PaaS, IaaS, SaaS Markets Hit $109B in 2016, Elevating 13 Top Cloud Computing Vendors to Exclusive Billionaire Club

Thirteen Cloud Computing vendors chalked up more than $1 billion in annual recurring revenues each in 2016, widening their lead over rivals in Enterprise IT by delivering a growing list of Cloud-based products via the Platform(PaaS), Infrastructure(IaaS) and Software as a Service(SaaS) models.

The results are based on our annual survey of more than 1,000 leading Cloud Computing vendors as we track their product revenues across different Cloud categories as well as 21 verticals and dozens of enterprise applications segments as shown in the Taxonomy section below. The results are further validated by products that have been recently purchased and implemented by companies in our Buyer Insight Database, which covers more than 150,000 organizations around the globe.

With Amazon Web Services topping this elite group of Cloud Billionaires, the 13 vendors are aiming to pull away from traditional on-premise players by 2021 as Cloud-based Enterprise IT could become the de-facto method of delivering everything from powerful databases to online services.

Exhibit 1 shows the market shares of the Top 13 Cloud Computing vendors in 2016 as they collectively secured more than $54 billion in annual recurring revenues, or about half of the $109-billion Cloud market, which covers PaaS, IaaS and SaaS delivery.

In 2015, there were only 10 vendors with more than $1 billion in annual recurring revenues each. The rise of China helped fuel the growth of Alibaba as the eCommerce seller generated more than $1 billion in Cloud Computing revenues, according to its 20F filing with the US Securities & Exchange Commission. Similarly, ServiceNow saw a big jump in its Cloud revenues in the booming IT Service Management applications market. In addition, ServiceNow has made significant inroads into other functional markets including HR Service Management, Customer Service Management and Security Operations Service Management applications under the Enterprise Service Management umbrella. Athenahealth, on the other hand, surpassed rivals like Cerner, Epic and Medidata to become the first $1-billion healthcare applications vendor in the Cloud.

Among the top 10 Cloud Computing vendors, Microsoft and Oracle were the top performers as they zoomed past others at above-average growth rates with the former topping 77% in total Cloud sales and the latter posting a 60% jump over the past year.

Exhibit 2 shows the 2015 and 2016 Cloud revenues of the 13 top vendors by Cloud product category and their key Cloud Computing offerings for PaaS, IaaS and SaaS delivery.

Source: Apps Run The World, August 2017

In 2016, Amazon scored big in the IaaS product category as its AWS continued to trounce competition by making a broad array of Cloud services available at scale. It’s worth noting that in the first half of 2017, AWS’ IaaS business grew at a furious pace, topping $7 billion in revenues. The run-rate suggests that AWS IaaS could cross the $15 billion mark for the current year. The question is to what extent AWS’ torrid growth is being fueled by platform products like Dynamo DB for document store, Redshift for Data Warehousing and Aurora for Cloud-based Relational Database.

Already, AWS announced that customers have migrated more than 30,000 databases using the AWS Database Migration Service since it became generally available in 2016. That suggests that AWS’ successes in IaaS have helped the vendor capture more wallet share among customers that otherwise would have continued to use their existing platform products like Microsoft SQL. Now with additional products like Amazon Greengrass for messaging authentication especially for IoT data transfers, customers are likely to leverage the enlarged tech stack from AWS.

Riding high on the triple-digit growth streak of Azure, Microsoft finished right behind Amazon in 2016. What works to its advantage is the recent acquisition of LinkedIn, which added $2.3 billion in incremental revenues to its fiscal 2017, which ended June 30, 2017. If the momentum continues, Amazon and Microsoft could be duking it out in a hotly-contested race to become the first Cloud Computing vendor to reach $20 billion in revenues, which could happen as early as 2018.

Salesforce led the PaaS product category fueled by a massive Cloud developer community, now totaling four million Trailblazers building next-generation applications on Force.com and Heroku, using Einstein Platform Services to build custom AI-powered CRM apps and other customer-centric platforms.

