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Webscale competition increases among carrier cloud providers

Combined Cloud as a Service revenue for telecom operators in Technology Business Research Inc.’s (TBR) 2Q18 Carrier Cloud Benchmark rose 26.3% year-to-year in 2Q18 due to strategic acquisitions and alliances, investments in new data centers, and portfolio expansion in growth segments such as SaaS and hybrid cloud. All benchmarked companies sustained year-to-year Cloud as a Service revenue growth in 2Q18 as significant opportunity remains for carriers to target businesses seeking greater cost savings, scalability and efficiency by migrating traditional infrastructure and applications to the cloud.

Certain Asia- and Europe-based operators including China Telecom, Telefonica and Orange accelerated Cloud as a Service revenue growth in 2Q18 as the companies benefit from data sovereignty laws, such as General Data Protection Regulation (GDPR), requiring cloud data to be stored in local data centers, which is slowing the growth momentum of U.S.-based webscale providers in these regions. Pressure from U.S.-based webscale providers will continue to increase over the next five years in Asia and Europe, however, as they ramp up data center investments and partner with local data center providers to gain traction in these regions.

Graph showing total Cloud as a Service revenue and year-to-year revenue growth for benchmarked carriers in 2Q18

 

TBR’s Telecom Practice provides semiannual analysis of Cloud as a Service revenue in key segment splits and regions for the top global carrier cloud operators in its Carrier Cloud Benchmark. Operators covered include Bharti Airtel, British Telecom, CenturyLink, China Telecom, Deutsche Telekom, Korea Telecom, NTT, Orange, Singtel, Telefonica and Vodafone.

SaaS sweetens the cloud pot but requires vendors to up their ante to participate

‘Best of breed’ spawns diversity in the SaaS provider landscape

The vendor landscape may be consolidating on the IaaS side of the cloud market, but that is not the case for SaaS. Customers are most likely to increase the number of SaaS vendors utilized over the next two years, supported by a number of market trends, including new workload and feature adoption, platform ecosystems, and integrated multicloud deployments.

For workload adoption, there is a leveling of the playing field for which services customers are considering cloud as a deployment method. ERP, for example, used to lag in public cloud adoption but is now much closer to par with often adopted services like CRM and HR. Much of this increased consideration comes from enhanced comfort on behalf of customers for delivering sensitive workloads from cloud providers versus their on-premises data centers.

The other factor is the proliferation of complementary services available via PaaS ecosystems. The most tenured and largest example of this comes from the Salesforce Platform, which supports thousands of ISVs developing and selling solutions that complement and extend core CRM. Salesforce may have been the first, but other SaaS vendors, including SAP, Workday, Microsoft and ServiceNow, are taking the same approach, exponentially growing available SaaS services. The last driver is the continued rise of best-of-breed customer purchasing. For contracting and performance reasons, customers have long yearned for multivendor application environments, and now vendors are actually moving to accommodate that desire. Salesforce’s acquisition of MuleSoft and SAP’s introduction of the Intelligent Enterprise vision are the latest examples of how vendors are supporting customers in choosing and integrating solutions from numerous providers.

 

This special report is part of a series driven by TBR’s Cloud Customer Research reports, for which TBR conducted more than 50 interviews and 200 surveys. These special reports will highlight key trends and topics impacting the cloud industry.

SaaS sweetens the cloud pot but requires vendors to up their ante to participate

Despite the simple graph in Figure 1 depicting SaaS market size, the space remains difficult to sum up. In the eyes of customers, SaaS options are proliferating and spanning a wide swath of business functions and stakeholders. Yes, SaaS is the largest segment of the “as a Service” cloud market—and yes, it will continue to expand. Beyond that, however, SaaS will remain a collection of separate markets, with most vendors specializing in one or two core and adjacent areas, instead of one unified opportunity. Some examples of this fragmented and overlapping landscape include Microsoft leveraging collaboration dominance to reinvigorate its CRM strategy with cloud delivers, SAP returning its focus to SaaS CRM after ceding the market to Salesforce, and Workday investing to build out a financials-focused SaaS business from its HR roots.

