What is Happening?
Our ongoing Cloud use research indicates two seemingly opposite trends occurring simultaneously: Accelerating increase in the use of public Cloud for enterprise infrastructure, while the number of public Cloud providers is contracting.
ISG research programs confirm that the movement of traditional, on-premises infrastructure to Cloud-based alternatives is accelerating. For example, data from our 2016 Digital Platform Survey indicate a strong movement to public Cloud and hybrid public Cloud plus on-premises infrastructure by 2020. And recent work with ISG clients indicates that this number could grow even faster - upwards of 50 percent.
But at the same time, we’re seeing a continuing contraction in the number of public Cloud providers, with increasing dominance by top hyperscale Cloud providers. Interestingly, we also see a trend among providers that are terminating their public Cloud services: they often pivot to professional or managed services related to one or more of the remaining dominant public Cloud providers.
For example: on 4 April, VMware announced the sale of vCloud Air, its core Infrastructure-as-a-Service (IaaS) public Cloud business to OVH, the large French Cloud computing provider. Then on 5 April, OVH Vice-Chairman, Laurent Allard, explained in an interview that OVH plans to continue to use OpenStack for its public Cloud offering and will operate vCloud Air solely as a private and hybrid Cloud. This denotes a strategic shift from VMware’s strategy of offering an on-demand IaaS public Cloud, and signals the end of VMware's pursuit of the public Cloud market. It also effectively signals the end of vCloud Air that was originally announced by VMware in 2008 and repositioned in 2014 as a hybrid, public Infrastructure-as-a-Service (IaaS) to extend data centers already running vSphere.
Also on 5 April, Rackspace announced the launch of its Global Solutions and Services (GSS) division intended to provide customers with expertise and support in moving their workloads to public Clouds, like Amazon Web Services, Microsoft Azure and Google Cloud Platform.
Why is it Happening?
The increasing enterprise use of public Cloud services is simple to explain: the services fill a need for scalable, agile, and relatively inexpensive IT infrastructure. Even without the growing trend toward Digital Business, the use of Cloud-based IT infrastructure would grow. What’s making public more and more attractive versus private Cloud services is the cost along with a growing trust in the ability of public Cloud providers to ensure reliability and the security of their services.
We see the simultaneous, somewhat paradoxical contraction in the number of public Cloud providers as being due to three primary factors:
- Economies of scale. The largest providers enjoy massive economies in everything from physical sites, to energy costs, to support personnel.
- R & D funding. The largest providers also reap the benefits of greater funding for development of everything ranging from offerings, to specially-designed infrastructure, to tools for management of operations.
- Cost-based competition. The first two factors above enable the largest providers to deliver more services at less cost, making it more challenging for smaller providers to compete.
Prior to the VMware announcements this week, other notable examples of providers leaving the public Cloud market include the following:
- Rackspace. Announced last fall they would exit the market. At that time Rackspace also stated an intention to move to offering services to assist customers in using AWS.
- Cisco. Indicated in September and confirmed on 31 March they are retiring their InterCloud offering.
- Dell. Adopted a strategy in 2013 focused on OpenStack private Cloud and moved away from a public Cloud offering.
- HPE. Announced in Oct., 2015 the termination of its Helion public Cloud offering.
ISG sees these shifts as a logical pursuit of the growing market opportunity for professional services, migration services, and managed services related to Cloud adoption - all of which promise much greater profit, and potentially better differentiation, versus baseline Cloud IT infrastructure-as-a-Service. Figure 1 summarizes our latest survey data regarding current and expected enterprise use of such services.
Figure 1: Enterprise Use of Cloud-Related Services, 2016 – 2019. Source: ISG, 2016.
The big providers of public Cloud offerings will continue to get bigger due to attractive pricing, improving workload-specific functionality, and affinity between new workloads and those already on their platforms. If they are to survive, smaller providers must build unique value propositions that help them compete in areas other than simple cost of services, including such value-added capabilities as close partnerships with providers of professional and managed services, and/or alignment with specific vertical or regional markets.
As this happens, the big hyperscale providers will accelerate similar efforts, because even the largest cannot compete solely on price forever. This suggests that enterprise IT and business leaders will see a growing range of less-expensive Cloud-based infrastructure and professional or managed service bundles tailored to specific workload types, to specific industries, and to specific business processes. Clients of ISG Insights will see more Briefing Notes and other examinations of these types of services and their providers, as well as selection guidance, over the coming months.