Backed by across-the-board customer acceptance and investor support, the $30-billion Cloud applications market is poised to rack up big gains over the next five years.
The question is how fast will it grow and whether the market expansion will be evenly distributed across different regions and functional areas. Another pressing issue is whether the Cloud applications market growth will come at the expense of software license and maintenance revenues. In other words, is game over for conventional way of selling software if the Cloud becomes the preferred mode of delivering enterprise applications?
Before we answer any of the above questions, our latest forecast for scores of Cloud applications market segments(see taxonomy here) shows that the $30 billion-plus that thousands of vendors(there are more than 2,000 in our database) have generated in subscription fees over the past 12 to 18 months will continue to swell through 2018.
Based on the explosive growth of Cloud applications subscription revenues over the past three years, the market is projected to soar at a compound annual growth rate of 17.3% to reach a total of $67 billion by 2018, as shown in the following table.
Source: Apps Run The World, July 2014
Our forecast assumptions are three-fold. First, the recurring revenues that these vendors have captured are only the beginning of a long tail of deferred payments that will manifest themselves more profoundly in the forms of contract renewals, market expansions as well as price increases.
In February 2014, SAP executives told investors that in a seven-year period a Cloud deal is likely to generate 28% more in cumulative payment than an on-premise implementation. Oracle executives echoed that optimism during its recent earnings call in June, reiterating that it could generate more annual recurring revenues from Cloud deals than conventional software sales. In fact both vendors are so confident that their Cloud subscriptions would multiply that they are breaking out such recurring revenue streams every quarter. In other words, heads would roll if they fail to live up to their promises.
Second, customer demand for Cloud applications and services has continued to surge. In 2013 the UK government launched an expanded G-Cloud supplier framework that would support growth in Cloud Computing. Cost is one of the biggest reasons behind the government push, which estimates that off-the-shelf products from the Cloud can be up to 30% of the cost of bespoke solutions. Similarly, our 2013 user survey indicated that 65% of enterprises were pursuing Cloud software investment plans over the next 12 to 24 months.
Cost is only part of the equation. HP, the giant computer firm with more than 300,000 employees, now runs Workday’s Cloud HCM applications for managing its global HR processes, citing speed, efficiency and unprecedented ease of use.
Third, the network effect is working its magic through layers of partnerships that vendors, resellers, systems integrators, data center operators, and telcos have been stitching together to ensure Cloud applications can be delivered with ease, maximum security guarantee, and increasingly the ability to customize. While the first two gating factors enable the key stakeholders to put their skin in the game, the last may have the biggest implication. As customers are fully engaged in new Cloud product release cycle and perhaps given the opportunity to add specific features to their liking, vendors may be able to wield considerable pricing power over how and when these quasi-customized features should be made available and at what price point.
Amazon likes to point out it has been continuously lowering Cloud computing costs to its customers through its Amazon Web Services. The reverse could happen when the utility model works to the benefit of a handful of suppliers – similar to the demand-based pricing that energy producers are charging their customers these days.
Currently many Cloud applications vendors are practically giving their products away through a freemium approach, which is likely to be replaced by a premium model once they reach a critical mass. In addition the expected shakeout in the Cloud applications market will inevitably leave the survivors with the biggest leverage in terms of market coverage and pricing power.
Forecast By Region
Across the regions, the Cloud applications market is projected to experience sustained growth in the three major theaters with the biggest showing likely to be coming from Asia Pacific, as shown in the –following table.
Of the Cloud Top 500 vendors, only 18 are headquartered in Asia Pacific. However one can hardly underestimate the power and influence of such vendors as Yonyou, OBIC, and Ramco in China, Japan and India, respectively. All of them are expected to boost their Cloud applications offerings significantly having already amassed a huge following with their on-premise systems. Silverlake Axis, one of the major enterprise applications vendors in Malaysia that caters to the financial services industry, expanded its Cloud offerings in 2013 by acquiring Cyber Village, which offers Cloud-based CRM and eCommerce applications in Asia.
At the same time, the burgeoning number of Cloud users in Asia, unencumbered by legacy systems that are prevalent in other regions, will attract heavy investment from other Cloud applications vendors. Then there are Cloud-only startups like Xero in New Zealand, which has been doubling its revenues over the past three years since it started offering online accounting applications in 2006. Its customer count soared to 284,000 in March 2014, up from 1,000 in 2008.
In the EMEA region, the same upward trajectory is being played out in far-flung places from Finland to Israel. Almost one-fifth of the Cloud Top 500 are based in the EMEA region and their ability to grow their Cloud subscription revenues has no boundaries. SuperOffice, a CRM application vendor based in Norway, has secured 12,000 customers following its successes in winning deals close to home and abroad. With an aggressive channel strategy, SuperOffice now sells its Cloud applications under OEM arrangements with Visma, a major ERP and HR application vendor in Norway; as well as MYOB, an accounting applications vendor in Australia.