The market behaves in contrast to the IaaS market, which is highly consolidated around a standard set of often interconnected services and a small collection of vendors. In the SaaS market, growth will be achieved by new vendors addressing new workloads and features. From a vendor standpoint, there will be greater presence from legacy application providers such as SAP, Oracle and Microsoft, but also plenty of room for more niche providers as functional and regional niches develop.

While SaaS will grow the overall cloud opportunity, the challenge for vendors is that the SaaS opportunity will be more difficult to capture. That is not to say the historical model for SaaS adoption will cease to exist; there will still be SaaS purchases that are driven by lines of business (LOBs), transacted with a credit card in some cases, and deployed separately from legacy systems. At least some of the growth will continue to occur in that shadow IT model. However, much of the growth will be from SaaS solutions that deliver more critical services, are procured by joint IT and LOB teams, and are tightly integrated with legacy systems. These scenarios will require vendors both large and small to up their ante, bringing more sales, integration and support services to the table to win these more complex deals.

Figure 1

Graph depicting SaaS market size by delivery method from 2017 to 2022

‘Best of breed’ spawns diversity in the SaaS provider landscape

The vendor landscape may be consolidating on the IaaS side of the cloud market, but that is not the case for SaaS. As seen in Figure 2, customers are most likely to increase the number of SaaS vendors utilized over the next two years, supported by a number of market trends, including new workload and feature adoption, platform ecosystems, and integrated multicloud deployments.

For workload adoption, there is a leveling of the playing field for which services customers are considering cloud as a deployment method. ERP, for example, used to lag in public cloud adoption but is now much closer to par with often adopted services like CRM and HR. Much of this increased consideration comes from enhanced comfort on behalf of customers for delivering sensitive workloads from cloud providers versus their on-premises data centers.

The other factor is the proliferation of complementary services available via PaaS ecosystems. The most tenured and largest example of this comes from the Salesforce Platform, which supports thousands of ISVs developing and selling solutions that complement and extend core CRM. Salesforce may have been the first, but other SaaS vendors, including SAP, Workday, Microsoft and ServiceNow, are taking the same approach, exponentially growing available SaaS services. The last driver is the continued rise of best-of-breed customer purchasing. For contracting and performance reasons, customers have long yearned for multivendor application environments, and now vendors are actually moving to accommodate that desire. Salesforce’s acquisition of MuleSoft and SAP’s introduction of the Intelligent Enterprise vision are the latest examples of how vendors are supporting customers in choosing and integrating solutions from numerous providers.

Figure 2

Graph depicting the change in the number of cloud vendors utilized in the next two years

Expectation inflation raises the bar for SaaS providers

There may be a growing pool of revenue and room for more providers, but meeting customer expectations for SaaS solutions is anything but easy. Expectations have been on the rise, stoked by the greater control buyers have with cloud solutions versus on-premises software. The days of long-term software contract risk falling entirely on the customer are quickly coming to an end. Not only has the power dynamic shifted, but, as shown in the graph below, customers are successfully using more of their IT dollars to fund innovation over maintenance of existing systems. As a result, different evaluation criteria are being used for IT investments. Up front, there is a much more collaborative process between IT and LOB teams as they decide which offerings meet their underlying business need, not just what fits into their existing footprint. Calculating the benefits and return from SaaS investments is also a challenging task, as deployments use business outcomes as the ultimate goal. Although hard calculations seem challenging for most customers, it’s clear that enhanced levels of support and “customer success” roles are increasingly valued. Having these post-sale resources available and putting a greater focus on outcomes and other intangible benefits than on technology benefits seems to be the best way for SaaS vendors to meet inflated customer expectations for what the solutions can and should do for their business.

