Trends in the Cloud Industry
Key Insights
Marion Street Capital believes that although the cloud computing industry is growing substantially, SMBs and large enterprises hurt by the COVID-19 pandemic will force cloud suppliers to provide a more targeted and specialized suite of services to curb excessive and wasteful spending
The cloud computing market is expected to grow at a CAGR of 14.9% from 2020-2027, generating $808B in revenue by 2027[1]
59% of large enterprises reported that cloud usage would exceed prior plans because of COVID-19[2]
While adoption has been widespread, in 2020, organizations will exceed their budget for cloud spending by an average of 23% and waste an estimated 30% of it[3]
The highest priority cloud initiatives for 2020 is cost minimization, as 73% of organizations reported this as their primary concern[4]
Cloud spend is accelerating, 20% of enterprises spent over $12MM in 2020, compared to only 13% of enterprises last year[5]
Market Overview
The cloud computing industry experienced considerable growth over the past half-decade and should continue growing in the future. According to Grandview Research, the size of the global cloud computing market increased from $94.2B in 2016 to $266B in 2019. From 2020-2027, Grandview expects the cloud market to continue its impressive growth at a CAGR of 14.9%, reaching $808B in 2027. The main drivers of industry growth include “digital transformation among industries, rising penetration of internet and mobile devices across the world, and an increase in the consumption of big data.”[6] The cloud industry is notorious for its high profitability, with gross margins in the industry as a whole averaging 65%.[7] As of 2019, Software as a Service (SaaS) represented the largest share of the market at 54%, or $143.6B, while Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) garnered steady demand, accounting for $41.4B and $32.2B, respectively.[8],[9] Businesses of all sizes recognized the power of cloud computing in leveraging their business models, and they allocated significant funds to the technology.
The largest firms in the industry include Amazon Web Services (AWS), Microsoft Azure, Google Cloud, Alibaba Cloud, IBM, and Dell.[10] Over the past year, Microsoft Azure narrowed the gap between itself and AWS, as adoption rates grew from 60% to 69% compared to 67% to 76% for Amazon. Google Cloud grew fastest, with adoption rates growing from 20% in 2019 to 34% in 2020.[11]
Market Trends and COVID-19 Impact
According to a Flexera study on the state of the cloud industry in 2020, “enterprises continue to embrace multi-cloud and hybrid cloud strategies and are already using more than two public and two private clouds on average”.[12] Enterprises are planning to spend up to 50% more on cloud services this year compared to last year, as many workforces have gone remote during the ongoing COVID-19 pandemic, increasing on demand workflows. In fact, 59% of large enterprises reported that cloud usage would exceed prior plans because of the pandemic.[13]
While the various benefits of cloud computing became evident to businesses over the past few years, there still exists a lot of trial and error in matching the appropriate suite of cloud products with business needs, and in the high costs of implementing these products. In 2020, according to the Flexera study:
Organizations will exceed budgets for cloud by an average of 23%
Organizations will waste 30% of cloud spending
73% of organizations plan to optimize their existing use of cloud in a cost minimization effort, which ranked the highest among all cloud initiatives for 2020.[14]
While this excessive and wasteful spending by enterprises may not seem like a pressing issue to cloud companies themselves, being more conscious in optimizing a client’s cloud usage will be rewarded in the long term. The COVID-19 pandemic has shown the world that businesses of all sizes are fragile, and trial-and-error or excessive cloud spending can cripple a business. According to the Flexera study, 74% of enterprises said their annual cloud spending will exceed $1.2MM in 2020, and 20% reported that cloud spending will exceed $12MM this year. Comparatively, in 2019, only 50% of enterprises reported annual cloud spending of more than $1.2MM, and 13% reported spending more than $12MM.[15] From 2018-2019, corporate profits remained unchanged at nearly $8.3T. And due to business shutdowns from the COVID-19 pandemic, Q1 profits fell approximately 7% in 2020 compared to Q1 in 2019.[16] Given this higher magnitude of cloud spending and drop in corporate profits, SMBs and large enterprises cannot continue to increase cloud spending at such a high rate.[17] Managing cloud spending is even trickier in a multi-cloud strategy, which most businesses have. The average business manages 2.2 public clouds and 2.2 private clouds, with even more clouds in the experimentation phase.[18]
About Marion Street Capital
Marion Street Capital (MSC) is a business growth consultancy helping innovative growth companies solve their most pressing challenges.
We collaborate with ambitious leaders to provide time-saving partnership, unparalleled support, and world-class expertise designed to ensure lasting business success — at scale. We work with clients to achieve growth of 10x or more by delivering world-class services in five key areas: FinOps, DataOps, RevOps, HROps, and SpecialOps.
MSC’s resources include relationships with institutional investors (family office, private equity firms, venture capital firms, hedge funds, and mutual funds), relationships with local and international banks, “expert networks,” relationships with top academic institutions, outsourced software development teams, graphic design services,
and industry information providers. This robust suite of services enabled MSC to help clients across 16 different industries during the last two years
Footnotes
[10] Largest Cloud Computing Companies
[12] The referenced study surveyed 750 businesses, 554 of which were enterprises of 1,000+ employees, while 196 were SMBs
[16] Statista Estimate of Corporate Profits