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Russian aggression will not dampen pandemic-driven cloud demand

After benefiting from COVID-19 disruption, cloud should fare well yet again in the face of the war in Ukraine

We expect cloud vendors to experience limited financial and operational disruption as a result of Russia’s invasion of Ukraine. Most cloud and software vendors generate a small percentage of their revenue from the two countries combined and maintain limited direct investment, partly due to Russian business regulations. The larger potential impact, in terms of the cloud market, is a slowdown in adoption and investment. The effects of the invasion on the global economy, COVID-19 recovery, and energy markets are all still uncertain.

During the last prolonged economic downturn in 2008, the cloud market was still very early in its development and still quite a small part of most customers’ IT environments. That challenging economic environment was a boon for cloud adoption, largely due to the cost reduction and capital expense avoidance benefits it could provide to customers. The general perception and value of cloud have evolved since then to be more focused on agility and innovation rather than just cost savings, a change we believe may again benefit the cloud market.

In times of uncertainty, cloud’s ability to help customers change business processes, gain greater insight into data, and ensure IT services are available regardless of geolocation have proved invaluable. While prolonged economic uncertainty could pressure IT budgets, we expect cloud to remain a priority given the value customers have realized especially during challenging times. The cloud space may not directly benefit from this invasion as it did with COVID-19, but we expect its growth will continue.

Global hyperscalers do not stand to lose significant revenue streams, but will see delays in the already lagging eastern European cloud markets

The most obvious and direct impact of the war is the disruption of revenue streams for cloud vendors with business and footprints in Ukraine and Russia. Especially in Ukraine, business operations have been all but halted as citizens flee, protect their families, and defend their nation from the Russian military.

While the magnitude is not overly significant to most cloud vendors due to the relatively small size of Ukraine in population, economy and overall cloud adoption, certain global vendors, specifically Microsoft (Nasdaq: MSFT), have a sizable presence and generate revenue streams within the country. Microsoft announced a partnership with the Ukrainian government for cloud services and security in 2014 and in 2020 was discussing plans to invest up to $500 million, including two new data centers, to service the Ukrainian market. That investment has not yet come to fruition, but Microsoft’s relationship with the Ukrainian government has intensified as it works to thwart cybersecurity threats arising from the war.

Russia is certainly a larger economy, but also should not lead to material pressures for cloud vendors during the war and its aftermath. As the aggressor, Russia does not face security threats like Ukraine does, but sanctions have wreaked havoc on Russia’s economy. With the ruble plummeting, Moscow Stock Exchange closed, and financial systems facing chaos, the IT and cloud spaces are impacted along with every other industry in Russia. The effects are mitigated by the fact that cloud adoption has been quite low in the country. Europe in general lagged the U.S. in the acceptance and implementation of cloud solutions, and Russia is even farther behind.

According to industry estimates, 5% or less of IT spend in Russia is cloud related, well below worldwide rates in the 25% range, which means that Russia accounts for less than 1% of the total cloud market opportunity. For the U.S.-based cloud leaders, the revenue effects are mitigated even further by the regulatory challenges of competing in the country. Similar to China, Russia’s laws prevent direct operations by foreign firms. Local providers like Yandex, SberCloud and Mail.ru control a majority of the market. Microsoft and Amazon Web Services (AWS) (Nasdaq: AMZN) have partnered with some of these local providers to participate in Russia, but we do not believe those relationships have grown into significant revenue streams. The war will mean cloud revenue will be delayed further for AWS, Microsoft and other leading global cloud providers, and some vendors might opt to shutter their operations in the country.

Hyperscalers are reimagining how networks are built, owned and operated

Hyperscalers are building end-to-end networks that embody all attributes and characteristics coveted by communication service providers as part of their digital transformations. Hyperscalers are starting from scratch, completely reimagining how networks should be built and operated. Their clouds, numerous network-related experiments over the past decade, and raft of new network-related technologies on the road map will enable hyperscalers to build asset-light, automated networks at a fraction of the cost of traditional networks.