Figure 3

Graph depicting IT investment strategy of SaaS adopters three years ago versus now versus three years from now

Carriers focus on supporting hybrid and multicloud environments

Public and private cloud revenue 2017 to 2022 graph

More customers are integrating solutions from multiple providers  

Total Cloud as a Service revenue from the telecom market rose an estimated 13.5% year-to-year to $6.5 billion in 2017, and opportunity remains for carriers to target businesses seeking greater cost savings, scalability and efficiency by migrating traditional infrastructure and applications to the cloud. However, TBR projects revenue growth will decelerate to an 8.8% CAGR through 2022 as webscale providers become more dominant in the market. Though carriers have launched new native public cloud platforms over the past several years, such as Orange’s Flexible Engine and Deutsche Telekom’s (DT) Open Telekom Cloud, these offerings have not been able to overshadow demand for webscale solutions from Amazon Web Services (AWS), Microsoft and Google that are becoming staple services for businesses.

Competition will intensify over the next several years as webscales seek to play a larger role within the European and Asian cloud markets by investing in additional data centers in the regions. Amid demand for solutions from webscales in the cloud market, most carriers are offering access to these companies to complement their existing cloud portfolios and to support hybrid cloud and multicloud environments. Carriers are also integrating webscale cloud platforms to enhance adjacent portfolio segments such as IoT and unified communications as well as augment network platforms including SD-WAN and IP-VPN.

The overall cloud “as a Service” market is maturing, particularly in North America, where engagements are no longer vendor-hosted or on-premises only. As cloud adoption becomes more widespread, hybrid IT environments are the new normal, blending multiple cloud and traditional IT environments and services within each engagement to better integrate and utilize solutions. Providing access to a diverse range of solutions from multiple vendors is essential for carrier cloud providers to support customers’ hybrid environments as they become more complex. Multivendor hybrid environments involve complex integration logistics, as well as multiple security protocols, causing customers to favor cloud providers with broad portfolios.

For more information on TBR’s Carrier Cloud Market Forecast, contact Analyst Steve Vachon at [email protected].

Is ‘cloud repatriation’ real?

Cloud repatriation is real, but not real enough to change the prevailing cloud trajectory. Think of it as the exception, and not the rule.

It’s a question I’ve heard multiple times: “We heard that [insert giant company name] is taking their apps/data off [insert giant public cloud vendor name] and moving it back into their own data center. Is this the beginning of a big shift?” If your job is in any way related to selling products or services for enterprise data centers, “cloud repatriation” sounds like a promising concept. Amazon Web Services (AWS) and Microsoft have been eating the lunch of a whole bunch of IT companies, and those IT companies would like that lunch back, thank you very much. But is the exodus of customers from public cloud really happening? Well, I have some good news and some bad news.

Bad news first: Cloud repatriation is not a market-changer

Cloud repatriation is not real in the sense of being a major, market-shifting trend worthy of its own buzzword. I will not deny the existence of one-off customers making a monumental shift away from public cloud. TBR sees anecdotal evidence of companies leaving public cloud environments, but we don’t see a wholesale move to strictly on-premises environments. The numbers tell it all: TBR estimates the PaaS and IaaS market grew 16% overall in the second quarter, with the big three juggernauts (AWS, Microsoft, Google) growing 58% on average within the segment, accounting for about $10 billion of the quarterly segment revenue. If anything, the public cloud market is moving toward an oligopoly as it consolidates. But it’s not shrinking. The market growth is far outpacing the loss of any customers that may be defecting.

The good news: Companies continue to use on-premises data centers, negating the need for repatriation

Very few companies see a future without owning some kind of data center. Apps that never leave the data center do not need to be repatriated in the first place (although they will likely need to evolve to a more agile and scalable delivery method). As you can see in Figure 1, the bulk of companies expect to maintain a roughly even mix of on-premises apps and those in hosted cloud environments. Smaller companies are most aggressive in their desire to reduce their on-premises footprint while the largest companies make it clear they don’t see a future in hosting everything. These projections make sense to me, especially based on my conversations with IT execs in small and large enterprises. Smaller companies tend to be concerned about the proficiency of their own data center while larger companies are full of complexities that make moving to a new environment a challenge.

