Joe Weinman, senior vice president at Telx and author of Cloudonomics: The Business Value of Cloud Computing, once declared that the growth of the cloud was "creating wealth for those who exploit it, and leading to the demise of those who don't."
That quote encapsulates the virtual land grab in cloud computing, where tech giants such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and IBM (NYSE:IBM) are expanding beyond their core businesses.
But for many investors, the cloud can seem like an opaque business filled with confusing jargon. In this article, I'll cut through that jargon and highlight key areas on which investors should focus.
The business of cloud services
Amazon, Google, Microsoft, and IBM are all focused on growing their "cloud as a service" revenue, which comes from services provided to customers over the Internet. The three types of cloud services are Software as a Service, or SaaS; Platform as a Service, or PaaS; and Infrastructure as a Service, or IaaS.
SaaS solutions are designed for easy use by mainstream consumers. Examples include productivity suites such as Office 365 and Google Apps, customer relationship management platforms including Microsoft's Dynamics CRM, cloud storage solutions like Google Drive, and video conferencing solutions such as Microsoft's Skype.
PaaS solutions -- for example, Google App Engine, IBM's Bluemix, Amazon Web Services, and Microsoft's Azure -- provide developers with a framework for creating software applications. They also allow information-technology administrators to remotely manage operating systems, servers, networking, and other computing infrastructure.
IaaS platforms, such as Google's Compute Engine, offer "self-service" models for remotely accessing and managing data center infrastructures. This allows customers to tap computing services, like storage and processing power, from "virtual data centers." Bluemix, AWS, and Azure are notably both PaaS and IaaS platforms, since they straddle both with scalable all-in-one solutions.
Follow the money
Amazon, Google, Microsoft, and IBM all have different reasons for pursuing growth in cloud services. Amazon can diversify its top line away from e-commerce and use the cloud to support its digital media ecosystem. Google can connect its SaaS platforms to its massive search and software ecosystem. Microsoft can expand beyond Windows, while IBM can find a way to grow its revenue, which has fallen for 12 consecutive quarters.
Cloud revenue only accounts for single-digit percentages of annual revenue at all four companies, but the units are all posting double or triple-digit annual sales growth. Last quarter, revenue at Amazon Web Services' cloud unit rose 49% year over year to $1.57 billion, with an annual run rate of $6 billion.
Google has never disclosed how much revenue its cloud services generate, but research firm TBR estimates the business produced just $1.6 billion last year. IBM's trailing 12-month cloud revenue rose 60% annually to $7.7 billion last quarter, but its cloud as a service business only had an annual run rate of $3.8 billion.
Microsoft's total cloud revenue rose 106% year over year last quarter, with an annual run rate of $6.3 billion. The company's cloud business is larger than Amazon's, but most of that revenue comes from SaaS offerings such as Office 365 and Dynamics CRM. Amazon Web Services competes directly against Azure, which is a much smaller business for Microsoft. Deutsche Bank estimates Azure only generates between $500 million and $700 million in annual revenue.
Hybrid cloud solutions
While the spotlight usually shines on cloud as a service solutions, investors shouldn't overlook the growth of "hybrid cloud" solutions. Hybrid cloud solutions help businesses manage some of their resources locally (the "private cloud") while depending on external cloud services (the "public cloud") for others. For example, a company can keep recent customer data on the private cloud, but upload archived data to the public cloud.
This approach is attractive to older and larger businesses that aren't ready to send all their data to the cloud. Research firm Gartner estimates that nearly half of all large enterprises will install hybrid cloud solutions by the end of 2017.
To tap into that market, Microsoft teamed up with IBM and Accenture to offer hybrid cloud solutions for large businesses, which partially connects them to public cloud services such as Bluemix and Azure. Last year, Amazon started integrating AWS with AT&T and Verizon's private clouds to create hybrid solutions for large businesses. In January, Google announced a deal with enterprise cloud company VMware to launch a new hybrid cloud platform. These partnerships could help large enterprises more rapidly migrate to the public cloud.
Research firm IDC forecasts that public IT cloud services spending will surge from $56.6 billion in 2014 to over $127 billion in 2018, resulting in a stage of "critical innovation." As that battle heats up, the weight of cloud businesses on Amazon, Google, Microsoft, and IBM's top lines will increase, and they'll likely swallow up smaller "pure-play" competitors to consolidate the market and keep growing.