The dominance of the big three cloud services providers in the U.S. market is a standard part of the cloud storyline, but there are a few new wrinkles in the plot.
Cloud hyperscalers — AWS, Microsoft Azure and Google Cloud — own two-thirds of the U.S. IaaS market. Gartner analysis shows the AWS IaaS public cloud accounted for 40% of the market last year. Microsoft and Google account for 21% and 7%, respectively.
These megavendors can offer a buffet of tailored cloud services on their platforms, which has opened a new avenue for ascendancy.
Hyperscale cloud providers have moved from offering industry-agnostic infrastructure services to providing an array of industry-specific, vertically integrated services and are positioned to own a larger share of enterprise IT budgets, according to a new Forrester report.
Now, the choice for IT decision-makers is between locking in with a megavendor or working with a fragmented array of independent service providers for enterprise software needs.
Customers who previously relied on third-party vendors for cyber, data, ML and other technology solutions will be able to access many of these features via their CSPs, according Forrester’s analysis.
The development is likely to give CSPs a greater share of IT budgets, as cloud spend expands to envelop services and products that would otherwise be sourced from secondary vendors.
Several factors are driving this change.
Through partnerships with the systems integration companies, such as Microsoft’s recent deal with Kyndryl, hyperscalers are transforming a once bilateral relationship into a trilateral one in which the CSP serves as “kingmaker,” according to Forrester.
With the general-purpose cloud market reaching its saturation point, CSPs have also shifted to creating their own industry-specific cloud offerings in the last three years, the report said.
Google Cloud’s alliance with Ford, AWS’s partnerships with NASDAQ and Goldman Sachs, and the addition of Microsoft Cloud for Financial Services to the company’s portfolio in Nov. 2021 reflect this shift.
Consolidation within the cloud software and application ecosphere has the potential to fuel further hyperscaling, according to a recent report from Bain & Company.
The economic downturn disproportionately impacts smaller infrastructure software companies, particularly those funded by venture capital, increasing their vulnerability to M&A activity. Some companies may even be reaching out to CSPs for relief, according to David Crawford, leader of Bain & Company’s global technology and cloud services practice.
“It’s a well-worn capitalist dynamic,” Crawford said. “Great teams of innovators build a concept that is valuable to larger scale players in the sector, and the larger scale players — in this case the CSPs — acquire those technologies to expand and grow their platform. It’s synergistic.”
While this may put cloud consumers in a precarious position relative to the CSPs, it can also enhance market competition between hyperscalers.
“Even hyperscalers have to rely on multiple partners to tailor their offerings to enterprise-class customers,” Lee Sustar, principal analyst at Forrester, said in an email. “This compels the hyperscalers to cede customer revenue to [third-party vendors], but that is by far the lesser evil than seeing an account move to a rival provider.”