Application hosting strategy by number of employees

The reality: Most companies seek a balance

By and large, companies are evaluating the best fit for workloads, acknowledging that there is no one-size-fits-all solution. Regardless of the type of cloud(s) being used, more than 80% of users will either maintain or expand their environments over the next three years. The proportion of buyers planning for public cloud expansion exceeds that of those engaging in on-premises private cloud expansion. But the fact remains that there is not a mass exodus from any specific environment. Regardless of environment, changes and evolutions will occur, even within self-built private clouds.

Companies' expected changes in current cloud usage for 2018, 2019 and 2020

Given that business-to-business buyers are all over the map when it comes to cloud adoption, where can IT vendors succeed? There’s no easy answer, however, when discussing this topic with my colleague Senior Analyst Cassandra Mooshian, she had this to say:

“Recognizing there will be both exceptions and changes for most customers over the next three years is important for vendors, regardless of their cloud point of view. Yes, there will be workloads that have migrated to cloud that will move back to a traditional or on-premises delivery method. However, there will also be services deployed on premises that could eventually be moved to a cloud environment as customer needs and costs change. Something simple, yet critical, for vendors is to understand that no two IT environments are the same, especially across market tiers. Vendors may want their customers to go all-in on cloud, but that just is not feasible for larger organizations or even smaller companies in regulated industries or regions.

“The key to vendor success is to understand that there will be workloads best suited for cloud, while others may work just fine in legacy environments. The kicker will be in helping customers embrace hybrid, understand what works best where, and ultimately integrate and orchestrate it across each customer’s unique blend of legacy and cloud workloads. Once trust is established and there’s a mutual understanding around the idea that all options can and should be considered, that’s when long-term relationships start, and each company has a ‘favorite’ vendor or two.”

To discuss this topic further or learn about TBR’s cloud customer research, contact me at [email protected].

 

TBR launches new Cloud Customer Research reports covering infrastructure and applications adoption

Recognizing that a more mature cloud market needs deeper customer insight, Technology Business Research, Inc. (TBR) is launching two new programs: Cloud Applications Customer Research and Cloud Infrastructure Customer Research. While the vendor landscape is solidified from a leadership perspective, customer behavior has become even more difficult to decipher. TBR’s new programs will help subscribers to plan and take action to win more cloud business.

Many of the simple workloads, such as development & test, CRM and productivity, have moved to the cloud, but exactly what services will move next and how remain difficult questions to answer. TBR’s Cloud Customer Research reports address these new market realities, providing direct feedback on leading and emerging vendors and focusing the analysis on specific workloads in both the applications and infrastructure domains.

Insight provided through in-depth customer interviews allows subscribers to understand the nuance involved with customers’ cloud usage and leverage that information to directly influence their positions in the market. The result of the research is clear identification of market size, leading vendor share, vendor perception, vendor strengths and weaknesses, and case studies on workload adoption.

The two new Cloud Customer Research streams deliver insight that can be used internally to plan business strategies and field guides that can be used externally to initiate and close more competitive deals. While the two research streams will cover different markets (applications and infrastructure), they have a similar structure: analyzing market opportunity, customer behavior, vendor position and perception; offering engagement scenarios and field guides; and providing interview excerpts. TBR will conduct 400 surveys and 100 interviews annually as part of this program and will publish the two reports in September and March.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

Carriers are focused on supporting hybrid and multicloud environments as more customers integrate solutions from multiple providers

HAMPTON, N.H. (July 18, 2018) — According to Technology Business Research, Inc.’s (TBR) Carrier Cloud Market Forecast 2017-2022, total Cloud as a Service revenue from the telecom market rose an estimated 13.5% year-to-year to $6.5 billion in 2017, driven by portfolio and geographic expansion. However, TBR projects revenue growth will decelerate to an 8.8% CAGR through 2022 as webscale providers become more dominant in the market. Though carriers have launched new native public cloud platforms over the past several years, such as Orange’s Flexible Engine and Deutsche Telekom’s Open Telekom Cloud, these offerings have not been able to slow customer demand for webscale solutions from providers such as Amazon Web Services, Microsoft and Google that are becoming staple services for businesses.