Forecast By Functional Area
Our forecast calls for splitting the total enterprise applications market into 10 horizontal and the Verticals segments. The former runs the gamut from analytics to treasury and risk management. The latter in itself is comprised of 21 vertical industries from aerospace and defense to utilities.
By Revenue Type and By Functional Market, $B
Source: Apps Run The World, July 2014
Among these segments, content management is expected to post the steepest climb with a 38% CAGR through the forecast period as Microsoft flexes its muscle by extending its Office 365 franchise to a global audience. The vendor said over 50% of Office 365 revenue now comes from international markets and sales of Office 365 commercial seats have been growing at 174% year over year.
Other functional areas like analytics, eCommerce, ERP, supply chain management and treasury and risk management are also expected to post above 20% in CAGR through 2018 because of their relatively small base to start with as shown in the following graphic.
Cloud Applications Market Forecast By Functional Market, , By Compound Annual Growth Rat
CRM and HCM, the twin-engine behind the explosive growth of the Cloud applications market over the past few years, stand to show decelerating momentum because of the law of big numbers. While big vendors like Salesforce.com and Workday are confident about their growth prospects either organically or through acquisitions, other CRM and HCM vendors may not fare as well because of a lack of differentiating factors as well as near-term pricing pressures. For example, Resumator, an HCM vendor, now offers its products at a fixed price of $99 for unlimited number of users.
What it boils down to is that the acronym war will continue to redefine the Cloud applications market. Based on our forecast, CRM applications market will still account for 24% of the market by 2018, down from 30% in 2013, as other segments are fast catching up in terms of Cloud ubiquity.
 Source: Apps Run The World, July 2014
Within the fragmented vertical industries, the diversity of the user population will make Cloud adoptions a moving target. One thing is clear. Cloud ubiquity is here to stay. Temenos, a Swiss-based financial services applications vendor, expects all new core banking replacements will be in the Cloud by 2020, yielding up to $1.8 billion in cost savings for Temenos T24 users mostly in the form of shared infrastructure.
Regardless of how the horizontal and vertical segments are going to evolve, the existing Cloud applications vendors are expanding beyond their given slots by accelerating their platform and ecosystem development efforts. One possible outcome is for them to layer multiple Cloud services on top of a robust core system, which has been fully accepted and standardized by their customers.
The poster child of this brand extension is ServiceNow, which started its Cloud journey as an IT Service Management applications vendor in 2003. Soon it moved into project portfolio management and more recently enterprise service management with a clear mandate to expand into CRM and HCM.
What it underscores is the fact that many Cloud applications vendors are banking not on bagging the largest share in any given market, but rather the position of having the biggest wallet share within their customers through upselling and cross-selling of different Cloud services, thereby establishing the most sticky relationship that could end up paying them the most dividends in the long run.
Finally there is the knotty question of what will happen to on-premise license and maintenance revenues, which still represented 83% of the market in 2013. Even with the incursion of Cloud applications vendors, on-premise software sales are projected to hold onto about 70% of the market by 2018.
By Revenue Type and Functional Market, In Percentage
The long-term outlook for on-premise applications revenues is somewhat mixed. Markets such as analytics, CRM, eCommerce and HCM are expected to see the bulk of their revenues converting to Cloud sales. On-premise revenues in areas like ERP and Verticals are likely to retain their stronghold because of the sheer size of their markets, as well as the propensity of some customers to take their time to mull over their options.
On the other hand, many of these verticals – healthcare being the shining example – are undergoing major transformation as they seek to clamp down their costs, while boosting their efficiency. At the same time, banking and financial services vertical, which has been one of the biggest IT spenders for years, is hoping to rebound after the end of the financial crisis. In both cases, Cloud applications appear to be ready to come to their rescue.
One telling example of this rescue lies in the US banking industry, which has seen a 21% drop in the number of FDIC-insured financial institutions from 8,494 in March 2008 to 6,730 in March 2014 because of bank closures and mergers and acquisitions. During that period, Q2ebanking, a Cloud-based applications vendor that caters to regional banks and credit unions since its founding in 2005, has grown its customer count to over 334. In 2013 Q2 Banking saw a 38% jump in Cloud subscription revenues to $51 million, outstripping the growth of its counterparts in the on-premise banking applications space by a wide margin.
While the game may not be over for on-premise applications vendors, all signs are pointing toward the growing momentum of a moving locomotive that could knock down any object in its tracks.
