The market for cloud-based services has come down to a two-way fight between Microsoft and Amazon Web Services (AWS) with search engine giant Google a distant third.
Mike Seidenberg, portfolio manager on the $675m Allianz Technology Trust, sees the shift to the cloud and ‘software as a service’ as one of the dominant themes in technology as the trillion dollar plus IT market shifts to the cloud from current legacy systems.
He also suggests that the companies which hold the lead are set to stay in the lead.
“The dominant cloud providers today are Microsoft and AWS from Amazon. The switching costs are reasonably high and if you talk to companies using these services, they really like the products,” he says.
“In Microsoft’s case, there are zillions of workloads that are written in the client server that need to be moved to the cloud. Who better than Microsoft to move those?
“Microsoft has been a great story. It is really amazing what can happen when you refocus on your core constituents and you unleash intellectual horsepower inside the company and that’s what’s happened.”
Young favour AWS
However, Seidenberg says that if you talk to developers, especially the younger ones, they’ve been weaned on AWS, explaining why they have a significant share.
“If you roll back the clock back 12 years, I would have said they were weaned on Microsoft, so Microsoft has more of the legacy workloads. They’re trying get the younger group but it’s kind of a distinct market.”
He says firms familiar with Unix will be biased towards Microsoft and those used to Redhat enterprise software to AWS.
He says despite all its resources, Alphabet-owned Google still has a huge challenge really making its mark in the enterprise market.
Change needed at Google
“Google, in order to really be competitive, needs to change their mindset as to how they deal with the enterprise. When a CEO wants to ask somebody a question, you don’t point them to a web page. They want to have a call.
“I think they’re bringing the right people in for that, but they are really far behind. Where they might win, and where they probably have the best IP is around artificial intelligence. So they could resurrect themselves on that vector.
“But I think it’s going to be tough to displace Amazon and Microsoft workloads,” he says.
Cloud revenue to hit $325bn by 2022
Since the first manifestations of the cloud in around 2006, it took a decade for cloud revenue to reach $77bn out of an enterprise IT spend of about $1.3trillion. It hit $99bn in 2017 alone.
By the second quarter of 2018, cloud revenue reached $128bn with 34% year on year growth and it is now estimated that revenue will be $325bn in 2022.
One of the key drivers will be the total cost of ownership (TCO). To run a cloud-based service for five years, TCO is 64.3 per cent lower than on legacy systems.
This includes 63.4% lower data centre and infrastructure costs, 63.5% lower IT staff costs and an 81.7% lower costs for unplanned system’s downtime.
Proofed against a downturn
Seidenberg says this leaves company boards asking CEOs when they are moving and how fast can they go. Such spending should also be proofed against a downturn.
Seidenberg says: “Even in a tougher spending environment, companies will remain on the digital transformation journey. It requires re-platforming and getting out of their legacy systems perhaps over three to five years and once they have started it is difficult to stop.”
He says the pressure is on firms to embrace the digital transformation because if they don’t somebody else will. The classic example is legacy banks coming under pressure from challenger banks.
“If you take Wells Fargo, if they want to change a mortgage product, it literally takes them weeks to change because they have to get into the IT queue, because they have these old systems.
“You can’t find employees for these systems. There’s no chance a young person wants to learn how to code these systems. You have the cost to maintain those systems and it restricts your ability to move your business forward. So that’s a big theme for us.”