As Cloud computing becomes the mainstream vehicle for many companies to access mission-critical applications, the infrastructure cost component – or what makes Cloud delivery possible – is likely to become one of the most divisive issues facing vendors and end user organizations.
Pressures will intensify for vendors to contain their infrastructure costs, despite the fact that some vendors such as Oracle continue to invest further in their Cloud infrastructure as an attempt to address the needs of their existing and future Cloud users.
On the other hand, some startups and established players are reining in their soaring infrastructure costs in order to boost their margins. This is all done in hopes of averting an eventual market shakeout that could make financing tougher to obtain and the current torrid growth a thing of the past.
In other words, the less they spend on building their own data centers and the more they outsource the infrastructure to their hosting service providers, the more room they have to maneuver once the shakeout begins.
For many end user organizations, the infrastructure cost component – whether it’s being assumed by their Cloud vendors or on their own – could help determine whether they could successfully migrate their existing systems to the Cloud while still being able to exploit its ubiquity and always-on capability.
With Cloud applications vendors assuming the IT burden of hosting applications on behalf of their customers, the infrastructure costs they bear cover everything from buying servers and storage equipment for data centers to signing multi-year contracts with service providers and real-estate investment trusts that now represent the heart of Cloud computing with their sprawling data-center footprint located almost anywhere that has fast and reliable Internet connection.
Arms race among Cloud vendors
The infrastructure cost component is the crux of the arms race among Cloud vendors.
- Altogether Microsoft has invested $15 billion to build its cloud infrastructure, now keeping more than one million servers hosted in its datacenters.
- In 2013 Google invested $7.4 billion in capital expenditures in its Internet infrastructure – much of it going toward its massive data centers around the world.
- IBM is in the midst of a 15 cloud center expansion plan that amounts to a $1.2 billion investment by the Big Blue to grow its cloud presence around the world.
- For its current fiscal year ended January 31, 2015, Workday expects its capital expenditures – mostly for its data centers – to top $110 million.
- In February 2013 LinkedIn signed with a hosting provider for data center space that will cost the social network minimum payments of about $109 million over the next 11 years.
The above figures help usher in the top hosting service providers that have emerged as the key enablers for the 500 largest Cloud applications vendors to sustain and grow their subscriber base.
Top 10 Cloud Infrastructure Providers
As shown in the following graphic, currently 10 infrastructure service providers account for an estimated 61% of the total infrastructure costs that the world’s 500 largest Cloud applications are spending and their share is expected to grow, according to a new research study by Apps Run The World.
The study results also reveal these key findings:
- The Cloud Top 500 applications vendors were estimated to spend $7.5 billion, or a quarter of their 2013 product revenues, on infrastructure components for an array of tasks such as hosting, co-location, storage and dedicated resources either on their own or facilities owned by their service providers.
- Amazon Web Services secured about 13% of the $7.5 billion spend in 2013, compared with Equinix at 9% and Microsoft Azure at 8%, representing the top three infrastructure service providers for the Cloud Top 500.
- Ten leading Cloud applications vendors spent a total of $2.9 billion on infrastructure costs, or nearly 40% of the total expenditures spend among the Cloud Top 500 even though the Cloud revenues of these 10 vendors only represented 27% of the market. This underscores the fact that certain players are outspending their rivals by a wide margin in an effort to realize their their lofty goals with deep pocket.
- Major Cloud applications continue to invest in their own data centers along with co-location facilities through their service providers, raising questions about the long-term benefits of their economy of scale promise in an era where network resiliency and redundancy could mean doubling the costs.
- On a per subscriber basis, Cloud Top 500 vendors are allocating a wide range of infrastructure costs annually from 60 cents to as high as $1,440, suggesting the cost component could be an elusive target for years to come as some struggle with soaring costs after signing lengthy contracts with hosting providers that could entail significant long-term payments.
There are other ramifications for customers, vendors and infrastructure service providers as Cloud delivery of enterprise applications is transforming the competitive dynamics of the software business. In fending off threats from Cloud rivals, the old guards, which still account for the bulk of the enterprise applications market by selling on-premise licenses and lucrative maintenance contracts, are repositioning themselves with what they call Cloud-first initiatives in order to meet surging customer demand for Cloud products. That often entails expensive acquisitions that come with hidden costs.
