Although the shape of the cloud industry turned out better than expected, most telco strategies in the cloud haven’t delivered. We investigate why, what has led to success, and what telcos need to learn to do differently.
Introduction: The Cloud in 2016
STL Partners developed our comprehensive ‘forward-view scenarios’ on the evolving cloud services market, and the role of telcos within this market, back in 2012. Times have certainly moved on. In 2016, the cloud has become an established part of the IT industry. The key cloud providers – Amazon.com, Microsoft, Google, Facebook – are seeing dramatic revenue growth and (at least in Amazon Web Services’ case) unexpectedly strong margins in the 25-30% range.
Estimates of server shipments and revenue suggest that, so far, the growth of the cloud is a blue-ocean phenomenon. In other words, rather than cloud services supplanting on-premises data centres, the market for computing power is growing fast enough that the cloud is mostly additional to them. Enterprises’ consumption of computing has risen dramatically, as its price has fallen – and cloud is the preferred delivery method for the delivery of these additional data services.
Since our last major cloud report in 2012, there have been some major shifts in the market.
- Public cloud – think Amazon Elastic Compute Cloud (EC2) – has grown enormously, and to some extent subsumed part of the private cloud segment, as the public clouds have added more and more features. For example, Amazon EC2 offers “Reserved Instances”, rather like a dedicated server – these “allow you to reserve Amazon EC2 computing capacity for 1 or 3 years, in exchange for a significant discount (up to 75%) compared to On-Demand instance pricing”. EC2 also offers extensive “virtual private cloud” support, as does Microsoft Azure. This support has essentially put an end to the virtual private cloud as an industry segment.
- Platform-as-a-service (PaaS) has, as we predicted, become less important compared with infrastructure-as-a-service (IaaS), as the latter has added more and more PaaS-like convenience.
- Traditional managed-hosting providers, for their part, have begun to deliver managed hosting services in a “cloud-like”, programmatic, on-demand fashion, via the so-called “bare metal cloud”. Iliad’s Scaleway product is a notable example here.
- Meanwhile, enterprise IT departments who choose to retain their own infrastructure are increasingly likely to do it by creating their own private clouds. Open-source software, like OpenStack, and open hardware like the Open Compute Project and OpenFlow, make this an increasingly attractive option.
The upshot for telcos has in general been pretty bleak. In the volume-dominated public cloud market, they’ve failed to achieve significant scale; while the various niche cloud services markets have largely either been subsumed by the public cloud, or been served better by the open-source ecosystem. Telcos’ focus on enterprise cloud and (in most cases) on reselling VMWare’s technology as their core PaaS offering has rendered them vulnerable to severe competition. Enterprises could serve themselves better thanks to open source, while the public clouds’ engineering excellence and use of open source projects has allowed them to progress faster and address developers’ (the key buyers’) needs better.
However, as we discuss below, the big four cloud companies still only account for about half the total spending. The niche opportunities in cloud remain very real, and there are still potential opportunities for telcos who offer compelling technical and product differentiation.
STL’s cloud scenarios from 2012, revisited
In 2012, STL Partners identified three scenarios for the future of cloud, in our market overview report.
“Menacing Stormcloud”: this scenario essentially envisioned a world in which hyperscale data centre infrastructure just kept getting better. As a result, the cloud majors would eventually take over, probably also cannibalising the on-premises and private cloud markets. This would require cloud customers to bite the bullet and trust the cloud, whatever security and privacy issues might arise. Prices, but also margins, would be hammered into the ground by sheer scale economics. In “Menacing Stormcloud”, AWS and its rivals would dominate the cloud market, and little would be left in terms of telco opportunities.
“Cloudburst”: our second scenario postulated that the cloud was a technology bubble and the bubble would do what all bubbles do – burst. Some triggering event – perhaps a security crisis, or a major cloud customer deciding to scale out – would bring home the downside risks to the investing public and the customer base. Investors would dump the sector, bankruptcies would ensue, and interest would move on, whether to a new generation of on-premises solutions or to a revived interest in P2P systems. In “Cloudburst”, both the cloud and the data centre in its current form would end up being much less relevant, and cloud opportunities for telcos (as well as other players) would accordingly be very limited.
