Cloud Spending Dominated By SaaS In The Years Ahead

November 10, 2014 Timothy Prickett Morgan

There are three different levels to this public cloud racket: infrastructure, platform, and software, or what are commonly abbreviated as IaaS, PaaS, and SaaS. The higher up you go, the further you are away from the virtual iron. Oddly enough–or perhaps not at all if you think about it for a second–the distribution of revenues for future cloud acquisitions is very roughly mirroring the distribution of spending on systems and storage, middleware and databases, and application software in the industry at large.

This is not something that IDC mentioned in its recent prognostications about the cloud market, but I noticed the distribution looks somewhat familiar. Datacenter hardware spending is roughly half that of enterprise software spending. While raw infrastructure clouds are projected to be around $20 billion in 2018, or about 16 percent of total cloud spending, and platform cloud revenues are going to be around $25 billion, the remaining $100 billion plus in revenues will come from SaaS products. The markets for all three slices of cloud are expected to roughly triple between 2014 and 2018, according to the IDC data, with the relative sizes of each slice of the business remaining roughly the same, as you can see:

PaaS and cloud storage are growing a little faster than IaaS and SaaS in general, according to IDC.

I know what you are thinking. That distribution of public cloud revenues doesn’t look anything like the distribution of hardware and software sales in the IT market at large. But, you have to realize that the PaaS revenues imply and include a certain underlying IaaS cost, and further up the cloud stack, the SaaS revenues imply and include a certain underlying IaaS and PaaS cost. The trick would be to figure out precisely how much, and find out if SaaS really does result in more shared licensing of underlying system software and better utilization of shared hardware and therefore less revenues. I think this is probably the case, and it would be fun to prove.

“Over the next four to five years, IDC expects the community of developers to triple and to create a ten-fold increase in the number of new cloud-based solutions,” said Frank Gens, chief analyst at IDC, referring to the public cloud study the company just released. “Many of these solutions will become more strategic than traditional IT has ever been. At the same time, there will be unprecedented competition and consolidation among the leading cloud providers. This combination of explosive innovation and intense competition will make the next several years a pivotal period for current and aspiring IT market leaders.”

The other important thing to realize as well is that the public cloud market is growing at a compound annual growth rate of 22.8 percent, which is six times the growth rate expected for the overall IT market over that same time. It is likely that if you take cloud revenues out of the mix, then on-premises IT is not going to grow very fast. The growth in public cloud IT services, says IDC, will account for more than half of the growth in spending for software, servers, and storage.