The infrastructure cost components now come in all shapes and sizes confounding the key stakeholders at Cloud applications vendors still grappling with how and where Cloud delivery has taken hold and where it will end.
SAP and Salesforce.com in Cloud Duel
The complexity is nowhere more evident than at Salesforce.com and SAP, both of which are vying to dominate the Cloud applications market for years to come.
Because of its global expansion and the pre-existing arrangements between hosting service providers and companies that have been acquired by Salesforce.com, the vendor now works with a mix of hosting partners including NTT Communications, Equinix, Interxion, in addition to its own data centers.
For instance, the 2013 acquisition of ExactTarget has left Salesforce.com with multi-year hosting obligations totaling $22 million through 2018.
Meanwhile, SAP has embarked on a number of data center expansion projects including two in St Leon-Rot, Germany, and Newtown Square in the United States that are costing SAP $67.5 million over the next few years. In Europe, SAP leverages hosting service providers such as Swisscom, in addition to its use of Amazon Web Services for a number of its products such as SAP HANA.
In October 2014 SAP signed a deal with IBM to host its SAP HANA Enterprise Cloud ensuring its database users will have quick access to their data through IBM’s SoftLayer Cloud infrastructure.
The recent acquisition of Concur for Cloud-based travel and expense management applications has added another infrastructure layer. At Concur, it has chosen open-source infrastructure service provider SwiftStack, along with Exagrid and Microsoft Azure.
Complexity may well be the easy part. What’s more important for Cloud applications vendors is to better manage their sprawling infrastructure components by carefully budgeting and controlling their capital expenditures, while still achieving the best possible outcome in terms of performance, reliability and data security, especially in terms of privacy protection for their users.
Benchmarking their infrastructure costs and measuring all the moving parts in order to show sustainable improvement in one’s bottom line as well as customer satisfaction could well define long-term successes in the Cloud for all the key stakeholders involved.
Users Weigh Cloud Costs, Privacy Concerns
For customers, that could mean zeroing in on the infrastructure components that matter to them the most. Corporations that place a premium on data privacy and where and how the data center resides may need to reevaluate vendors that take a generic approach when it comes to using co-location facilities that may not enforce the strictest data privacy protection. Iceland, for example, has recently become a hotbed for data center operators because of its strict adherence to data protection laws.
Other customers may choose on the basis of the cost factor alone because of the need to process a certain amount of transactions in a given time. For example, a real-estate management application vendor may need to process millions of rent payments as infrastructure use spikes during month-end period, thus requiring a bifurcated infrastructure strategy to handle such peaks and valleys in the number of concurrent users.
Whatever the case, the infrastructure cost component is expected to be one of the gating factors that could make or break the future of Cloud applications vendors as many of their customers are counting on ready access to their systems usually at time of their choosing. As a result, planning for such persistent and oftentimes difficult to manage infrastructure utilization will continue to be a daunting task and getting a better handle on the underlying costs could separate the winners from the losers.
Subscribe to Apps Run The Cloud and access premium content including a series of reports that analyze Cloud Cost Centers of the Cloud Top 500 applications vendors and their implications. The reports also include downloadable tables that detail the annual infrastructure spend among 61 of the Cloud Top 500 applications vendors as well as a full listing of hundreds of infrastructure service providers mostly cited by the Cloud Top 500 applications vendors as their primary and secondary hosting partners.
Following the release of the Cloud Top 500 survey project in August 2014, we proceeded with further research on the Cloud infrastructure of the world’s 500 largest Cloud applications vendors. We supplement those data with interviews that we conducted with privately-held and publicly-traded companies in order to establish their current infrastructure spend levels, investment plans, as well as the data center service providers that they work with closely. For the Cloud Cost Centers study, our benchmarking data are derived from tabulating their costs of Cloud revenues over the past seven quarters as well as the number of Cloud subscribers.
Vendor shares and market forecast results are based on a combination of existing databases as well as demand side and supply side research conducted throughout the year with validation from vendors, customers, channel partners and documentations such as earnings releases and 10Q and 10K filings, vertical industry studies, regional and country-level statistics from public and private institutions.
For more on our SCORES methodology, check here. Don’t forget to look up our Cloud Applications taxonomy as well as a searchable database of thousands of Cloud applications customers that have been taking advantage of the latest innovation from these vendors. For additional information on our methodology and taxonomy, check https://www.appsruntheworld.com/research.