Public cloud has experienced almost a decade of 30%-plus growth. Even amid pandemic budget-tightening, the public cloud market accelerated, with many enterprises crediting their speedy adaptation to public cloud platforms. In the years ahead, however, growth will be tougher, with or without a recession. Why? As competition among the four biggest public cloud providers intensifies, they are compelled to make massive investments in analytics, AI/ML, and other differentiated premium services to stay in the top tier, while burdened by the costs of increasingly commodified infrastructure. But tougher competition doesn’t mean slowed market growth is on the horizon. The market will continue to growth at a similar 20%-plus rate. Forrester estimates that the market will more than double from $446.4 billion in 2022 to cross the $1 trillion mark by 2026. To explore this future, Forrester just refreshed our report, The Public Cloud Market Outlook, 2022 To 2026. A few other key takeaways from this research include the following:
- Major cloud players maintain appearances. On a quarter-by-quarter basis, poor decisions or suboptimal execution will make a major difference when cloud revenues account for a critical share of their parent companies’ revenue. AWS, for example, has been responsible for keeping Amazon in the black in recent quarters. Google Cloud parent Alphabet is allowing the operation to pile up hundreds of millions in operating losses each quarter as the price of revenue growth. Microsoft does not break out Azure revenue separately, so there’s no way outsiders know whether it is profitable in any conventional sense, even as Azure very slowly closes the distance with AWS for market share.
- The forecast is aligned by service category, not the classic -as-a-service buckets. If the last bullet seems like interesting tidbits for investors but not relevant for customers, take a closer look at Outlook’s revenue breakdowns. The report’s updated methodology moves away from the “as a service” model — an artifact of the lift-and-shift era of early cloud — to a focus on cloud infrastructure services, cloud database and analytics services, cloud development services, and cloud applications. The latter category encompasses SaaS and applications consumed in a similar manner. This framework allows for a mix of managed services and customer-operated infrastructure and applications that typically comprise the enterprise-class cloud IT estate. Cloud customers who can distinguish between the essential services and the so-so ones can save serious money, especially in multicloud environments.
- Data and analytics is the hottest contest. By taking a service-type approach to cloud market analysis, Outlook highlights why the competition — and faster growth rates — will be concentrated in particular areas. The hottest contest is data and analytics, big-ticket services that cloud providers hope will win them a following beyond the traditional IT operations to reach data scientists and analysts. At the same time, however, the hyperscalers must grind away at breaking ground, pouring concrete and stacking racks in data centers worldwide to absorb the workloads that have yet to come toward cloud.
- Cloud infrastructure is a major share of revenue, not profit. Cloud infrastructure, too, is an arena for differentiation, particularly around instance types on lower-cost ARM chips and purpose-built hardware for security, AI/ML, and more. Yet the enormous capital investments required to compete at this level means that just four companies — Alibaba, AWS, Google, and Microsoft — appear in the market share chart. The rest have effectively abandoned the effort to catch up, even if their marketing messages claim otherwise. Meanwhile, core cloud infrastructure is increasingly standardized on the open source Kubernetes project, driving the hyperscalers to innovate higher up the stack. Core infrastructure will continue to account for a major share of cloud revenue — but it is less a source of profit than a means to capture customers and move them to higher-priced services.
- Market saturation slows cloud application growth. The market for cloud applications — a category dominated by non-hyperscalers who lead in SaaS — will see a slower rate of growth due to market saturation, especially for areas such as HR or customer resource management. But that more moderate pace of market expansion won’t stop public cloud giants from pushing their way into market segments dominated by SaaS players. Hungry for revenue to feed their expansions, the hyperscalers will tolerate, if not embrace, ecosystems of partners that can help them create industry clouds to compete with customizable SaaS platforms. And if the hyperscalers can’t beat the SaaS providers, they’ll join them by acting as hosts for digital operations platforms such as enterprise resource planning.
So while the public-cloud growth curve bends up toward the $1 trillion threshold, the path won’t be smooth given the high-stakes competition. Add geopolitical tensions, war, and economic challenges to the mix, and the future appears rather fraught. Certainly, the public cloud market will consolidate its dominance of IT by 2026. But getting there will be quite a ride.