Will coronavirus compound the concentration of cloud computing champions?

With COVID-19 forcing more people to work and entertain themselves at home, the cloud segment has been profiting. But it is debatable as to whether these riches are being evenly spread.

Although many would presume cloud is now a mainstream concept in the business world, it still accounts for less than 5% of total IT budgets. It will of course never be 100%, but this is a remarkably low percentage for how many companies who boast about how forward-looking and innovative they actually are.

The coronavirus has not only forced a new social dynamic, but also coerced traditional organisations through digital transformation projects.

This is of course an opportunity for the cloud companies, but you have to question whether this bounty will be distributed across the market, or whether it will be concentrated at the top, extending the lead which the likes of AWS, Microsoft, Google and Alibaba have worked over the chasing peloton, featuring companies such as IBM, Rackspace and Oracle.

Will everyone benefit, or just the market leaders?

Cloud computing market share by period
Company Q1 2020 Q4 2019 Q1 2019
AWS 32% 32% 33%
Microsoft Azure 17% 18% 15%
Google Cloud 6% 6% 5%
Alibaba Cloud 6% 5% 5%
Other 38% 39% 42%

Source: Canalys

The data above suggests the cloud profits are being increasingly concentrated at the top. This data will not make a comfortable read for niche cloud companies, but there is always hope. One of COVID-19’s success stories has elected to go outside market leadership to scale its offering.

Despite poor security credentials, suspect ties to Chinese ownership and misleading statements made by the management team, Zoom is proving to be one of the bolters of 2020. Thanks to enforced work from home trends and keeping in touch with friends and family during lockdown, usage of Zoom’s video conferencing services is skyrocketing.

The more popular Zoom becomes, the more cloud capacity the business would need, and Oracle won the race to secure the popular video conferencing company as a customer. High value customers are of course very beneficial to the financial spreadsheets, but it provides more confidence for other potential customers to sign on also.

Interestingly enough, Oracle sits outside the leaders in the cloud computing segment. Most would have assumed Zoom would select one of AWS, Microsoft or Google to scale services, but in electing for Oracle perhaps this is evidence the fortunes of coerced digital transformation are being spread proportionally.

How this money is being distributed through the community is a bit unknown for the moment, though it is clear companies are being forced through a digital transformation project.

“Up to now, there has been a tendency to not be fully committed to cloud,” said Nicholas McQuire, SVP and Head of Enterprise Research at CCS Insight.

This is an issue in itself. As McQuire highlights, many companies are being forced to rush into decision making to ensure business continuity, but this might only be a short-term gain with a recession looming on the horizon.

As with every period of recession, belts are tightened as profits are protected. This can mean certain projects are cut back, or expenditure is rationalised. This could be a problem for the niche players in the cloud ecosystem, according to McQuire.

Multi-cloud will of course persist, but some companies may well sacrifice best-in-class purchases in pursuit of greater procurement value. For example, Microsoft and Google might look like very attractive cloud vendors as on top of the storage components, these companies can also offer productivity services such as desktop virtualisation.

“As a niche provider in a time of recession, you have to provide immediate business value above what is being offered elsewhere in the market,” said McQuire.

This may well prove to be a challenge for smaller players in the market, such as Rackspace or IBM, but it could prove to be an advantage for the likes of Microsoft, Google and AWS, all of which offer very broad services, across numerous business criteria. It could look very attractive to a company which is being forced through a digital transformation process at a time where profits are likely to be limited.

Interestingly enough, AWS might be a company to keep an eye on in this space. Amazon Chime, WorkDocs, and WorkSpaces are all productivity and collaboration tools offered by the company but are rarely pushed. During the most recent earnings call, they were all explicitly mentioned suggesting the productivity and collaboration could be an element of the Amazon war chest to get an upgrade during this period.

Looking at the financial statements of these companies, this is an assumption which is holding strong:

Quarterly financial gains for cloud giants
Revenues Year-on-year
AWS $10.2 billion 33%
Microsoft (Productivity) $11.7 billion 15%
Microsoft (Cloud) $12.3 billion 27%
Google Cloud $2.7 billion 52%

At Microsoft, Teams is a draw for decision makers on top of the Azure services, as would Dynamics, while the same could be said for Google and its G-Suite offering. The rationalisation process might help the big boys at the top of the pile, but with new companies entering the cloud space, familiarity might also help.

Companies like Oracle and Workday might enjoy success and capture newly created revenues as there are existing relationships in place with products such as Enterprise Resource Planning (ERP) and Human Capital Management (HCM). Companies who are not as cloud savvy as others already purchase this software and may well turn to their existing suppliers to help.

One final element to consider during this period is free offers.

