Could Market Fears Be Turning the Tide against the Public Cloud Business Model?

The public cloud model has shown tremendous growth since Amazon launched Elastic Compute Cloud in 2006. Since, then the public cloud compute market (with the other key players Alibaba, Google Cloud Platform (GCP), and Azure) has exhibited market leading Year-over-Year (YoY) revenue growth well in excess of 25%. Public cloud providers follow a platform business model that creates value by enabling interaction between various players and leveraging the network effect to deliver value-add services to a wide range of consumers. It provides compute/storage resources at scale at a fairly low cost to support enterprise digitalization. Their model is high volume with a fairly low margin and has shown revolutionary performance to date.

However, in 2Q 2022, each of these major players has shown a slowdown in cloud compute revenue growth. Notably, Amazon Web Services’ (AWS) growth slowed from 37% in 1Q 2022 to 33% in 2Q 2022. Although limited and accompanied by explanations from company executives highlighting that this is the result of wider macroeconomic trends, ABI Research believes that this may be a sign that their “public cloud” model is showing small cracks driven by wider market sentiments, as well as macroeconomic headwinds. This comes at a time when public cloud providers are being increasingly scrutinized by public bodies. GCP was recently fined €2.42 billion by the European Commission for breaching European Union (EU) antitrust rules. Ofcom recently launched a probe into the market to examine the position of AWS, Microsoft, and Google in the United Kingdom’s cloud service market. This is not unexpected given the oligopolistic public cloud model, but if competition concerns are uncovered, it could lead to even further global examination.

Increasingly, market sentiments are shifting against the once “omnipotent” public cloud model. Below, ABI Research explains some commercial and operational factors that could explain this growing public cloud skepticism:

• Security/Data Sovereignty Concerns: Europe has shown its data sovereignty hand, stating that any data collected in the EU must be processed and stored within the region, while the United States is shifting toward rules governing data location. These, among ongoing security concerns, are hindering the economic and operational case for the public cloud. Private cloud usage provides much greater regional control and allows companies to implement their own security measures.
• Spiraling Costs: Public cloud usage is proving most expensive and given the amount of data created, the economic case is struggling to keep up. This is especially true given the risk of vendor lock-in to a particular hyperscaler and the huge cost that moving away would bring. Simply running compute and storage in the public cloud is no longer as economically astute as it used to be. These costs will increase considerably as new use case emerge that require more expensive compute facilities and more data are created.
• Multi-Cloud Applications Necessity: Enterprises and Communication Service Providers (CSPs) require applications/services from all cloud providers and given the current lack of interoperability, these players can no longer support ambitious Information Technology (IT) operations.
• Edge Compute Applications: Simply put, centralized cloud compute and storage is increasingly not serving the requirements of enterprise use cases. Lower latency and greater control are required in many of the data-intensive verticals that are associated closely with industry 4.0.
• Increasing Networking Costs: More and more data are being created that need processing and storage, which has supplementary networking costs when using the public cloud. By leveraging a higher proportion of local private cloud compute, enterprises and CSPs can significantly reduce networking costs, while reducing carbon emissions, which will have substantial benefits down the road.

Compute and storage versality, resiliency, and customizability are some of the key factors that are pushing market sentiment away from the public cloud, in favor of private, multi, or hybrid cloud models with a greater reliance on on-premises deployments. This market sentiment is already obvious from telecommunications operators as they look to deploy their 5G core in the cloud. Many have highlighted that they will not be deploying in the public cloud, citing security and lock-in concerns. At most, some will use the public cloud for low-margin, low-risk back-office data functions, such as Business Support Systems (BSS)/Operations Support Systems (OSS).

This skepticism will present an opportunity for the interconnection provider business model to flourish. Interconnection providers (e.g., Equinix, Console Connect, and Megaport) can bridge the gap between enterprises, CSPs, and required cloud compute and storage by providing a range of services to customers, enabling portfolio extension and an opportunity to connect with public cloud services and other carrier networks. This network interconnection point can also provide colocation space with significant private cloud server deployment availability. The true value proposition of an interconnection provider is its simplicity, customizability, and application accessibility; for telcos, this enables them to deliver complete end-to-end solutions at scale and speed, while ensuring that security and sovereignty are not compromised.

But let’s not jump too far ahead, the hyperscalers are not foolish, and they will be ready to deploy new services to leverage their cloud expertise to continue to grow. This process is already obvious as they look to partner with telcos to capture the growing value at the network edge. From ABI Research’s perspective, the hyperscaler model will not crack, but mold into something that more closely reflects changing market sentiments. Certain key areas will help public cloud providers align more closely with expectations and continue to dominate the cloud compute and storage market in the face of economic and market sentiment headwinds:

• Reduce, or even eliminate, egress fees
• Drive standardization and public cloud interconnectivity
• Simplify operations and lower barriers to transition
• Work with clients to optimize cloud operations and lower operational costs
• Investment in local cloud operations with data sovereignty regulation compliance guarantees
• Focus “go-to-market” strategy on attracting customer back-office operation cloud migration, e.g., running OSS/BSS in the public cloud
• Invest in network edge and heterogenous compute to capture more complex, cross-vertical use cases