Cloud Computing – renting instead of (self-)making

In retrospect, 2006 was a decisive year for online retailing: the industry giant Amazon opened up its IT infrastructure, which until then had been used exclusively by itself, to other retailers and companies as a service. These "Amazon Web Services" include a broad range of different technical solutions that can be booked and cancelled according to individual needs. „Cloud computing" developed from this. In the following analysis, investors will learn about the complexity behind it, the opportunities that arise from it and which companies currently dominate the market.

By Mike Glöckler, Technology Sector Analyst at DJE Kapital AG

Today's globally active online mail order company Amazon, which once started out as a pure online bookseller, has been able to develop into the world's largest eCommerce platform within just a few years thanks to a greatly expanded range of products including additional product categories. In order to successfully operate a website that receives millions of enquiries every day, a complex IT infrastructure with all kinds of technology components is required. The Amazon team came up with the idea of building a common infrastructure and giving each internal development team access to the same infrastructure through a "virtualisation layer". This way, all developers could use the infrastructure components as a kind of provided "service" (for example, data storage, computing power, database service, etc.).

Cloud instead of do it yourself

In 2003, management came up with the idea of making the complex IT infrastructure that Amazon operated for one of the world's largest websites available to other companies. After numerous revisions, the "Amazon Web Services" (AWS) division was finally established, which went online in 2006 with the first "Cloud Services" for corporate customers. The newly offered services for storage, computing and soon also databases were an immediate success in the developer world. Start-ups in particular were able to implement their ideas quickly, directly and cost-effectively without having to make large investments. But the advantage of large companies to maintain the necessary expensive infrastructure also melted away. By 2010, AWS was able to build and expand the cloud computing market without competition.

The major cloud providers in the market

In 2010, Microsoft finally launched its "Azure" platform and entered into competition with AWS. This was followed in the coming years by Alibaba, Google, IBM and Oracle, among others, to name just the biggest. All of them were initially far inferior to AWS in technical terms, so that AWS had a head start of about six to seven years until serious competition developed with Microsoft Azure. Microsoft Azure has outperformed AWS in percentage terms in subsequent years, starting from a significantly lower revenue base, with AWS often generating significantly more absolute new business than Azure in every quarter from the start of cloud computing until today. This means that in absolute terms, AWS's overall market size has moved further and further away from the competition. In percentage terms, AWS has kept its market share stable in the range of about 35 to 40 per cent of the global cloud computing market for several years. Microsoft Azure follows with about 20 to 25 percent. Google Cloud comes next with about ten to 15 per cent, followed by various other competitors. AWS (Amazon's "cash cow") and Microsoft Azure are highly profitable, while Google is still losing a lot of money with its cloud offering. All three cloud providers also fall under the term "hyperscalers", i.e. the largest scaling cloud providers with the widest range of cloud services. AWS started with three services and now offers more than 200 different services. In terms of breadth and depth of offerings, AWS continues to be the technical leader. However, Microsoft's long-standing relationship with enterprise customers makes it easier for them to build on existing business relationships. Both companies are now well represented in the enterprise space, with Microsoft still likely to have a customer relationship advantage.Wie können Unternehmen die Cloud einsetzen?

With cloud computing, companies can use various IT technologies, "rent" or "book" them, as it were, without having to worry about setting up and operating the infrastructure. This infrastructure layer is also referred to as "Infrastructure as a Service" (IaaS for short), i.e. infrastructure offered as a service. Companies can thus select and activate the technologies they need at the push of a button and thus get a complete infrastructure environment up and running within minutes to hours. With the traditional way of working in companies, this provision of infrastructure often took several weeks to months. You had to think about which infrastructure components you needed, calculate the budget for them and apply for them. After approval, the order had to be placed and after a longer delivery time, the infrastructure (server, databases, firewall, etc.) had to be set up and installed. Nowadays, you can get all this with cloud providers at the push of a button. In theory, you can book as much as you want (and where in the world you want) - and pay the corresponding prices for the infrastructure services (also called cloud services) for the time booked. Conversely - if less is needed - you can simply cancel the service again and pay nothing more for it. There are a variety of booking models, so that one can flexibly switch the cloud services on and off at any time or also book a longer period in advance, the latter including a price discount.