“Cloud Layers”: this scenario foresaw a division between a hard core of hyperscale public cloud providers – dominated by AWS and its closest competitors – and a periphery of special-purpose, regional, private, and otherwise differentiated cloud providers. This latter group would include telcos, CDNs, software-as-a-service providers, and enterprise in-house IT departments. We noted that this was the option that had the best chance of offering telcos a significant opportunity to address the cloud market.
Looking at the market in 2016, “Cloud Layers” has turned out to be closest to the current reality. The cloud has certainly not burst, as we postulated in our second scenario. As far as the first “Menacing Stormcloud” scenario, public cloud majors have indeed become very dominant, but the resulting price drops this scenario envisioned have not necessarily ensued. Even the price leader, AWS, has only returned about half the cost-savings derived from technical advances (what we would call the annual ‘Moore’s law increment’) to its customers through its pricing, capturing the rest into margin.
Further, although there have been exits from the market, the exiting providers have not been niche cloud providers or traditional managed hosting providers. Rather, we have seen exits by players who have made unsuccessful attempts to compete in hyperscale. HP’s closure of its Helion Public Cloud product, Facebook’s closure of its Parse mobile developer PaaS, and the resounding lack of results for Verizon’s $1.4bn spent on Terremark, are cases in point.
Looking at the operators who managed to find a niche in the “Cloud Layers” scenario – such as AT&T, Telstra, or Iliad – an important common factor has been their commitment to owning their technology and building in-house expertise, and using this to differentiate themselves from “big cloud”. AT&T’s network-integrated cloud strategy is driven by both using open-source software as far as possible, and investing in the key open-source projects by contributing code back to them. Iliad introduced the first full bare-metal cloud, using a highly innovative ARM-based microserver it developed in-house. Telstra is bringing much more engineering back in-house, in support of its distinctive role as the preferred partner for all the major clouds in Australia.
- Executive Summary
- Introduction: The Cloud in 2016
- STL’s cloud scenarios from 2012, revisited
- How much are we talking here?
- Competitive Developments in Cloud Services, 2012-2016
- Understanding the strategies of the non-telco cloud players
- Most Telcos’ Cloud Initiatives Haven’t Worked
- The Dash-for-Scale failed (because it wasn’t ‘hyperscale’)
- Only the disruptors made any money
- Too little investment in cloud innovation resources, and too much belief in marketing reach as a differentiator
- Cloud innovation is demanding: the case of AT&T
- Cloud 2.0 Scenarios 2016-2020
- Scenario 1: Cumulonimbus – tech and Internet players’ global cloud oligopoly
- Scenario 2: Cirro-cumulus – a core of big cloud players, plus specialists and DIY enterprises
- Scenario 3: Disruptive 5G lightning storm fuses the Cloud with the Network
Figure 1: 2016 Forecasts of cloud market size through 2020
Figure 2: Forecasting the adoption of cloud
Figure 3: Our revised cloud services spending forecast: still a near-trillion dollar opportunity, even though IT spending slows
Figure 4: Our forecast in context
Figure 5: Public IaaS leads the way, with AWS and Microsoft
Figure 6: IaaS is forecast to grow as a share of the total Cloud opportunity
Figure 7: All the profit at Amazon is in AWS
Figure 8: Moore’s law runs ahead of AWS pricing, and Amazon grows margins
Figure 9: Cloud is the new driver of growth at Microsoft
Figure 10: Google is still the fourth company in the cloud
Figure 11: AT&T’s cloud line-item is pulling further and further ahead of Verizon’s
Figure 12: STL world cloud spending forecast (recap)
Figure 13: Driver/indicator/barrier matrix for Cloud 2.0 scenarios