The cloud is poised for rapid growth in the the business world. A growing number of companies are swapping traditional IT systems for affordable cloud-computing services to improve efficiency. Aware of the cloud market's huge potential, tech giant Cisco Systems (NASDAQ:CSCO) is looking forward to offering a new cloud service. The networking company plans to spend $1 billion on this project over the next two years, called Cisco Cloud Services.
At first glance, Cisco's new venture could be regarded as yet another cloud service. However, the service that Cisco plans to provide is well-differentiated. The company plans to use OpenStack technology -- an open-source cloud-computing platform for private and public clouds -- to create a global intercloud, which is a network of clouds designed for high-value application workloads. Cisco will likely employ an infrastructure as a service, or IaaS, model. The company has already partnered with Telstra, Australia's largest telecom, and other organizations. However, Cisco could face strong competition from Amazon.com (NASDAQ:AMZN), which started offering online services through its cloud platform -- Amazon Web Services -- in 2006. How does Cisco plan to win the cloud computing industry?
It's all about differentiation
The key benefit to Cisco Cloud Services is that it would allow customers to hold and manage a variety of clouds in a single platform. This would be especially useful for companies with large, fast-paced, growing needs for data processing and storage, which might experience difficulties relying on just one cloud. As fellow Fool contributor Joseph Gacinga recently pointed out, several Internet giants such as Best Buy and PayPal have used the OpenStack technology before, and have gotten quite positive results. By using OpenStack, Cisco could successfully enter the market by targeting needs that leading cloud companies currently overlook.
A way to cross-sell the Internet of Things
Cisco plans to sell its cloud service to other companies that will later resell it through a bigger package. The company will likely use its new cloud service to move forward with its Internet of Things project, which aims to bring together data, processes, and people to enhance an organization's efficiency and performance.
In its most recent quarter, Cisco's revenue came in at $11.2 billion, down 8% year-over-year, enough to surpass the Street's revenue expectations. Moreover, its cash dividend increased to $0.19 per common share, up by $0.02 from the former quarter.
Regarding the future, the company's new cloud service has great growth potential. According to a forecast by research firm Gartner, cloud computing will take the majority of IT spending by 2016. Another research firm, IDC, estimated that worldwide spending on public IT cloud services might exceed $107 billion by 2017, with IaaS becoming one of the fastest growing categories, experiencing a compounded average growth rate of 27.2%. Certainly, there is a bright future ahead, yet Cisco will have to face competition from another great tech company, Amazon.com.
Amazon is a serious competitor
Amazon.com is a pioneer in cloud services, and it is already a well-established, respectable brand in the industry. Amazon Web Services is distinguished by its S3 (data storage) and EC2 (resizable compute capacity) services in the cloud. Note that, after several years of losses, the company has recently performed well, in financial terms. In 2013, revenue came in at $74.5 billion, representing a 22% annual increase. Moreover, its net income was $274 million, reversing its 2012 net loss of $39 million.
As the Wall Street Journal reported, estimates show that Amazon Web Services could be generating $3 billion or more in annual revenue. Simply put, the cloud service is a strong asset for the company. Even if Cisco offers a different service, it might face a difficult time entering the cloud service market due to the aggressive price strategies that Amazon.com uses to market its cloud server farm.
Final Foolish takeaway
Cisco plans to offer a differentiated cloud service. Using OpenStack technology, Cisco Cloud Service will allow customers to access data and run their businesses through different clouds. The move seems to be part of the company's Internet of Things project, which aims to connect data, processes, and people to improve efficiency and performance in any business. Note that there is a strong competitor in the market; Amazon is a cloud computing pioneer, able to put pressure on competitors through aggressive price reductions. That being said, Cisco could use OpenStack and its strong brand to enter the market successfully.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cisco Systems. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.