Salesforce has also benefited from its first-mover advantage in the Cloud applications market as its CRM products for salesforce automation, service and support as well as marketing automation and eCommerce are firing on all cylinders after signing more than 150,000 customers for such products over the past decade and a half. Salesforce also continued to lead in SaaS category with 2x revenue than the second largest vendor.

Salesforce’s uninterrupted growth streak suggests that the vendor is on its way to achieve more than $10 billion in product revenues in 2017 as it consolidates its gains in the CRM market especially in key verticals like insurance and life sciences. At the same time, Salesforce is expanding into adjacent areas like healthcare patient engagement with Health Cloud and advanced analytics with help from its Einstein AI push.

As AWS, Microsoft and Salesforce are vying for dominance in the next phase of Cloud Computing market evolution, the future is fraught with uncertainty.

The PaaS, IaaS and SaaS product categories are projected to reach $159 billion in total recurring revenues by 2021 based on our latest forecast. This is a milestone that underscores the popularity of Cloud Computing, especially when it comes to the Public Cloud that optimizes the placement of artifacts, objects and data in a multi-tenancy environment that eliminates hardware upfront costs for customers, while leveraging the economy of scale needed to serve millions of transactions, instances and/or users in real-time simultaneously around the world.

The next milestone is particularly significant because Cloud Computing could surpass the size of traditional on-premise Enterprise IT implementations through the forecast period, as shown in Exhibit 3.

Exhibit 3 – Enterprise IT Product Market Split By Cloud-based Offerings(PaaS, IaaS, SaaS) and Non Cloud-Based Products, 2016 Revenues and 2017-2021 Forecast, $M

Source: Apps Run The World, August 2017

Forecast Assumptions:

1. PaaS – Platform As A Service will be fueled by growth of Cloud platform products like 12c Database from Oracle and Amazon Aurora as customers migrate their workload to the Cloud. The steep growth of Mulesoft for Cloud integration, along with the renewed vigor of VMWare and Dell Boomi could breathe new life into PaaS. The same applies to the growing use of open-source tools from Cloudera, Hortonworks, MongoDB and others, all of which will drive the adoptions of AI, IoT, Machine Learning and Robotic Process Automation to new highs, thusly boosting the overall growth of PaaS through the forecast period.
2. IaaS – Vendors are bolstering their Infrastructure As A Service offerings by tapping into more data centers, co-location and telco facilities that come online in order to cater to increased demand for real-time Cloud access. However pricing pressures as well as consolidation among REITs, data center operators as well as telcos could make it harder for anyone to sustain its operations for long. Already, Rackspace’s decision to pin its future as a managed Cloud provider by piggybacking on AWS’ installed base suggested that the IaaS market may not be able to support that many vendors. Alibaba’s meteoric rise could also prevent AWS, IBM and Microsoft from gaining a foothold in the lucrative Chinese market. What comes next is that IaaS could be controlled by a handful of super-regionals that would not cede ground to anyone until another round of brutal market shakeout plays out through the forecast period.
3. SaaS – The Software As A Service product category remains highly fragmented as more than 3,000 vendors are vying for a slice of a market that has the potential of topping $100 billion in annual recurring revenues in the next decade. Still the entrenched presence of on-premise products in verticals like banking and financial services, healthcare, and even utility threatens to postpone Cloud migration for an extended period of time. The recent sell-off in Cloud vendor stocks – some of which are citing risk aversion as the main reason behind customer inertia even after years of testing and running Cloud applications by some of the biggest companies – suggests demand for net new Cloud adoptions may be decelerating.

In addition to the above drivers and inhibitors, there are a number of issues to contend with even for Cloud billionaires like Amazon CEO Jeff Bezos and Salesforce CEO Mark Benioff, both of whom are actual billionaires with the former challenging to unseat Bill Gates of Microsoft as the world’s richest person.

First is how and whether these Cloud billionaires are going to prevail with an assortment of products for PaaS, IaaS and SaaS, all of which target a slightly different audience. The question is if they can win in all three as Oracle Executive Chairman and CTO Larry Ellison has repeatedly pointed out that his company is the only one capable of outsmarting its foes across all three because of its dominance in database and now enterprise applications after buying NetSuite.

