Technology

Cloud Computing Reachs $100 Billion, but Who Makes Money?

The cloud computing market has become so large that it will produce over $100 billion in sales this year. The business is cutthroat enough that many competitors may not make money. As the fight for market share continues, margins will come under more and more relentless pressure.

Global Industry Analytics forecasts the size of the entire market worldwide at $127 billion in 2017. The reasons for that size are primarily the cost savings that companies realize by cutting expenses for running in-house IT operations. The investments for a standalone company to start and maintain IT infrastructure are low due to the cloud, because the costs are carried by companies that maintain and market cloud services. And the burden of future improvement to enterprise IT operations also gets pushed to cloud providers.

The most pressing issue facing cloud providers is that so many very large companies have entered and are trying to dominate the market. Global Industry Analytics reports the competition includes most large tech companies and several medium-sized ones:

Key players in this marketplace include Akamai Technologies Inc., Amazon Web Services LLC, CA Technologies, Dell Inc., ENKI, Flexiant Ltd., Google Inc., Hewlett-Packard Development Company L.P., IBM Corporation, Joyent Inc., KloudData Inc., Layered Technologies Inc., Microsoft Corporation, Netsuite Inc., Novell Inc., OpSource Inc., Oracle Corporation, Rackspace Hosting Inc., Red Hat Inc., Salesforce.com Inc., Skytap Inc., Terremark Worldwide Inc., Yahoo! Inc., among others.

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Amazon.com Inc. (NASDAQ: AMZN) is acknowledged to be the industry leader. Its Amazon Web Services (AWS) should produce $10 billion in revenue this year, which would give it about 10% of the global market. AWS should post $1.5 billion in operating income. Unfortunately, Amazon does not report how much of its corporate costs would apply to AWS if it were a standalone business. This is true of most of its competitors. However, Rackspace Hosting Inc. (NYSE: RAX) produces most of its revenue from cloud computing. Its revenue in the most recent quarter was $164 million, up 13% from the same period a year earlier, which is hardly impressive growth. Its net income for the quarter was $29 million. That puts its margin at 17%, which is modest for a software-based company. Rackspace’s market performance has been pitiful. Over the past two years, its share price has dropped 45%, against an S&P 500 gain of 18%. Maybe part of the drop is because Rackspace is too small to matter. Or alternatively, the market does not believe in the cloud computing market.

With at least eight of the world’s largest tech companies fighting to have the largest part of the cloud computing model, prices will be critical to growth. New features may gain some customers, but International Business Machines Corp. (NYSE: IBM), Amazon and Salesforce.com Inc. (NYSE: CRM) have too much tech fire power to allow competition to keep a lead in major features of long.

As the industry shakes out, part of the shaking model will be advantages based on price.

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