August 17, 2020 UW Finance Association Cloud Computing Industry Primer Market Research Research and Education Cloud Computing Industry Primer All amounts in $US unless otherwise stated. Author(s): What is Cloud Computing? Rohit Dabke, Kevin Hsieh and Ethan McTavish According to the National Institution of Standards and Research Analysts Technology (NIST), Cloud Computing is defined as a model for Editor(s): enabling network access to a shared pool of configurable John Derraugh and Brent Huang computing resources that can be rapidly provisioned. In more Co-VPs of Research and Education layman terms, Cloud Computing is the delivery of different computing resources on demand via the Internet. These computing resources include network, servers, storage, applications, and other services which users can ‘rent’ from the service provider at a cost, without having to worry about maintaining the infrastructure. As long as an electronic device has access to the web, it has access to the service provided. In the long run, people and businesses can save on cost and increase productivity, efficiency, and security. • Exhibit 1: See below the advantages and features of cloud computing. In general, cloud computing can be broken down into three major categories of service models: Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). Infrastructure as a Service (IaaS) IaaS involves the cloud service provider supplying on-demand infrastructure components such as networking, servers, and storage. The customer will be responsible for establishing its own platform and applications but can rely on the provider to maintain the background infrastructure. August 17, 2020 1 UW Finance Association Cloud Computing Industry Primer Major IaaS providers include Microsoft (Microsoft Azure), Amazon (Amazon Web Service), IBM (IBM Cloud), Alibaba Cloud, and Alphabet (Google Cloud). Platform as a Service (PaaS) PaaS builds upon IaaS and includes the delivery of an established platform (i.e. the underlying language, library, tools, etc.) to the customer. The customer can utilize these tools to develop, manage, and host its own applications. Most IaaS providers listed in the above section also provide PaaS. Software as a Service (SaaS) SaaS is the on-demand delivery of software applications by the service provider to the customer. Instead of installing the software locally, customers can simply access the software application via the Internet. Examples of such software include services such as Gmail, Office365, CRM and ERP solutions, etc. Major SaaS companies include: Salesforce, SAP, Oracle, in addition to previous examples mentioned. Industry Summary Cloud Computing is an industry that has come to relevancy over the past decade as businesses and individuals alike began the transition from investing in proprietary hardware such as servers and storage, to simply paying a service provider who will store and maintain information remotely. Even though the industry has already experienced tremendous growth, it is still expected to continue this upwards trend. An estimated $229 billion dollar industry as of 2019, the subsector is expected to double this number to around $500 billion in 2023, with a compound annual growth rate (CAGR) of 22.3% according to eSP (European Solution Providers). Of the three broad types of cloud computing, SaaS is the largest category, accounting for 57.1% of the total industry value as of 2019. IaaS follows as the second largest category of spending, and it is also anticipated to experience the highest growth, with an estimated five-year CAGR of 32.0%. PaaS is also estimated to experience a similar level of growth, with an estimated five-year CAGR of 29.9%. In terms of geography, the United States is the predominant market for cloud computing, accounting for 55.5% of the global cloud industry. 5 Forces Analysis Rivalry Although there is great competition amongst competitors, the industry has experienced rapid growth over the past few years, and there exists many small players in different niches that are able to compete against larger players, reducing the degree of rivalry to a moderate level. Buyer power Buyers of cloud services range from individuals and small companies to large global conglomerates or even government bodies, and thus the level of buyer power will vary. Of course, larger buyers tend to have more financial leverage and the ability to influence prices, while smaller buyers may not have that privilege. The industry often employs a pay-as-you-go format that charges based on usage, wherein August 17, 2020 2 UW Finance Association Cloud Computing Industry Primer customers can terminate their contract without too much difficulty. In general, customers have a moderate level of buyer power. Supplier power As with the case of modern technology companies, a major “supplier” of cloud computing companies is skilled workers who possess necessary technological expertise to help a company develop its products. There is a high demand for these skilled workers among the industry, and top cloud developers usually command lucrative compensation. Other sources of input for cloud computing companies include hardware and raw material. In terms of raw material, IaaS providers require specialized material such as silicon, which is a highly specialized industry in its own right. Thus, major silicon suppliers enjoy a great degree of supplier power. Hardware/hardware component suppliers similarly have high supplier power as these respective industries have limited players. The overall supplier power of the cloud computing industry is strong. New Entrants There is definitely potential for small scale companies to enter the cloud computing industry and survive if they are able to find particular niches and provide specific services, for instance, healthcare or finance related solutions. However, financial resources are required to scale the business to a higher level, which gives larger companies greater advantage. In addition, regulation is dependent on the type of service provided. Financial service providers are subject to higher regulation than the typical cloud service provider. In general, the potential of new entrants in the industry is average. Substitutes Cloud computing is technically speaking a substitute for traditional IT software/systems that are hosted or installed internally within a company, so companies do have the option to revert to or stick with existing systems depending on a variety of reasons. However, the cloud computing industry experienced massive growth over the past decade precisely because cloud services offer key advantages over traditional IT systems. For one, employing cloud services can reduce capital expenditure by a considerable amount compared to maintaining and upgrading a company’s own hardware. Additionally, cloud software services are more accessible and flexible in the modern day compared to locally installed software. The only concern with choosing cloud computing over traditional infrastructure is the issue of security. Wherein a company will choose to store sensitive data and information in internal databases, rather than risk exposing it via a potentially insecure network. Overall, the threat of substitutes is low. Main Players There are numerous companies in the cloud computing space including small-cap companies to large, some specializing in specific sectors such as healthcare or the restaurant industry, etc. Nevertheless, the industry is largely dominated by tech giants including: • Alibaba (Alibaba Cloud) • Alphabet (Google Cloud) • Amazon (Amazon Web Service) • IBM (IBM Cloud) • Microsoft (Microsoft Azure) August 17, 2020 3 UW Finance Association Cloud Computing Industry Primer • Oracle (Oracle Cloud) • Salesforce • Exhibit 2: See below the market share of largest cloud computing segment SaaS, and the smaller two, IaaS and PaaS in 2019. Source: Synergy Research Group August 17, 2020 4 UW Finance Association Cloud Computing Industry Primer AliBaBa (NYSE:BABA) Alibaba Group Holding Limited provides online and mobile commerce business internationally. The company operates through four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others. Its Cloud Computing segment, $702,227M predominately Alibaba Cloud was founded in 2009 and accounts for Market Capitalization 6.6% of its LTM total revenue. Alibaba is the largest cloud computing (July 13, 2020) company in China which has grown its market share through a joint $72,853M venture with SoftBank and partnered with SK Holdings in 2016. Its LTM Total Revenue Cloud Computing segment provides SaaS, IaaS, and PaaS. This includes (March 31, 2020) storage, big data analytics, and machine learning platforms. The company was founded in 1999 and is based in Hangzhou, China. AlphaBet (NASDAQ:GOOG) Alphabet Inc. provides online advertising services, digital content, and cloud services internationally, through Google. Among numerous products including: Android, Chrome, and YouTube, its cloud $1,060,000M computing product, Google Cloud was launched in 2008 and accounts Market Capitalization (July 13, 2020) for 5.5% of its LTM total revenue. The company acquired several competitors to grow its cloud business including bebop, Orbitera, $166,677M Apigee and Looker all between 2015-2019. Through Google Cloud it LTM Total Revenue (March 31, 2020) provides IaaS, and PaaS, which includes data storage, data analytics, and machine learning. The company was founded in 1998