Martin Hingley's Blog

UK Cloud Computing Forecast Highlights

• The UK has a leadership position in Cloud Computing adoption with even the government introducing early systems
• Leading suppliers realise they need third parties for the relationships they have with customers, although there will be some disintermediation of smaller managed services suppliers who fail to ‘cloudify’ their services
• The lower TCO of multi-tenanted solutions and advantages of Op Ex over Cap Ex will make it successful in the current downturn
• In 2011 UK users will spend £33B on Cloud Computing – 16% of the ITC market
• By 2016 spending will be £43B, rising to 20% of overall ITC
• Telecom Service, followed by IT Service are the key categories of the Cloud Computing market
• While the pre-existing offerings of Broadband and Internet Services will continue to predominate, there will be a proportionate rise in SaaS, PaaS and IaaS spending
• Consumers and small businesses will spend most on Cloud Services
• Initial investments in building private Clouds is strongest in large and medium businesses

Cloud Computing - A Big Growing Market

The total spending on ITC in the UK in 2011 will be £200 billion, of which some £33 billion (16%) will be spent on Cloud Computing. By 2016 the total market is expected to grow to £219 billion, of which Cloud Computing will account for 20% (£43 billion). Figure 1 shows a condensed view of our quarterly spending forecast for Cloud Computing and Traditional ITC Spending.

Telecom And IT Services Will Account For The Majority Of Cloud Computing Expenditure

When itemising the numerous spending categories for Cloud Computing the two strongest components are IT Service (of which Internet and Other Services account for the largest part) and Telecom (of which Broadband Service predominates). Other categories – in particular SaaS, IaaS and PaaS – account for only a small proportion of current spending and, despite the focus on these areas, they are important for the role they play in developing private and public Clouds from which end-user services are delivered. While these grow faster than the existing large categories, we do not forecast that they will ever play a leading role in the market – at least using the criteria we’ve taken for sizing Cloud Computing. We’ve included a view of the forecast by category in Figure 2.

Two years ago while other analysts spent much time talking about ‘Software as a Service’, our initial view was that Service as the Software (SatS) would be more popular. - services suppliers making hands-on activities available through a browser front end. If IBM and others are highly successful with Business Process as a Service (BPaaS) offerings, we will be proved right.

For the UK market there is a strong threat to existing UK-based Managed Services and Outsourcing suppliers from larger international players, especially if they can persuade government legislators to accept their credentials across national borders. While many countries continue to protect national players, it is probable that the free market ideals will encourage the shift to Cloud Computing as a cost saver for UK businesses and government accounts. The legislation which insists that data is kept within the country of a business will be used to restrict the influx of foreign data centres into many country mixes. In the UK there are currently as many as 25k companies –most very small – which supply managed services and software.
For those not supplying Cloud Computing the growth rates look much worse – see Figure 3 for what we call Traditional ITC spending.

A view of some of the expected mix of components (‘offerings’ in our methodology) in Cloud Computing spending is shown in Figure 4. Between 2011 and 2016 – a time when the market is expected to grow from £33 billion to £43 billion – Internet Services will decline from 21.6% to 19.6% and Broadband from 32.4% to 23.4%. SaaS will grow as a proportion of spending from 3.9% to 7.7%, as will Paas (from 3.5% to 6.4%) and Infrastructure software (from 3.9% to 5.1%).

Consumers And Small Business Will Invest Most In Cloud Computing In The UK

Consumers are already the majority users of Cloud Computing. The use of free-to-use social networking, Internet email and backup services is naturally being expanded with the introduction of music and television streaming and other paid-for Internet services. Equally small businesses (those with less than 100 employees) have found initial Cloud Computing easier to adopt than those companies which run their own IT infrastructure. We don’t expect the success of companies such as IBM, HP and Fujitsu to help larger organisations build their own private Clouds to lead to those companies spending overtaking smaller organisations and consumers within the current forecast. A view of ITCandor’s forecast for Cloud Computing spending by company size is shown in Figure 5.

Retail Services Will Be The Strongest area Of Demand

Cloud services themselves will take the majority of spending in the UK, followed by Telecom Service, Delivery Platforms, Development Service and Access Devises (in order). For a picture of our forecast by year from 2008 to 2016 see Figure 6.

Of the various areas making up Cloud Computing Retail Services the two largest categories are expected to be Broadband and Internet Services: however PaaS, IaaS and SaaS will grow proportionately throughout the forecast period – see Figure 7.

