There are few who doubt that we are in the Internet Age. Few doubt we’re entering the Cloud Age and maybe even the SDN/NFV Age, but I wonder whether there’s broad understanding that the cloud and related technologies like SDN and NFV are going to be as transformative as the Internet was. When the Internet first developed, nobody saw what it would become. We’re just now starting to see the signs of what might come next.
Our biggest news item last week was Amazon’s first break-out of cloud earnings. The company reported about $5 billion in cloud service sales and a $6 billion run rate. If you give Amazon about 28% of the IaaS/PaaS cloud market, that sizes that cloud market at $18 billion, which is about 1.8% of current IT spending. More significant to financial analysts was that Amazon reported a profit of about $1 billion on the cloud.
I think the most interesting thing about the Amazon number is the way it frames total cloud service sales. If you believe the cloud will largely displace private IT, it’s clear there’s a long road ahead. If you don’t, which I don’t, then you have to examine cloud service opportunity more closely to see where we are now and where we’re heading. It’s that examination that takes us into the future, into the transformation that just might change everything.
The first point is that SaaS is generally viewed as the larger cloud service segment, but it’s hard to size effectively because hosted services and SaaS services are hard to distinguish. If you eliminate web hosting, my own estimate is that SaaS currently accounts for about $16 billion in spending, which would make it a titch smaller than the “platform” clouds. Total cloud computing spending would then be about $34 billion. Include all hosted services and the spending doubles, which shows that SaaS and the cloud are really extending trends that had been established before.
Online sales and similar adventures by enterprises didn’t displace current IT spending, they augmented it. What that proves in my view is that we had two possible views of the cloud to choose from when it launched—substitute IT or a new opportunity—and we picked the most pedestrian.
The cloud can probably displace only about $240 billion of current IT spending. Even with that low a target, it’s obvious that we’ve not even reached 14% of likely penetration, which means that public declarations of an Amazon victory are likely optimistic simply on statistics. Other providers still have a good chance. That means not only current providers of cloud services, but even new and credible cloud service market entrants. But while a quarter-trillion isn’t chump change, it’s not transformative either.
What makes things interesting in my view is that right now about a third of the platform (IaaS/PaaS) cloud spending and 20% of the SaaS spending isn’t displacing current IT spending at all, but rather is accretive to it because the cloud is doing stuff that was never done traditionally. Despite cost-driven targeting, we’ve been witnessing a quiet cloud transformation, a shift from the pedestrian and short-sighted targeting to something exciting. The future cloud opportunity lies more with this new stuff, which for the enterprise is about $800 billion according to my model. If you go beyond the enterprise into new consumer mobile and NFV services, you add another $1.5 trillion, which gets you into the realm of real money.
Amazon has an impressive but not compelling cloud position in the “enterprise cloud” as most would see it today. They have no real position in the extended enterprise, mobile, or NFV spaces. That means that if the cloud fully develops and Amazon doesn’t push out of its current focus area or change market share, they’d end up with 28% of what is about a $1 trillion total opportunity. That’s a lot of growth for them, and investors would have every reason to be happy.
The question is the rest of the cloud opportunity, the roughly $1.5 trillion in mobile/NFV services. This is the space that the network operators (at least the savvy ones) hope to reap with the “service agility” NFV is supposed to provide. It’s also the space that Google obviously hopes to capture with its Fi MVNO service.
Put into cloud terms, Fi could be a model to transfer network service value upward out of the network and into the cloud, and then to meld it with MVNO network services to create what the user would see as a new native mobile service. Google is likely betting that the operators, who could create a tighter linkage between true mobile connection services and Fi-like cloud services through NFV, won’t be able to move far enough or fast enough. In a way, Google is targeting the biggest disintermediation project since the Internet, where the cloud disintermediates operators from higher-layer service value.
As-a-service activity, virtualization, SDN/NFV, the cloud, or whatever you call it, are generators of “new opportunity” that aggregates to well over $2 trillion in annual revenues. At least three-quarters of this could be viewed as “natural opportunities” for operators and all of it would be an opportunity were operators to position their cloud assets properly. How do we know that? From Amazon.
Amazon’s profits on AWS are hard to validate because we all know that it’s difficult to know the formula the company uses to allocate costs on shared infrastructure. But we do know that in the cloud overall, the highest profits will likely accrue to the guy with the lowest costs. Amazon’s enormous scope has made it an economy-of-scale play. The operators, with NFV, could in theory deploy even more infrastructure than Amazon and do so at a lower expected ROI because of their utility-like internal rates of return. Financially they could win.
We can also draw some insights from the regulatory opposition to the Comcast/TW acquisition that ultimately killed the deal. Regulators were at least as afraid of the impact on OTT video as they were on other cable/broadband or telco video/broadband service providers. That suggests that even in regulatory circles there’s a growing sense that services are above the bit. If that’s true then Google and Amazon have a shot at the whole pie, which could be huge for them.
This also shows why network equipment is lumpy. Mobile infrastructure needs a higher-layer boost, so Ericsson is seeing a slowdown. Future services will be based mostly on software and servers, so F5 saw a boost. Profitable traffic in the metro, to be supplemented by the cloud, still demands carriage of some sort and Juniper is aiming at that and hoping that somebody with a good specific cloud and NFV story won’t step on them.
I’ve tended to call future applications and services “contextual”, meaning that they exploit the sense of context that mobile users (and humans in general) base their behaviors on. Call them what you like, but I think that these services, whose total revenue value is over $2.5 trillion per year, represent the pie that everyone has to be looking to slice at the provider level, and that every vendor wants to supply with equipment, software, and professional services. The question seems how and when to start.
Inside every Tier One is a planner who understands the future. That’s true for about half the Tier Twos and perhaps a quarter of Tier Threes. Among the largest enterprises, about half see the future as it is, and the rate of insight drops radically as you move toward the SMBs. The point is that future-speak is nice if you’re a reporter but it’s not necessarily the path to riches if you’re selling network equipment, software, or services. There’s always a need to build the future on the present, not destroy the present to get to it. That means that the status quo will hold a powerful appeal until there’s no way to avoid facing future reality.
We may be getting to that point. Optical players like Infinera are speaking future-truth already and reaping the rewards. NFV’s principles are becoming clear even if there is still an unknown amount of work to do on specs, and we’re gaining on the 2017 deadline when operators will need something from NFV to save profits, and may leapfrog remaining standards and issues to get there.
I still see this as a kind of face-off-by-proxy, with Google Fi on one side and Alcatel-Lucent’s Rapport on the other. Can Google figure out how to build superior higher-layer services on top of an MVNO framework? If so, then they relegate operators to MVNO hosts at even slimmer margins. Or can operators use Rapport or NFV or both to build agile service layers, not new ways of doing connection services?
We may have other answers even sooner. Amazon and Apple can’t let Google own this transformation. If all Fi represented was an MVNO deal, competitors could sit on the sidelines because the risk is great and the upside isn’t that great. If Fi is a step toward a multi-trillion-dollar opportunity, nobody dares ignore it. Apple is particularly vulnerable, but also particularly well positioned with a loyal fan base and a legion of related products. Once they’ve reported (today) can then clear the decks and move more decisively into this new age? That we’ll have to see.