Turning back to the Amazon earnings call, the team has said small businesses would be able to use certainly toolsets for free for a 12-month period. This is somewhat of a loss leader position to take, which will certainly be attractive to some decision makers. Major players might be able to offer such promotions due to diversity of revenue streams, bulging bank accounts and engaged investors, however niche players might be more reliant on cash moving through bank accounts.

It might not be the best way to win business, but the big players might just be able to undercut rivals at a loss and outwait the market.

More money in the cloud computing market might seem like a good thing on the surface but pay closer attention to where the money is actually going. AWS, Microsoft, Google and Alibaba have already worked a considerable lead over the chasing peloton of less successful cloud companies, though this could be extended if the fortunes are disproportionately directed towards the top.

Some might say this is due to tactical as opposed to strategic expenditure during a period where time is a luxury few decisions makers have when rapidly undertaking a digital transformation programme, but with the risk of supplier rationalisation on the horizon, it might not get any easier for the niche cloud players.

Smartphone segment in for another rough year – CCS Insight

Analyst firm CCS Insight is predicting the smartphone segment could be in for another year of drudge, with year-on-year shipments forecast to decline by 3%.

With cash conscious consumers still tending to favour refurbished devices, or holding onto their current smartphones for longer, it seems the sluggish segment could evade the booming landgrabs of yesteryear, that is unless you are a Chinese brand.

“Yearly sales of 2 billion mobile phones seemed so close just a few years ago, but might become a distant dream for the industry,” said Marina Koytcheva of CCS Insight.

“It is little surprise that all big mobile phone-makers are strongly pursuing the Indian market. India is one of the few oases where a significant growth opportunity still remains. However, it is Chinese brands like Xiaomi that are achieving the most success, which is of great concern to high-profile brands such as Apple and Samsung.”

Although the 2 billion annual milestone has been predicted many times, CCS Insight believe shipments will be around 1.8 billion for 2019. A new five-year outlook is for 1.9 billion on an annual basis until 2023.

Western Europe is perhaps one of the biggest contributors to the decline, with 35% of survey respondents suggested they will be holding onto devices longer, and only 13% stating refreshments cycles would be more frequent. That said, China is also not immune from global trends, with CCS Insight forecasting sales in the country will be down 9% year-on-year. This follows a 13% decline last year.

For the smartphone segment, it is a very similar story. It seems a lack of device innovation and a sense of more of the same is discouraging consumers from prying open their wallets, especially when the prices are so steep. The launch of Huawei’s P30 Series is an example of this. Priced between £899 and £1099, it will probably be an excellent device though is demonstrating little more than feature upgrades. It’s a lot of money to pay for incremental improvements.

5G might change this perception over the coming months, but it won’t be enough to save the fortunes of the segment in 2019. CCS Insight is forecasting 220 million 5G compatible devices will be sold over the course of 2019, though considering the limited nature of coverage and limited supply, this will have little impact on the dampening trends. This number will rise to 930 million by 2023, accounting for more than half of smartphone shipments, though it will be a slow burner by the looks of things.

It should hardly come as much of a surprise, but the smartphone segment might be in for another mediocre couple of months.

Operator confidence raises 5G connections forecast to 340 million in 2021

CCS Insight has suggested 5G connections will reach 340 million in 2021, before surpassing one billion in the first half of 2023.

The confidence in raising its forecasts come after more bullish behaviour from the operator segments in the industry, with more telcos declaring their 5G ambitions before expected. Telia in Finland was one which suggested it will hit the on-switch in 2019, while EE is another to confirm the 5G bonanza next year.

“The intentions of major US carriers to launch 5G in late 2018 have been clear for a while. But recently we’ve seen greater urgency to deploy networks from providers in Europe, the Middle East and China,” said Kester Mann of CCS Insight. “While Europe may still be around a year adrift of the leading markets in 5G, some regional operators are clearly determined to launch commercial services as soon as next year.”

Aside from EE and Telia, Telecom Italia, Swisscom and Telenor has also suggested they might reach the finish line sooner than expected. Finnish operator Elisa has even gone one step further by saying it has a 5G network now, though this seems questionable. Of course, the sluggish stereotype of European operators is there for a reason with the likes of Vodafone, Orange, Deutsche Telekom and Telefonica taking a much more cautious approach.

Of course, it is certainly encouraging to see progress in Europe, but let’s not forget the leaders are miles ahead. Many commentators have pointed to China as leading the 5G race, though with all the US telcos targeting the end of 2018, it puts the European progress into context. CCS expects China to overtake the US to become the biggest 5G market in 2020, with 40 million connections. By 2025, connections in China will surpass 1 billion, accounting for nearly four connections in every ten worldwide.

It’s nice to see there is some confidence in the European markets, but it still a notable distance behind the market leaders.

Consumers ‘cracking the code’ when it comes to smartphone purchases

Research from CCS Insight suggests consumers in France and the UK are becoming more savvy when purchasing devices, seeking more cost-effective options outside the telco channel.