Cloud Computing Defined For Market Sizing

As with our UK sizing activities we started by looking at the total ITC spending by quarter and offering in Holland. Once done we then set about estimating what to count as ‘Cloud Computing’. For this we’ve adopted the following definition:

“For market-sizing purposes Cloud Computing encompasses all ITC offerings (products or services) which are used for the consumption or delivery of remote, browser-accessed applications – the delivery of which comes from data centre resources unknown to the ultimate end-user. Typically Cloud Computing applications are purchased on a pay-as-you-go basis and can be accessed by industry standard client devices such as PCs and Smart Phones. Specifically excluded are applications requiring local processing and storage, client server computing and interactive processing. Single-customer applications are not excluded as long as the delivery mechanisms have been adjusted.”

This is quite a generous definition and we even allowed offerings such as printers, gaming consoles, converged devices to be counted for the time they spend associated with these applications.
For our latest sizing we have grouped the offerings into new subdivisions in order to make our forecasts more vital. In particular:

• Cloud Access Devices (CADs) – we grouped the devices to which Cloud Computing is delivered, taking PCs, smart phones, smart tablets gaming consoles, peripherals and set top boxes; as before we’ve estimated only the expenditure on those devices accessing the relevant applications and excluding the proportion of the time these machines are involved with traditional computing; iPhones downloading music from iTunes are excluded, those using Google maps are included for instance
• Cloud Delivery Platforms (CDP) – here we included those components used to deliver Cloud Computing either to a company’s own employees or consumers; elements including include servers, storage systems, networking equipment, operating systems, infrastructure software and applications as well as hardware and software maintenance; again we’ve excluded those machines used for traditional computing from our estimates
• Cloud Telecom Connections (CTC) – here we’ve estimate the costs of Telecoms service (fixed line and wireless) used to access and deliver Cloud Computing applications to users; a small, but growing, part of the overall Telecoms service market
• Cloud Development Services (CDS) – in this category we’ve tried to capture the amount being spent on developing Cloud Computing by users and aggregators; the components include implementation service, as well custom and development and test software
• Retail Cloud Services (RCS) – this is where we capture the majority of Cloud Computing spending; the two existing 100% classes – Broadband and Internet Service are joined by the newer SaaS, IaaS and PaaS services
• Cloud Location – in addition to the groupings of products and services we’ve also decided to plot where the applications and systems are run by identifying on and off premise locations; this is designed to help identify the balance in the business between selling services or building private Clouds for customers

There remains a lot of confusion over the definition of Cloud Computing, with some lazy analysts just saying everyone disagrees so let’s not discuss it. ITCandor believes that more clarity will develop over time for the classes which appear obscure today. Our subdivisions should allow business planners to pick and chose their inclusive classes: ignoring the Communications offerings or focusing just on software and service parts for instance.
Of course we have also kept count of the non-Cloud Computing spending in order to judge the relative growth rates and opportunities.

Some Conclusions – Cloud Computing Will Be Disruptive In The UK

Overall Cloud Computing is now a measurable market. It is one of the few ITC topics which is growing from the ‘bottom up’, enabling small companies to compete more effectively, with less cost, than ever before. Larger companies are catching up with enthusiasm: even the government has made strides to prevent its applications from appearing old-fashioned and sluggish. The disruption of Cloud Computing will be felt in many places – among the indigenous Managed Service and Outsourcing providers and in the slowing productivity of organisations which fail to invest.
Large international (and especially American) suppliers are not having it all their own way however. Trusted relationships and a thorough understanding of governance, compliance, security, data protection issues mean that the Cloud will typically remain inappropriate for the majority of corporate applications, since most UK companies will continue to need real people to help them implement and run their internal systems. However even here there are moves to ‘cloudify’ applications through advanced virtualisation and in large organisations there is a slow influx of non-critical applications from suppliers such as Google and Amazon alongside the traditional big systems vendors – Cloud applications supplied from unknown places.
The evolution of Cloud Computing is a symptom of the desire by many of us to let someone else run our applications, since although technology takes an ever-increasing part of our lives (and wallets), we’re not keeping up with the skills need to run it.
Cloud Computing is mature enough to be the countervailing business in the current recession in a parallel way to data centre outsourcing in 2001-3 and consumer devices in 2008-9. However, while the advantages for users are often in the lower costs of multi-tenanted solutions, the risk of capital investment has moved to suppliers: they may do badly if they are unable to expand to new customers, since less usage will mean less revenue.
Finally we believe that Cloud Computing involves a merger between IT and Communications – not least because it can only exist in a heavily connected world. It is undoubtedly helping many Telecom suppliers with their convergence strategies and is leading to many new types of services being introduced.
Please let us know more about you approach to Cloud Computing by commenting on this article.

Filed under: Cloud Computing, Market Share And Forecast, UK Tagged: | #Cloud, Hingley, ITCandor, UK