This gained flexibility enables companies to try out and develop new developments in the IT sector much more quickly and - when no longer needed - to quickly discontinue them.

This flexibility and speed are the technical basis for being able to drive innovations in all areas many times faster and more efficiently. Cloud computing not only accelerates IT development cycles through the immediate provision of resources and computing power, but new technologies in particular are also provided in cloud computing. In addition to infrastructure as a service (IaaS), cloud computing also offers the so-called "Platform as a Setvice" (PaaS). Here, basic IT functionalities are provided on demand. These include, for example, the analytical evaluation of data, development tools, migration tools (to transform so-called workloads into the cloud), Internet of Things, securing the cloud components with security solutions and development environments for artificial intelligence (AI).  With Software as a Service (SaaS), complete application/software solutions are offered in the cloud. There are many well-known names there, such as Salesforce, Adobe, SAP or Microsoft Office 365. SaaS usually allows the providers a higher margin than the traditional local installation model and is undoubtedly a huge market - and the cloud platform providers (Amazon, Microsoft, Google and others) also earn money here, as the SaaS providers usually do not build their own cloud platform, but use those of the so-called hyperscalers.

The iPhone moment of artificial intelligence

It is precisely the AI field mentioned above that is currently receiving the most attention in the media and the corporate world - through ChatGPT (Generative Pre-trained Transformer). There is currently talk of the "iPhone moment" of artificial intelligence. This refers to the point at which AI has made the breakthrough to market maturity and the growth of functioning, meaningful solutions will increase strongly (possibly exponentially) - and thus can also spur economic growth in a wide variety of areas.

The topic of AI has functionally arrived at the end user and will potentially trigger an investment boom in the IT industry that will last for years. Amazon and especially Google have always been considered strongly positioned in the AI field. Microsoft was rather less known there, even though the group had already been working intensively in this area for years. The strategic partnership and an investment of ten billion US dollars in Open AI has given Microsoft a decent push forward in the field of AI. Similar to the Californian gold rush, where it was mainly the providers of the tools for gold prospecting and mining who earned from the boom in gold prospecting, it could also play out in the broad application of AI worldwide. Some of the best tool choices are with the three largest cloud providers. Of course, there are other winners and companies that are excellently positioned for AI, such as chipmaker NVIDIA, which has been known for its AI chips for many years.

The market development of cloud computing

The three major hyperscalers AWS, Microsoft Azure and Google Cloud represent more than 70 per cent of the cloud computing (IaaS and PaaS) market. There are large gaps between the top three providers when market shares are measured in terms of revenue. The growth rates of the entire cloud computing market have averaged around 20 to 25 percent over the last ten years. Due to the size achieved and also the current global economic slowdown, average annual growth is expected to be around 17 percent in the next few years. With the current cloud computing (includes IaaS, PaaS and SaaS) market size at the end of 2022 of $545 billion, this means a doubling by 2027 to approximately $1,200 billion. IaaS and PaaS together account for about 55 per cent and SaaS for about 45 per cent of the market, with growth forecast to be stronger for IaaS and PaaS. The market will most likely continue to be dominated by these three hyperscalers.

However, the economic slowdown is also being felt by the large cloud computing providers: this is weighing on their share price performance. Companies currently have to cut costs due to the more uncertain economic times. But this is precisely another advantage of the flexible cloud computing model, because services and capacities can be adapted dynamically - a long-term advantage for the cloud providers, as companies now clearly recognise this advantage over traditional IT. This realisation should additionally lead to decisions to move IT solutions to the cloud.

Good growth prospects - special boom not ruled out

The global IT market (incl. cloud) is growing at around five to ten per cent per year, and the greater part of IT spending is still accounted for by traditional IT. Various analyses and statistics assume that currently probably only 25 to 30 percent of the possible shifts to the cloud have been completed. New workloads are often set up right there because of the advantages in the cloud. Therefore, a long-lasting growth in cloud computing is likely to be assured. At the same time, it can be assumed that growth will weaken slightly in the long term, with fluctuations in percentage terms. Nevertheless, this is also not a definite statement, which can be observed in the currently potentially triggered AI boom. Should this turn out to be even more significant than currently assumed, such a technological quantum leap could trigger a boom for technology platform providers for possibly several years.


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