We try to attend at least one global technology conference each year to keep abreast of latest developments, market trends and hot topics. Over the last five years, speakers have focused on many exciting areas with large market growth potential (covering online migration and SaaS business models disrupting the old world), consumers going mobile, big data and Artificial Intelligence (AI), and the Internet of Things (IOT) to name but a few.
This year there was a more subdued feel to many presentations including references to slowing market growth rates (the fading “j” curve), rescaling business models for this new world (including “marketing optimization”) and searching for market adjacencies (the pivot). While no one was claiming the technology boom was over, the 10-year tailwind of online migration was no longer guaranteed to float all boats. Despite this more subdued backdrop, there was still considerable hype surrounding the opportunities regarding the public cloud providers.
We will review these key thematics in this paper.
The Public Cloud Debate
The term public cloud refers to a service provider making computing resources available to multiple parties via the internet. These resources may include storage capabilities, applications and/or virtual machines. The main appeal is the ability to buy services on a usage basis and avoid the capital costs of hardware and the associated maintenance. The larger players such as Amazon Website Services (AWS), Microsoft (owner of Azure) and Google provide hyperscale cloud offerings which provide additional services such as distributed sites, proprietary data analytic packages and scale economics. The picture below of one of Azure’s sites shows the scale of these farms, containing tens of thousands of servers.
All speakers agreed that the ongoing digitisation of corporates, enterprises and government entities was resulting in a fundamental reassessment of their information and technology strategies, platforms and operations. The key question now being asked is the extent to which these processes are best suited to being exported to the public cloud and which should remain on-premise in private data centres on controlled servers. While there was no consensus, all agreed the public cloud had captured between 10-30% of the current market and this percentage was set to rise.
The question as to the ultimate penetration of the public cloud can probably be defined by four factors:
While the public cloud offers scalability, flexibility and variable pricing, there remains large portions of work that require relatively fixed processing that can be more economically serviced today by in-house servers, often with bespoke hardware and processes. There are also issues over latency that again bias decisions towards retaining on-premise solutions. However, Microsoft highlighted investment by hyperscale cloud players in dedicated chip design, optics, skew mix between CPU, disk and RAM configuration, and specialised server design, are delivering a three times efficiency boost over a standard corporate server rack.
Many firms have systems today that may not suit the configuration of the public cloud providers, either due to legacy software and/or hardware stacks. While the transformation to a digital platform may make these systems redundant, the risk of rewiring mission-critical applications may overshadow immediate economics, at least in the short term. The flip side is the investment that the hyperscale cloud players are making in AI, security and data analytics provide attractive add-ons for many businesses. As these features/applications become mainstream, the ability of corporates to support internal platforms becomes increasingly marginalised.
The security/privacy issue is a multi-faceted beast. The most well-known aspect is issues about data security, particularly amongst government departments which often require data to remain onshore (i.e. data sovereignty). The data sovereignty argument is becoming diluted as cloud technology is more accepted but certain businesses are unlikely to cede data offshore in the foreseeable future, including public health and legal entities.
However, there is also the general question of security solutions. The current approach tends to provide security on a point to point solution basis. VMware (VMW), a large IT software provider, believes the security offering is currently broken, quoting there is in excess of 4,000 providers offering over 6,000 products. This can lead to a myriad of internal security products (for instance, The Wynn Corporation, one of the world’s largest casino operators, believes it has several hundred security solutions across its organisation), which raises serious questions as to robustness, network complexity and network conflicts. Couple this with never-ending patches and updates and the potential for disaster is considerable. There was a universal view that some form of overarching security platform across the entire data and applications offering was the logical end game and, arguably, this plays into the public cloud providers’ domain.
While the public cloud may make intuitive sense for many businesses, many corporates have large investments in hardware and proprietary software that make any migration daunting and raises questions as to business risk during transition. Furthermore, in many instances, companies have a myriad of software suppliers requiring individual migration of each process and there is no guarantee the suppliers’ software is fit for purpose in the cloud.
The move onto the cloud by players such as Amazon, Microsoft, Google and Oracle (to a lesser extent) raises the question as to where the new R&D dollar is being spent. A number of software vendors at the conference were explicit in saying that their future new spend would be entirely cloud focused. VMW estimated that while 70% of its software was on-premise today, cloud would exceed it within the next three years (and edge servers would also gain share).
Furthermore, with the ongoing substitution of software for hardware solutions, the risk of unsupported on-premise technology stacks is likely to increase with time. Microsoft was relatively blunt with its commitment to aligning its R&D spend to a single architecture platform. Microsoft also highlighted it was spending over USD $1 billion p.a. on cloud security over and above the security spending on Microsoft 365.