“Carrier cloud providers will emphasize hybrid and multicloud solutions over the next five years as customers look for integrated suites and ties to existing network and IT assets,” said TBR Analyst Steve Vachon. “Carriers are focused on fostering deeper interoperability and accessibility to webscale solutions to support hybrid and multicloud environments and bolster revenue from value-added services as well as from network platforms such as SD-WAN and IP-VPN.”

TBR’s market forecast also examines how carriers are integrating emerging technologies to enhance their cloud portfolios. Total other cloud (which includes SaaS, PaaS and BPaaS) revenue from the telecom market increased an estimated 16.2% year-to-year to $2.2 billion in 2017, driven by the adoption of services including unified communications, CRM and office productivity solutions. These workloads will become more deeply integrated with artificial intelligence and analytics capabilities over the next several years, which will create new cross-selling opportunities for carriers. Carriers are also integrating NFV and SDN technologies to enhance their enterprise solutions, enabling operators to offer a more agile cloud portfolio that can be delivered with greater quality of service to customers on demand.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information, please visit www.tbri.com.

Hybrid, multicloud, reunited partners featured in TBR’s upcoming cloud & software research

Going into the second half of 2018, TBR’s Cloud and Software Practice anticipates providing additional research around a few issues that have been top of mind among TBR’s clients and our analysts. The common theme across the three issues highlighted in this report is the growing focus on how cloud and software are jointly being used to deliver real solutions for customers. Highlights of the research center on how establishing hybrid capabilities is a primary challenge for enterprises and a growth driver for vendors, from the initial design and integration through to the ongoing management and optimization of the increasingly complex environments. Additionally, offering multicloud is the first priority for customers and creates opportunities for vendors other than category leaders such as Amazon Web Services (AWS) and Salesforce. Lastly, partnerships that were previously threatened by cloud are now realigning for new opportunities created by on-premises hybrid delivery and solution bundling. Look for more insight into these topics in our upcoming research.

Hybrid enablement is an increasingly critical predictor of vendor success
There is no question that cloud and software solutions are being increasingly deployed into hybrid environments and have been for some time now. The real customer pain point in regard to a truly hybrid environment — one or more cloud assets integrated with one or more on-premises assets for the seamless flow and sharing of data — is around enabling each of the solutions to fit into the environment and integrate with the others for optimal utilization.

Cloud and software vendors alike are investing to capitalize on this growing opportunity around empowering enterprise IT departments to integrate sprawling environments on their own, with the help of automated tools and platforms. Salesforce’s acquisition of MuleSoft is one of the more noteworthy examples as it has vast implications for both Salesforce and the market. This is because MuleSoft offers licenses alongside its subscription offerings despite Salesforce’s “No software” mantra, and because many organizations utilize one or more of Salesforce’s cloud offerings, which will soon feature and/or be integrated with Salesforce Integration Cloud, a solution that will be based on MuleSoft’s well-known Integration Platform as a Service (iPaaS).

Software vendors are making similar investments, such as Red Hat announcing its own iPaaS — Fuse Online — and VMware’s continued updates to the vRealize cloud management suite. Additionally, many continue to expand their partnerships with cloud vendors and systems integrators to improve their hybrid technology and hybrid enablement portfolios, increasingly going to market with a software-led services approach.
Cloud brokerage and hybrid integration pure plays continue to generate buzz as well, providing attractive solutions for enterprise IT departments struggling to keep pace with integrations, orchestration and skill sets. We expect some of these vendors to be acquired over the next couple of years as cloud and software vendors look to quickly build out their hybrid integration and enablement tool sets.

