Industry Analysis: Cloud Computing

  • Define the industry – Cloud computing

In 2021, the global cloud computing market was valued at 368 billion USD. It is expected to grow at a rate of 15% from 2022 to 2030. During the COVID-19 pandemic, the need for cloud computing has grown as businesses and employees work from home and use different online computer systems to manage their business and bring down costs (Techradar, 2022). Cloud computing is not a new technology and has been around for decades. In simple terms, cloud computing means that computing services such as servers and storage are offered over the internet (“the cloud”). Traditionally, businesses needed to invest in buying hardware and software to run their data-centers, servers, and applications. With the use of cloud computing, companies can access, for example, business critical applications via the cloud without investing in data servers, electricity for power and cooling (Techradar, 2022).

  •  Introduce the actors

The cloud computing industry can be seen as very nuanced with several different vendors. But the three dominant players are Google, Amazon, and Microsoft. These three are also part of the Gartner Magic Quadrant that evaluates vendors and their capabilities.

https://www.gartner.com/en/documents/4004076

With AWS, Amazon is the leading player in this market, with a hold of over 41% of the market in 2020, more than doubles that of Microsoft. Its total revenue was around 45 billion U.S. dollars in 2020 (Statista, 2022). AWS offers a wide range of services to businesses, and they have a cloud ecosystem that lets businesses create their own IT infrastructure. It offers everything from compute, storage, analytics, developer tools, and security applications. AWS is the one that has been in the market the longest compared with other actors. They are seen as mature providers with extensive offerings.

Google is dominant in the search engine and advertising industry and has established brand recognition in the digital age. It is estimated that Google has around 30,000 paying customers that use their cloud computing services. Their strategy is built upon providing open-source innovation with a focus on developers (Techradar, 2022). They have compute services such as Kubernetes and TensorFlow that are used by developers around the world. Although they don’t reval actual revenue numbers, statistics from 2020 show Google Cloud revenue amounted to 19 billion U.S. dollars, accounting for 7.5 percent of Google’s total revenues (Statista, 2022).

Microsoft is best-known for its operating system, Windows. In recent years, it has focused more on the cloud computing industry and has launched Microsoft Azure, which offers end-to-end cloud service solutions. Their strategy is now to focus on a “cloud first” focus rather than selling copies of their operating system. Microsoft’s cloud revenue of $19.1 billion was nearly 39% of overall sales in 2020 (Statista, 2022).

  • Why the actors are competitors

According to Gartner, the cloud computing market is dominated by five vendors that account for 80% of the worldwide market. As we have described above, the cloud computing segment generated a new type of sales income for the companies listed. According to Keat and Young (2014), the meaning of competition is based on two factors: the ability of firms to control and use price as a competitive market and the ability of firms to earn above normal profit in the long run. The pricing war in the cloud computing industry among these three actors is fierce. Actors pay lower prices to obtain or keep customers with the aim of locking them into their ecosystem of services. Another factor to consider is that both Google and Microsoft were late to enter the cloud computing market, which means that AWS has the advantage of a large market share and has enjoyed the advantage of being around much longer than the other actors.

Competition analysis

  • An overall picture of the companies in the industry

The cloud computing industry can be seen as an oligopoly as a few large firms control most of the market share. With over 40% of the market share, AWS dominated this market. Following the big three, we have ten vendors with a combined market share of 18%. According to Keat and Young (2014), the oligopoly market is characterized by a small number of large firms and the products are often standardized. Their market power comes from their size or market dominance. Furthermore, when there are few sellers in the market, each seller monitors each other’s pricing carefully and watching the other to see pricing behaviors. Furthermore, in an oligopoly market, price leaders frequently establish the role of price leader by being the first to announce any price increase. (Keat & Young, 2014).

  • Potential competition analysis entrant

To look at the potential competition assessment for new entrants, we can use the Porter Five Forces analysis. In this current landscape, the big three giants have gained relative market power with the buyers. Buyers are frequently unable to easily switch between cloud computing providers or combine various hybrid models. The competitive market landscape is seen as an oligopoly, which means that there is some market attractiveness in terms of creating rival products, but in this landscape the lock-in effect of, for example, AWS is strong, so it is difficult to win over customers. For new entrants, it would require capital requirements, major spending on infrastructure (servers and storage), and a highly educated workforce. So, for new entrants, it is very difficult to enter this market and compete with the big three giants.

  • Current competition analysis incumbent

Within the big three giants mentioned above, the competition is getting fiercer to challenge AWS. The profits from this industry are huge, and the different vendors try to differentiate themselves to gain more contracts. All three actors try to update their infrastructure, software, and support on a regular basis. For buyers, the exit barrier is high once you have invested in cloud computing. All three actors try to use lock-in effects to ensure buyers are within their ecosystem services. Amazon Web Services (AWS) has been in the market longer and has more mature offerings. They also have an extensive support function for large organizations, which the other two actors lack. The product offerings of the three giants are changing, and three categories have emerged: Infrastructure as a service (Iaas), Platform as a service (Paas), and Software as a service (Saas) (Techradar, 2022). The incumbents sell all three product categories to the customers. With Infrastructure as a Service, it requires that the firm invest in servers, hardware, and storage. Here, Amazon AWS has built an extensive network around the world and thus is leading in this category. Thus, they can somehow achieve economies of scale in terms of lower server expenses (Techradar, 2022). In the future, more security aspects will be crucial to protect data from cyber-security threats, and here all three actors try to create new services around this segment.

References:

Keat & Young  Managerial Economics (2014): Economic Tools for Todays Decision Makers, 4th

Microsoft Azure (2022). What Is Cloud Computing? A Beginner’s Guide | Microsoft Azure. [online] azure.microsoft.com. Available at: https://azure.microsoft.com/en-us/overview/what-is-cloud-computing/#benefits.

Techradar. (2022). 2021 saw a major cloud spending surge. [online] TechRadar. Available at: https://www.techradar.com/news/2021-saw-a-major-cloud-spending-surge [Accessed 1 May 2022].

Statista. (n.d.). Google cloud revenue by quarter 2021. [online] Available at: https://www.statista.com/statistics/1254388/google-cloud-revenue-by-quarter/.

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