Why 2015 will be the year the cloud grows up

By the end of next year, one of the global infrastructure–as–a–service providers will drop out of the race and price cutting will be the new normal for those left standing.

Cloud computing came a long way in 2014. Previously of interest mainly to developers and website owners, it has become an important part of any company’s IT strategy reaching the CEOs desk as an important tool for increasing business agility.

It’s now an important part IT budgets, too. Australian companies spent $1.23 billion on public cloud services in 2013 and are expected to spend nearly four times that much by 2017. Globally, cloud spending will reach $250 billion by that time.

Much of that has been spurred on by the so–called ‘race to the bottom’ among major cloud providers, with Google, Microsoft and Amazon all slashing their prices multiple times during 2014 as part of a fierce competitive trend.

But I suspect the cloud industry is about to undergo a massive upheaval.

That constant cost–cutting has done little to change the market landscape, with the longest-running provider, Amazon Web Services, still enjoying an 83 per cent market share in Infrastructure–as–a–Service (IaaS), according to Gartner.

And while we continue to see the emergence and development of new players in the Software–as–a–Service (SaaS) and Platform–as–a–Service (PaaS) spaces, the commercial proposition needed to justify the significant capital that goes into building massive Cloud computing data centres is diminishing.

Pure cloud infrastructure and storage services have effectively been commoditised, and are now run on slender margins and huge economies of scale.

That’s why I’ve got my bet down for 2015: By the end of next year, one of the global IaaS providers will drop out of the race. Who that is, I can’t say, but investors and boards are likely to be putting serious thought into whether a business requiring huge capital investment that delivers low margins and intense competition is truly where they want to be.

For the major IaaS providers that survive, I suspect price cutting will begin to stabilise. The early wins in efficiencies and massive scale are now reflected in the cost of infrastructure and storage, and with the growth of their Cloud divisions the impact of large price cuts on their overall profitability is more significant.

That’s not to say there will be no price cuts. Moore’s Law stipulates that compute and storage and costs will continue to come down over time. It will simply happen at a more sustainable, consistent rate than we have seen over the past two years.

During 2014, we also saw new players take interest in the local cloud market. Microsoft launched services in Australia for the first time while Amazon, which has operated here since 2012, is rumoured to be building two of its own data centres, highlighting just how much demand there is for local services.

This shows that the fear of cloud is rapidly dissipating as technology executives realise the benefits vastly outweigh the negatives.

As a result, cloud computing is becoming less about basic web and software development, and we will see more “all–in” cloud migrations. Suncorp, Mi9 and Yamaha have been a few early adopters of this approach, with Suncorp alone moving 2000 enterprise applications to a cloud environment.

As companies become much more comfortable with the prospect of a public or hybrid cloud deployment, company executives and boards are more likely to use this as an opportunity to limit capital expenditure in favour of an operational expenditure.

IT infrastructure replacement cycles have already slowed for some time and for many, the depreciation cycle will soon be complete.

This won’t all happen in 2015. Much of this takes careful planning and significant discussion with those still wary of the cloud. But as CFOs squeeze IT budgets, and CEOs demand greater innovation, the prospect of the cloud as a basis for all infrastructure will quickly look attractive.

2015 is likely to be the year the cloud grew up. For years the realm of early adopters and risk–takers, it will become an everyday consideration for all but the most conservative companies in search of cost–savings and a much more agile platform on which to transform their businesses.

Mark Randall is chief customer officer of ASX-listed Managed Cloud Services provider Bulletproof.

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