Consolidation around leading PaaS & IaaS vendors does not reduce competition
The public cloud IaaS market, substantially made up of businesses that complement scalable infrastructure with general purpose PaaS, has consolidated around the four leading U.S.-based cloud vendors — AWS, Microsoft, IBM and Google — and one international vendor, Alibaba, which has been successful in the highly exclusive Chinese market and is diligently focused on effectively competing with these U.S.-based vendors on an international stage.

Among the insights gleaned from TBR’s upcoming Cloud Infrastructure & Platforms Customer Research, it is becoming evident that even in discrete use cases and niche industries, the general-purpose nature of these vendors has enabled them to be considered across needs. Many customers agree that there is a delicate equilibrium yet to be found in first balancing on-premises and cloud deployments, and then balancing vendor lock-in concerns, usage volume discounts, vendor specializations and multivendor environment complexity. TBR will closely watch and assess how each vendor overcomes its perceived downfalls and positions itself to help customers best weigh the benefits and drawbacks of increasing cloud adoption.

In particular, customers almost universally recognize Google Cloud as the third option behind AWS and Microsoft Azure, citing TensorFlow as a key technology that will drive Google’s growth into a more prominent cloud vendor, but in the same breath identify that Google’s enterprise vision has not matured from “talk the talk,” particularly outside of the executive office of Google Cloud CEO Diane Greene. Meanwhile, Azure has become a viable alternative to AWS for many customers that note general ubiquity in each vendor’s ability to support various enterprise needs. TBR expects the closeness in AWS and Azure functionality, strained by the maturation of Google’s enterprise vision and Alibaba’s increasingly competitive entry into Western markets, will cause the converging market to grow quickly around this competition.

Partnerships are being both stressed and created as the cloud market evolves
The increased focus on cloud delivery methods has certainly stressed many long-held partnerships between traditional hardware, software and service vendors. The model of solution creation, distribution, installation and support was one that had multiple participants in the traditional model but became more focused on the cloud provider in the transition to cloud. Cloud is also an opportunity for new or nascent vendors to take share in markets such as business applications, where SAP and Oracle have been dominant. SaaS vendors fill portfolio gaps and augment vendor offerings for verticalized use cases, enabling legacy players such as Microsoft and SAP to adapt and compete with born-on-the-cloud providers. An example of this shift in vendor landscapes comes with the release of Dynamics 365 Business Central, which will help Microsoft gain footing over SAP in the SMB space for business applications and provide new opportunity for Microsoft’s SaaS partners. However, as each vendor expands its cloud portfolio, its respective ecosystem will be required to adapt. SAP’s acquisition of CallidusCloud will improve the vendor’s position in the cloud front-office space, but it also places SAP in direct competition with its ecosystem of Configure, Price, Quote (CPQ) providers. Now more than ever, the market will see vendor shares susceptible to ongoing changes as the market for core business applications remains relatively immature for cloud.

Hardware and services partners were previously hard hit in the transition to cloud but will have more opportunities with a growing mix of public and private cloud options becoming available. Microsoft will continue to leverage hardware and services partners to deliver and implement its hosted private cloud, Azure Stack, which has already doubled its geographical reach in recent months. This new opportunity for longstanding hardware partners such as Dell EMC and Hewlett Packard Enterprise to collaborate in delivering Microsoft’s Azure Stack offering does little to offset the erosion those vendors have seen as Microsoft built out its own Azure public cloud offerings, reducing customer demand for hardware.

Note: TBR provides extensive, sustained coverage of the strategies and select performance metrics of all the vendors mentioned above, as well as their competitors and key technology partners. Contact the authors for additional details.

By Allan Krans, Practice Manager and Principal Analyst; Cassandra Mooshian, Senior Analyst; Meaghan McGrath, Senior Analyst; and Jack McElwee, Research Analyst