650 Group's Weckel breaks down cloud, SaaS and IaaS markets

cloud
Hyperscale cloud providers will continue their market dominance, but there's opportunities for smaller cloud providers as well. (Pixabay)

Booming revenue growth for the hyperscale cloud providers is becoming almost rote, but the numbers continue to be staggering.

According to a recent report by 650 Group, cloud market revenue grew 36% year-over-year in the first quarter to reach $84 billion. Cloud market revenue is projected to reach $712 billion by 2022, which is roughly the same size as Sweden's gross domestic product, according to the report.

"I think Amazon definitely has that Goliath lead and Microsoft and Google are following that," said Alan Weckel, founding analyst for 650 Group in an interview with FierceTelecom. "You will see some regional presence in Asia, obviously, especially China as well as Japan because there will be some nationalistic activity there.

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"The big three in the U.S. will be dominant just because of their size. They've created several levels of moats around them where a startup today just simply couldn't compete in this space. They could never get access to capital or a cost structure like these hyperscalers have created for themselves."

Related: Colocation providers key for running cloud, internet in the future, report says

Weckel said there's enough leftover in smaller cloud niches for companies such as IBM and Oracle.

"They can be more focused on things like the federal vertical or government," he said. "They could be more focused on a specific aspect, say IoT, or a specific aspect of self-driving cars. You see some specialization amongst the small and even amongst the large hyperscalers there. Oracle has their great leverage in software, which is a great expertise.

"IBM has a great leverage in managed services and the outsourcing of IT. That makes their clouds very attractive to a set of customers, which will let them thrive and grow and maintain their niche or potentially grow slightly larger."

U.S. telcos, such as Verizon, abandoned their cloud efforts to focus on being last-mile providers. Service providers, including Verizon, Deutsche Telekom, Telefónica, and AT&T, are tapping into the cloud to offer cloud-based virtual services, including as a service VNFs, IaaS, PaaS and virtual customer premises equipment, to their enterprise customers.

"The U.S. service providers have divested most of what they had in-house and what will happen is as they look to deploy 5G and the next generation of radio networks out there, the service providers will not only be a channel to the cloud, like an Amazon or a Microsoft, but they will also be user of the cloud as well," Weckel said. "Whether that's with a colocation provider like Equinix or Digital Realty, or whether that's on top of Amazon or on top of Google. The tide will shift with 5G where the AT&Ts and Verizons of the world will consume the cloud like Amazon and the colocation providers like an Equinix.

"It's a little bit different in Europe because of the strict sovereignty rules for those countries' inhabitants. You can't have German population data sitting in France or things like that. That has required the local telco service providers to have a local cloud offering to meet those rules. A lot of those clouds are actually built, ironically, by Huawei. You have that aspect going on over there. Deutsche Telekom is a good example of that."

U.S. cloud providers are making an effort to set up shop overseas, but they have to build those regional data centers in countries such as France and Germany.

"That changes the tide a little bit because IBM and Microsoft have had 30 plus years of experience working with governments over there, some of that negative, some of that positive," Weckel said. "They understand a lot of the subtleties of what it means to have a localized data center presence whereas an Amazon and a Google, and for sure any of the social media companies, are learning as we go with a lot of negatives and positives there. The older you are in terms of business creation, the more successful you are right now in Europe because you have that localization knowledge."

IaaS had 53% year-over-year growth rate in the first growth with significant projected sequential growth in the second quarter of this year.

"So that's the Amazon Web Services bucket," Weckel said. "That's going to continue to grow. We're still in the very early stages of all cloud growth around infrastructure-as-a-service, workloads into the cloud, conversion into the cloud, so there's still a long runway there for growth. We also have some new catalysts kicking in in that space like machine learning and AI. That will help the markets maintain growth as it becomes larger in size."

Software-as-a-service (SaaS) revenue increased 41% year-over-year while CapEx grew 16%. The top four SaaS vendors are Microsoft, Salesforce, Oracle and SAP.

"That's going to continue at that rate for several reasons," Weckel said. "The first is because there's end-user demand for it, and the second is because a lot of companies are changing their business models in order to be a SaaS company versus being a hardware company or single-purchase company for software. SaaS will continue to grow for a while, riding on top of the other cloud technologies out there."

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