The everlasting IaaS evolution: $100bn revenues and networking maturation %

The tech media has spent years arguing whether innovation and market size within infrastructure as a service (IaaS) has finally topped out – but the most recent figures show there is still some way to go yet.

2022 saw the worldwide IaaS market grew by almost 30% (29.7%) to total $120.3 billion (£93.6bn) in revenue, according to figures totted up by Gartner. Amazon maintained the number one spot, with Microsoft as runner up. Alibaba retains third place ahead of Google – though at 7.7% and 7.5% market share respectively, it is a negligible lead – with Huawei in fifth position. The top five vendors accounted for more than 80% of the market, Gartner added.

Within this are interesting examples of evolution in themselves. Google Cloud filed the most profitable quarter in the company’s history earlier this month, with an operating income of $395m during Q2 2023. This compared with a loss of $590m this time last year. Microsoft, meanwhile, posted an all-time best net income of $20.1bn. Yet the company stalled with regard to Azure – whose figure is allocated across several buckets rather than being entirely disclosed – which grew only 26%, compared with 27% the previous quarter.

The narrative driving these figures is, of course, AI. Microsoft CEO Satya Nadella, and Alphabet CEO Sundar Pichai outlined their thought process where the cloud infrastructure and AI markets are converging in their earnings calls.  

“Azure… the way I think about is we still are [at] inning two or three of even cloud migration, especially when you view is whether by industry moves to the cloud, segment move… as well as country adoption of the cloud,” said Nadella. “There’s still early innings of the cloud migration itself, there’s a lot there still – and then on top of that, there is this completely new world of AI driving a new set of workloads.”

“When I think about it long-term, I view the AI opportunity as expanding our total addressable market and allows us to win new customers,” Pichai told analysts. “The scale of investments that we can directly bring into [Google] Cloud now – we have over 80 models across Vertex [AI], Enterprise, Search and Conversational AI, and we are taking all of them, translating it into deep industry solutions.”

For the hyperscale cloud providers, AI has long been a service to provide on top of the infrastructure. Gartner has seen this play out for some time, having added platform as a service (PaaS) to its IaaS Magic Quadrant in 2020, recognising expanded enterprise use cases. “IaaS is driving software as a service and platform as a service growth as buyers continue to add more applications to the cloud and modernise existing ones,” said Sid Nag, VP analyst at Gartner.

Nag added that the maturity of the IaaS market has led to a ‘slight softening’ from the end of 2022, as companies use their allocated capacity, but another acceleration should come in 2024.

“Generative AI will continue to drive the cloud market forward, particularly as hyperscalers look to support offerings beyond the existing, democratised generative AI solutions,” said Nag. “As enterprises integrate generative AI into their technology portfolio, new markets and opportunities for cloud hyperscalers will emerge related to sovereignty, ethics, privacy, and sustainability.”

Meanwhile, IDC has posited that worldwide revenue for what the analyst describes as IaaS cloud networking services will reach almost $20bn ($19.4bn) this year, with a compound annual growth rate (CAGR) of 27.9% from 2022 to 2026.

IDC defines this space as ‘public cloud-based IaaS network services in which all the network infrastructure and services are elastic and on-demand.’ The primary example of such networking technology is cloud connects and interconnects – in other words, either providing a dedicated network to connect to the cloud versus linking multiple connections to enable data exchange – while other examples include cloud WANs, IaaS service meshes, and VPNs to IaaS clouds.

Again, this is an area where the hyperscalers are wielding significant leverage and investment. IDC noted that the top five public cloud IaaS vendors – the analyst puts Google ahead of Alibaba and swaps Tencent in for Huawei – were also the leaders in the IaaS cloud networking market. Organisations’ hybrid and multi-cloud strategies are helping to define this market.

“Cloud connects/interconnects are foundational to every cloud strategy as these make it possible for enterprises to quickly and securely connect their on-premises and edge environments to IaaS providers,” said Rohit Metra, IDC group vice president, network and telecommunications. “The rise of multi-cloud and SaaS applications that meet the demands of the modern distributed workforce in enterprises is the driver of rapid growth in cloud WANs and other IaaS network services.”

So if you are thinking there is little left to uncover in the IaaS market – it may be time to think again.

Photo by zhang kaiyv

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