Will coronavirus compound the concentration of cloud computing champions?

With COVID-19 forcing more people to work and entertain themselves at home, the cloud segment has been profiting. But it is debatable as to whether these riches are being evenly spread.

Although many would presume cloud is now a mainstream concept in the business world, it still accounts for less than 5% of total IT budgets. It will of course never be 100%, but this is a remarkably low percentage for how many companies who boast about how forward-looking and innovative they actually are.

The coronavirus has not only forced a new social dynamic, but also coerced traditional organisations through digital transformation projects.

This is of course an opportunity for the cloud companies, but you have to question whether this bounty will be distributed across the market, or whether it will be concentrated at the top, extending the lead which the likes of AWS, Microsoft, Google and Alibaba have worked over the chasing peloton, featuring companies such as IBM, Rackspace and Oracle.

Will everyone benefit, or just the market leaders?

Source: Canalys

The data above suggests the cloud profits are being increasingly concentrated at the top. This data will not make a comfortable read for niche cloud companies, but there is always hope. One of COVID-19’s success stories has elected to go outside market leadership to scale its offering.

Despite poor security credentials, suspect ties to Chinese ownership and misleading statements made by the management team, Zoom is proving to be one of the bolters of 2020. Thanks to enforced work from home trends and keeping in touch with friends and family during lockdown, usage of Zoom’s video conferencing services is skyrocketing.

The more popular Zoom becomes, the more cloud capacity the business would need, and Oracle won the race to secure the popular video conferencing company as a customer. High value customers are of course very beneficial to the financial spreadsheets, but it provides more confidence for other potential customers to sign on also.

Interestingly enough, Oracle sits outside the leaders in the cloud computing segment. Most would have assumed Zoom would select one of AWS, Microsoft or Google to scale services, but in electing for Oracle perhaps this is evidence the fortunes of coerced digital transformation are being spread proportionally.

How this money is being distributed through the community is a bit unknown for the moment, though it is clear companies are being forced through a digital transformation project.

“Up to now, there has been a tendency to not be fully committed to cloud,” said Nicholas McQuire, SVP and Head of Enterprise Research at CCS Insight.

This is an issue in itself. As McQuire highlights, many companies are being forced to rush into decision making to ensure business continuity, but this might only be a short-term gain with a recession looming on the horizon.

As with every period of recession, belts are tightened as profits are protected. This can mean certain projects are cut back, or expenditure is rationalised. This could be a problem for the niche players in the cloud ecosystem, according to McQuire.

Multi-cloud will of course persist, but some companies may well sacrifice best-in-class purchases in pursuit of greater procurement value. For example, Microsoft and Google might look like very attractive cloud vendors as on top of the storage components, these companies can also offer productivity services such as desktop virtualisation.

“As a niche provider in a time of recession, you have to provide immediate business value above what is being offered elsewhere in the market,” said McQuire.

This may well prove to be a challenge for smaller players in the market, such as Rackspace or IBM, but it could prove to be an advantage for the likes of Microsoft, Google and AWS, all of which offer very broad services, across numerous business criteria. It could look very attractive to a company which is being forced through a digital transformation process at a time where profits are likely to be limited.

Interestingly enough, AWS might be a company to keep an eye on in this space. Amazon Chime, WorkDocs, and WorkSpaces are all productivity and collaboration tools offered by the company but are rarely pushed. During the most recent earnings call, they were all explicitly mentioned suggesting the productivity and collaboration could be an element of the Amazon war chest to get an upgrade during this period.

Looking at the financial statements of these companies, this is an assumption which is holding strong:

At Microsoft, Teams is a draw for decision makers on top of the Azure services, as would Dynamics, while the same could be said for Google and its G-Suite offering. The rationalisation process might help the big boys at the top of the pile, but with new companies entering the cloud space, familiarity might also help.

Companies like Oracle and Workday might enjoy success and capture newly created revenues as there are existing relationships in place with products such as Enterprise Resource Planning (ERP) and Human Capital Management (HCM). Companies who are not as cloud savvy as others already purchase this software and may well turn to their existing suppliers to help.

One final element to consider during this period is free offers.

Turning back to the Amazon earnings call, the team has said small businesses would be able to use certainly toolsets for free for a 12-month period. This is somewhat of a loss leader position to take, which will certainly be attractive to some decision makers. Major players might be able to offer such promotions due to diversity of revenue streams, bulging bank accounts and engaged investors, however niche players might be more reliant on cash moving through bank accounts.

It might not be the best way to win business, but the big players might just be able to undercut rivals at a loss and outwait the market.

More money in the cloud computing market might seem like a good thing on the surface but pay closer attention to where the money is actually going. AWS, Microsoft, Google and Alibaba have already worked a considerable lead over the chasing peloton of less successful cloud companies, though this could be extended if the fortunes are disproportionately directed towards the top.

Some might say this is due to tactical as opposed to strategic expenditure during a period where time is a luxury few decisions makers have when rapidly undertaking a digital transformation programme, but with the risk of supplier rationalisation on the horizon, it might not get any easier for the niche cloud players.