\u2019ll continue watch that closely as well.<\/p>\n

Over to IBM: The company is in the process of a major do-over. Chief Executive Arvind Krishna inherited three generations of leadership with a professional services mindset. In the post-Lou Gerstner era, both Sam Palmisano and Ginni Rometty held on far too long to IBM\u2019s service heritage and protected the past from the future, missing the cloud opportunity and forcing the acquisition of Red Hat to position the company for the hybrid cloud wars. Rometty tried to shrink to grow but never got there.<\/p>\n

Krishna is moving faster to rip off the Band-Aid and, with the Kyndryl spin, is promising mid-single-digit revenue growth, which would be a welcome change.\u00a0IBM has a lot of work to do and we would expect its Net Score figures as well to bounce around as customers transition to the future.<\/p>\n

Plotting the cloud platforms shows the impressive position of AWS and Azure<\/h3>\n

Let\u2019s take a look at all these players in a different context.<\/p>\n

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The chart above plots all the clouds we just mentioned but in a two-dimensional view. The vertical axis is Net Score or spending velocity and the horizontal axis is Market Share or pervasiveness in the data set. There are a few key callouts we\u2019d like to make here:<\/p>\n