From a financial viewpoint, moving away from the subsidized handset model would certainly be attractive for the telcos, though the consequence might well be shorter contract timeframes and increased customer churn. Should customers not have to stick to a 24 month contract to pay-off devices, the result could be more frequent searches for cheaper data tariffs. Losing this stickiness is not an ideal proposition for the telcos, though it could offer a chance to innovate and move out of the dreaded utility function.

According to CCS, more consumers are searching for alternative means to secure a smartphone. More than half of those on SIM-only contracts said they worked out that it would be better value to buy their phone and SIM card separately, with channels such as Amazon, eBay and Argos becoming increasingly popular. The research also demonstrates an increased appetite for second-hand and refurbished devices.

“We refer to this concept as ‘cracking the code’,” said Kester Mann of CCS Insight. “People now have a far greater understanding of the true value of the different parts of a mobile service. In the past they significantly underestimated the real worth of a smartphone, which was traditionally heavily subsidised and bundled into operators’ service plans.”

One in every ten mobile phone users in the UK said that their primary device is a second-hand model. The majority of the time these devices are sold or passed on between family and friends, while refurbished devices currently represent about 4% of the UK market with potential for growth.

The subsidised device model is one the industry has been edging away from for some time. There are of course consequences to refresh periods for customers, and with the cash-conscious consumer becoming more savvy on searching for deals, there is a risk of churn. However, by removing the subsidized devices from offers, telcos can concentrate on building value elsewhere.

O2’s Priority strategy is an excellent example of how value can be built into contracts with low-risk and high-reward. As a partner programme, the focus is placed on the wallet of the customer not O2. Relationships are developed with third parties, and a broad variety of discounts offered to customers. The customer experience is enhanced, value is offered and loyalty increased, but there is no cost to O2 aside from developing the platform and negotiating offers with third-parties on the behalf of customers.

This is a genuine value add which can be built into propositions once the idea of customers chasing the latest flagship for a subsidised price. There are of course risks, and there will be customers who desire the subsidised devices, but consumer trends separating the device from the SIM offers opportunities for telcos to create business models focus on experience and value, not simply throwing flagship devices on advertising boards.

Research paints gloomy 5G picture for Europe

New findings from research consultancy CCS Insight forecast Europe lagging behind the US and Asia as countries look towards the future 5G world.

While the 5G promise has been a slow burner so far, this was largely expected. The telco industry is excellent at overhyping a technology in its infancy, only for the world to be impatient at what should be considered normal progress. That said, the emergence of the 3GPP NR standards at the end of 2017 gave a jolt of life to the old-timers falling asleep in the board rooms.

2018 has begun with a boom, with numerous companies signing agreements on standards, trials, deployment of chipsets and infrastructure, while several operators committed to 5G deployments towards the end of this year and beginning of 2019. Unfortunately for us living in Europe, those commitments have come from the US and Asia. We might have to watch the glory of bufferless cat videos longingly from afar for the first few years.

“The industry might be struggling to establish the business models for investment in 5G, but this isn’t stopping leading operators battling for bragging rights to launch the first networks,” said Kester Mann of CCS Insight. “Competitive forces and the need for capacity are the leading drivers of early deployment, although we caution this could set unrealistic expectations for initial network capability.”

CCS forecasts that while the early launches might be in the US, Korea and Japan, China should storm to the front of the 5G pack. Estimates predict 5G in the country would hit 100 million connections in 2021 before passing 1 billion in 2025. Despite most other markets having launched commercial services by 2025, China will still account for nearly four in every 10 global 5G connections.

The first connections are likely to come in the US however, with the three main operators (and Sprint) fighting for the bragging rights. Verizon has promised commercial 5G services in Sacramento with Samsung during the second half of the year, Dallas, Atlanta and Waco have hit the AT&T 5G jackpot with the end of 2018 as a deadline, while T-Mobile US has been preaching it will be the first to have a nationwide 5G network.

Western Europe is not looking as promising though. The region is expected to pass 100 million connections in early 2023, though Telia and Telecom Italia are showing a bit more appetite than the rest of the pack. CCS notes that aside from these minor bright spots, the region seems further adrift from the leaders than ever before. Perhaps this is down to the search for the elusive 5G business case.

While operators in the US and Asia seem a bit more adventurous in their quest for 5G, there does seem to be a ‘build it and they will come’ attitude, while European are seemingly much more risk adverse. Last year we watched both BT and Orange at a Huawei conference say that the monetization would of 5G would have to be sorted out before commitments would be made, though this is a very lethargic and dated.

Some of the services and products which are now available on 4G networks would not have been imaginable five years ago, but that is the way innovation works. The technologists need the tools to be able to create and drive innovation. A 5G network is one of those tools for the next wave of digital evolution. Searching and waiting for the business case to justify 5G investments will force Western Europe into the second tier of the global economic rankings.