Second is how and whether PaaS, IaaS and SaaS will converge as Artificial Intelligence(AI), Internet of Things(IoT), and Mobility could usher in more sweeping changes to the Cloud marketplace. What’s possible is that AI, IoT, autonomous vehicles and other trends from sharing economy to augmented reality could disrupt the Cloud marketplace the same way Benioff’s revolutionizing software consumption by launching Salesforce.com in 1999 and ultimately undermining the value of on-premise applications.

The next decade or two could fundamentally change people’s expectations of Cloud delivery. A convoy of connected autonomous vehicles parked nearby or on the go could provide continuous Cloud access. For example, in February 2017, Ford announced it would invest $1 billion in Argo AI to build self-driving cars by 2021, following similar extravagant moves from other makers from General Motors to Volkswagen.

Such pods on wheels could also deliver services from shelter to transportation and from solar-powered energy to healthcare from mobile clinics or even office space, potentially putting makers like Ford, Tesla and Toyota in the driver’s seat as next-generation mobility redefines our lives.

Then there is the specter of millions of companies and organizations entering the fray as they transform themselves digitally. Many of these entities are now positioning themselves as tech play by investing heavily in software development. According to our survey of 150,000 end-user companies in our Buyer Insight Database, for every dollar they spend on outsourced software technologies like an ERP package from Oracle and SAP, they are estimated to invest at least 40 cents on insourced apps. You can check our recent presentation on the end-user market trends including Insourced vs Outsourced options here.

ARTW CFO Webinar: Finance Pivots to the Cloud, a joint production from Apps Run The World and Middle Market Executive on Vimeo.

For such insourced development efforts, many of them have benefited from the ease and affordability of spinning up such apps with help from AWS and Azure. All major car makers like Ford are building more apps than ever on their own. The same applies to the likes of Bank of America, GE Digital or anyone that doesn’t want to be Uberized(as in vaporized by a disruptive force like Uber). If a fleet of self-driving cars can take someone from San Francisco to Los Angeles with less hassle than flying, what should airlines like American do in response? Developing more apps to improve customer experience may well be the answer.

Ultimately, customers’ increased emphasis on Cloud development, which covers everything from Private Cloud to mobile apps, could proliferate and even become game-changing sometimes at the expense of the top Cloud Computing vendors. It’s fair to predict that the Cloud Computing pie will only get bigger over the next decade. What’s not clear is if everyone is going to get a larger slice than what they have today.

Taxonomy for Cloud-Based Enterprise IT

PaaS – Platform As A Service covers a range of development tools like Java and Heroku, Integration products like Middleware for application deployment and integration, Data Management products like Databases, ETL, Data Warehousing tools, as well as System Software for change and configuration management. All of the above need to be delivered via Cloud services with hosting, virtual machine, container and private, hybrid and public Cloud subscriptions.

IaaS – Infrastructure As A Service covers a range of Cloud services that are designed for anyone needing to outsource hosting, compute, container, bare metal server for input and output workload, virtualization, storage, backup and recovery, networking, load balancing tasks and other infrastructure services to a third-party provider.

Security – Off-the-shelf security software delivered via the Cloud is not included in our Cloud Computing taxonomy as IaaS and PaaS service providers are embedding security into their subscription services, making it difficult to isolate recurring revenues for security from such bundling arrangements. Customers now come to expect security as standard Cloud Computing services, similar to what commercial landlords are bundling physical security, building upkeep and maintenance into leases for their tenants. Standalone Cloud-based Security products are being rolled into Other Enterprise IT Products.

SaaS – Software As A Service covers a range of enterprise applications delivered via the Cloud for business functions and processes such as Order to Cash, Hire to Retire as well as industry-specific capabilities like Jail Management Software, Electronic Health Records as well as other apps for 21 verticals in our taxonomy.

Here is how we define SaaS:
Cloud applications are derived from more than a dozen primary and secondary markets designed to automate specific and discrete business processes and functions generally used by a customer either within an enterprise or across multiple divisions of a vertical industry.

Definition of Enterprise Applications Components In 21 Vertical Industries

• SaaS Market
• PaaS Market
• IaaS Market
• Feature