Join Principal Analyst Chris Antlitz on Thursday, March 24, 2022, for an in-depth, exclusive review of TBR’s most recent Hyperscaler Digital Ecosystem Market Landscape, during which he will discuss hyperscalers’ disruption of the telecom industry, how and why hyperscalers are building networks, and the particular focus of these networks.

The Hyperscaler Digital Ecosystem Market Landscape tracks how and why the world’s largest hyperscalers are disrupting industries to unlock economic value in the digital era, with specific focus on the disruption of the telecom industry. The report focuses on Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft and Rakuten.

Mark your calendars for Thursday, March 24, 2022, at 1 p.m. EDT,
and REGISTER to reserve your space.

Related content:

  1. Hyperscalers are reimaging how networks are built, owned and operated
  2. Top 3 Predictions for Telecom in 2022

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WEBINAR FAQs

Hyperscalers are poised to disrupt the private cellular networks market over the next few years

Hyperscalers are poised to disrupt the private cellular networks market through their ecosystems, platforms and marketplaces

Hyperscalers (especially Amazon, Google and Microsoft) intend to standardize, modularize and verticalize private cellular networks (PCN)-related solutions inside their ecosystems, platforms and marketplaces, especially as it pertains to 5G and edge computing. Hyperscalers are focused on hiding the complexity of private networks and edge computing, enabling end users to more easily procure and consume these resources and unlock the value of data.

Enterprise and government consumption of networking resources will ultimately come to resemble how IT resources are consumed via the cloud, and solutions will be outcome-based. Early manifestations of this trend can be seen with Microsoft’s packaging of its 5G core with Azure Private Multi-Access Edge Compute (MEC) to enable and drive enterprise digital transformation with on-premises private 5G MEC. Microsoft is also building a range of vertical-specific use case solutions spanning smart factory, defense, retail transformation, and healthcare. Amazon and Google are following Microsoft’s lead in this domain.

Ultimately, TBR believes a large portion of activity in the private cellular networks and edge computing markets will be conducted inside hyperscalers’ ecosystems. CSPs and vendors will increasingly have to play inside hyperscalers’ ecosystems in some way to stay relevant in the market as it evolves.

Private 5G Network Revenue by Provider Type 2020-2025E

TBR’s Private Cellular Networks Market Landscape deep dives into the market for private cellular networks. This global report covers enterprises that are investing in private cellular networks as well as all of the major vendors and some nascent players that supply infrastructure in this space. The research includes key findings, key market developments, market sizing and forecast, regional trends, technology trends, vertical trends, use cases, and key customer deals that are occurring in the market. TBR’s Private Cellular Networks Market Forecast, which is global in scope, details private cellular network spending trends among enterprises and governments, particularly as it pertains to 5G. This research includes current-year market sizing and a five-year forecast of several private cellular networks market segments and geographies.

Hyperscalers are poised to disrupt the private cellular networks market over the next few years

Key insights

Hyperscalers (especially Amazon, Google and Microsoft) intend to standardize, modularize and verticalize [private cellular networks (PCN)-related solutions inside their ecosystems, platforms and marketplaces, especially as it pertains to 5G and edge computing.

Enterprise and government consumption of networking resources will ultimately come to resemble how IT resources are consumed via the cloud, and solutions will increasingly be outcome-based.

Hyperscalers are focused on hiding the complexity of private networks and edge computing, enabling end users to more easily procure and consume these resources and unlock the value of data.

TBR’s Private Cellular Networks Market Landscape deep dives into the market for private cellular networks. This global report covers enterprises that are investing in private cellular networks as well as all of the major vendors and some nascent players that supply infrastructure in this space. The research includes key findings, key market developments, market sizing and forecast, regional trends, technology trends, vertical trends, use cases, and key customer deals that are occurring in the market. TBR’s Private Cellular Networks Market Forecast, which is global in scope, details private cellular network spending trends among enterprises and governments, particularly as it pertains to 5G. This research includes current-year market sizing and a five-year forecast of several private cellular networks market segments and geographies.