This analysis is by Bloomberg Intelligence Analyst Senior Industry Analyst Anurag Rana and Bloomberg Intelligence Associate Analyst Andrew Girard. It appeared first on the Bloomberg Terminal.
The next phase of public-cloud services growth may be propelled by companies shifting more on-premise IT infrastructure to the cloud vs. the previous priority of spending on applications. In both categories, we believe the top 2-3 providers could gain market share from smaller rivals, driven by scale, greater security, low upfront cost and better functionalities.
Cloud is about 22% of total tech spending
Despite the hype, cloud accounts for only about 22% of total IT spending, even after being championed by companies such as Salesforce (in applications) for over 20 years and Amazon Web Services (in infrastructure) for around 15 years. In 2021, total cloud spending was $418 billion vs. IT spending of $1.9 trillion. Though IT spending rose from $1.3 trillion in 2016, growing 8.9% annually, public cloud increased from $118 billion, up an average of 29% a year.
New workloads and startups have historically been key drivers for public cloud, but we believe the next big growth phase could be from legacy enterprises. This move has more of an adverse effect on hardware spending, as companies buy fewer servers and storage products.
Spending on public cloud could exceed $1 trillion
The shift from on-premise infrastructure and applications is the primary driver of revenue growth in the technology industry, yet this expansion could soften until at least 2H23 given a deteriorating economy. The market for public cloud, which includes infrastructure and applications, may reach $1.1 trillion by 2026 from $418 billion in 2021, increasing 21% annually, IDC data show.
For most enterprises, public cloud provides a lower total cost of ownership of their IT assets, greater scalability, more agility and little to no maintenance. In cloud infrastructure, enterprises can focus on building higher-value applications and leave the lower-end infrastructure work to cloud providers. These two can become greater catalysts to shift to the cloud as elevated economic uncertainty persists.
SaaS accounts for 63% of total cloud spending
Software-as-a-Service (SaaS), or cloud-based applications, accounted for 63% of total cloud spending in 2021, largely because these services were first to shift to a multi-tenant shared model from an on-premise environment. Salesforce, founded in 1999, was key in championing this trend. Now, with the market maturing, its growth rate has slowed vs. the cloud-based infrastructure market. In 2017, SaaS made up 74% of total cloud and grew 34%, while sales of cloud-based infrastructure — Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) — climbed 39%.
Microsoft, Amazon lead with double-digit shares
Microsoft and Amazon lead the total cloud market with a combined 30% share, with the former gaining an edge with its Microsoft 365 suite and above-market cloud-infrastructure product growth. While Amazon generates over 95% of its cloud sales from cloud-based infrastructure products, Microsoft’s cloud sales are split more evenly between applications (57%) and infrastructure (43%). By comparison, about 76% of Salesforce’s total cloud sales comes from applications, and this figure may rise with the addition of Slack. Google, Oracle and SAP are the other main cloud providers by market share.
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