Breakthrough for wearables predicted, yet again

Wearables have been a promise for the technology industry ever since science fiction movies showcased wonderful uses for the gear, but time and time again, we’ve been disappointed. That said, CCS Insight think it’s about to kick off.

The research from CCS forecasts 71 million smartwatches will be sold in 2018, then doubling to 140 million in 2022. The wearables space on the whole is expected to grow 20% year-on-year through to 2022, becoming a $29 billion market with 243 million unit sales. Predicting the wearables boom has been a perilous game in recent years, but the general public is becoming more in-tune with future tech, just look at the growth of smart speakers, maybe this is the time for wearables, with smart watches leading the charge.

“Apple has become the market leader for smartwatches. Sales volumes have exceeded expectations and the introduction of a cellular-enabled model has pushed up the value of its sales, which we estimate at $5 billion in 2017,” said George Jijiashvili of CCS Insight.

“It’s not surprising that traditional watchmakers are looking over their shoulders nervously at Apple given the significant slice of the market it has secured in just three years. Our projections show that in 2018 Apple will come close to matching worldwide sales of Swiss-made watches, which sold 24 million units in 2017.”

The problem with smart watches to date is that they are a solution without a problem. Until recently the devices were tethered to a smartphone, but even with standalone connectivity few are likely to ditch their smartphones for the devices. The more expensive models are not going to replace traditional watches as fashion icons (not yet anyway) and the cheaper devices from manufacturers such as Fitbit are perfectly suitable for fitness fanatics. That said, the market for fitness trackers, which has largely driven wearables to date, is predicted to have weakened; new areas will be needed.

One area which could be of interest to the manufacturers is children’s watches. These could act as safety/tracking devices, while also a stepping stone for youngsters towards smartphones. A basic communications tool which prevents a child from venturing into the unholy areas of the internet could appeal to some parents. CCS estimates that 25 million of these watches were sold in China over 2017.

“The success of kids’ watches in China is impressive. There’s strong support from Chinese mobile network operators and we’re expecting further growth in 2018 as 4G networks improve to support even more advanced features,” said Jijiashvili. “Although we recorded sales of about 1 million units in the US in 2017, we don’t expect the kind of volumes we’ve seen in China. And in Europe, privacy concerns and regulatory issues have cut the market to just a few thousand units.”

Elsewhere in the wearables world, hearable devices, which are defined as smart wireless headphones, earphones or earbuds that connect to smartphones and other compatible devices, could be on the increase. We’re not 100% convinced wearables are ever going to be more than a footnote to the technology world, though AR could make a bit of difference when that technology becomes more mainstream.

China predicted to account for half of 5G subscribers

Analyst house CCS Insight has been running the numbers on predicted 5G adoption and come to the conclusion that China will be all over it.

They reckon 5G will take off faster than any of the previous generations, which is no great reach since that’s usually the case with the next ‘G’. With things only set to kick off in 2020, CCS forecasts we’ll hit the 1 billion mark by 2023, with more than half of that accounted for by China alone.

China has shown a remarkable ability to ramp very quickly. For years growth in the smartphone industry was driven by around a billion Chinese consumers upgrading from feature phones to smartphones and they clearly love a mobile phone. Furthermore vendors like Huawei and ZTE, alongside mega-operators like China Mobile have been throwing cash at 5G for a while. By contrast CCS reckons Europe will trail the Far East and the US by at least a year.

“We see China playing a far more influential role in 5G than it did in 4G,” said Marina Koytcheva, VP of Forecasting at CCS. “Size, scale and economic growth give China an obvious head start, but we expect network deployments to be much faster than in the early days of 4G. China will dominate 5G thanks to its political ambition to lead technology development, the inexorable rise of local manufacturer Huawei and the breakneck speed at which consumers have upgraded to 4G connections in the recent past.”

The firm has clearly been receiving many of the press releases we have around 5G and warns that many of the utopian use-cases put forward are going to be a long time coming.

“The unrelenting hype that has surrounded 5G for several years has seen a diverse range of applications put forward as the main drivers of adoption,” Kester Mann, Principal Analyst, Operators at CCS. “Some of them will be relevant at different times of the technology’s development, but the never-ending need for speed and people’s apparently limitless demand for video consumption will dominate 5G networks.”

“5G is about creating a network that can scale up and adapt to radically new applications,” said Geoff Blaber, VP Research, Americas at CCS. “For operators, network capacity is the near-term justification; IoT and mission-critical services may not see exponential growth in the next few years but they remain a central part of the vision for 5G. Operators will have to carefully balance the period between investment and generating revenue from new services.”

Here’s the CCS Insights global 5G connections forecast.

CCS Insights 5G forecast