When assessing the cloud opportunity, readers should appreciate a complete switch to the public cloud is highly unlikely for large scale organisations. Applications might switch 100% to the cloud but databases are more sensitive and likely to remain on-premise – a hybrid business model that both Azure and AWS discussed.
Looking forward there was no agreement as to where the on-premise/hybrid cloud data centres versus the public cloud split was going to end, but the general view was the public cloud should capture somewhere between 50-70% of the communications/IT spend within the next five plus years.
The fading “J” curve
Previously the terms “land grab” and “total addressable market” were some of the key criteria against which many tech companies were measured. However this year, while these terms were mentioned during the conference, their use was much diminished from previous years. Indeed, there was a focus, particularly in the retail segments, on competitive pressures as opposed to unbounded growth prospects.
A sign of the maturing nature of the online world was a quote by the Match company (owner of Tinder) executive, who stated that in the US and Western Europe meeting via online matching had gone from 4% to 40% in the last ten years. There are now multiple applications offering this service in various guises including, more recently, Facebook.
While the consumer adoption of mobile/cloud is already well advanced, as discussed earlier, the digitisation of corporates is less mature. This phenomenon explains the focus at the conference on cloud vendors servicing enterprise as opposed to consumer and B2C propositions.
However, while the heady days of online migration may be behind us, most companies at the conference were nevertheless reporting revenue growth rates of at least the mid-teens. What was apparent was that these growth rates were not enough to totally mask macro considerations.
Reworking the business model
In a world of slower revenue growth many speakers seem to revert to somewhat outdated concepts like customer alignment, maximizing channel spend, right-sizing the business, product refreshes, developing multi brand strategies targeting communities and “closing” sales. Interestingly, many of the companies talked of the need to rework their own technology stacks, many of which are over ten years old.
Marketing spend, which historically simply followed revenue growth, was mentioned by several speakers as being “optimised”. Other companies stated that during the revenue rush of earlier years, the marketing spend had become ever more speculative and subject to diminishing returns. Many mentioned that marketing was now being assessed against ROI measures. While these concepts are hardly unique, it does point to a more commercial emphasis being adopted by many of the online businesses.
While at the conference, WeWork’s attempted IPO process also garnered some commentary (as well as the poor post-IPO performances of Uber and Lyft; the latter presented at the conference), suggesting the market’s willingness to ignore traditional market fundamentals may be waning.
Focus or diversify
One surprising contrast was the differing views on how to handle slowing growth rates. We heard from some companies who believed focusing on being best in class was the only way to prosper, while others were aggressively looking to diversify into adjacencies to either better service their customers or leverage their core competencies. Others spoke of the potential in emerging markets such as India and Indonesia, although they also acknowledged the competitive threats of their local counterparts already having a foothold in these markets. Again, the companies most keenly seeking adjacent opportunities tended to be in the B2C space. In all cases firms are looking at how to best use the ever-increasing data they hold on their customers.
Those companies looking to move into adjacencies are well aware about the risks of disappointing their existing customer base. Booking.com, a leading retail accommodation portal, is aggressively looking to add attachments such as attractions and their own travel wallet. However, the key focus remains securing the loyalty of their existing customers. The end goal is to secure more repeat customers; hence the “additions” cannot afford to detract from the overall experience. The company is also seeking to use bundles to differentiate themselves from their competitors. In contrast Trivago intends to stick to being best in class in accommodation search and this necessitates an ongoing commitment to R&D.
The commentary around moving into adjacencies also led to discussion about some of the sector giants, namely Amazon, Google and Facebook, and their sometimes-strained relationships with these gatekeepers/competitors. Some speakers talked of trying to go direct to consumers, others restricting information flow to the intermediaries, but all acknowledged the influence (and data) that the big three hold in the eyes of consumers.
Implications for New Zealand companies
New Zealand technology companies are not immune to these issues. Indeed, in the last six months we have seen several companies reviewing their strategies. Pushpay, in their recent industry day, highlighted the need to reset their vision and pivot their marketing plan to better ‘nurture’ their client base. Furthermore, both Pushpay and Volpara Health technologies have outlined the need to broaden their product suites in response to client demands. Meanwhile The a2 Milk Company in China this week outlined an extensive marketing program that is very data-oriented and more focused on e-commerce marketing within a measured return on investment framework. Both Vista and Gentrack detailed the need to move their product offerings onto cloud infrastructure, driven by client requirements.
While the online world has not gone ex-growth, the backdrop is such that companies will have to remain nimble and prepared to review their business models continually in this fast-evolving space.
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