Cloud computing faces growth, but it must lighten up

The cloud computing industry has had a great run since the start of the covid-19 pandemic, as businesses and individuals have embraced digital. However, in the last two quarters, the sector—comprised of infrastructure, platform and software providers that offer it as an internet service—has shown signs of slowing down. This raises concerns, especially in India.

One, many industry players believe that the cloud is still in the early stages of adoption, and has great scope to grow. Two, over the last few years, digital transformation projects, of which the cloud is an integral part, have been driving the Indian IT services industry. Any slowdown in its growth can affect them adversely.

The slowdown is reflected in recent numbers, across segments. Get cloud infrastructure services. The three leading providers in this segment are Amazon Web Services (AWS), Microsoft Azure and Google Cloud, and they control 63% of it.

All three reported a slowdown in growth in the last two quarters, though it was coming off a high base. Year-over-year revenue growth of AWS, the leader, fell to 33% in the quarter ended in June, from 37% and 40% in the previous two quarters. Customers are growing more slowly and deals are taking longer to close, amid an economic slowdown in the West.

The slowdown also reflects on cloud equipment vendors. For example, Seagate, which sells data storage and other IT infrastructure equipment to cloud companies, cut its revenue forecast for the September quarter from $2.35-2.65 billion to $2-2.2 billion, partly due to caution shown by cloud service providers.

The SaaS question

Downstream, the market for software is growing at a slower pace than before. As a result, SaaS (software as a service) providers like Salesforce and ServiceNow, which provide various software services to clients in the cloud, are seeing a slowdown in revenue growth. Microsoft, which has pivoted to the cloud for its MS Office products, saw revenue from that segment slow to 15% in the latest quarter, from 17% and 19% in the previous two quarters.

Similarly, Salesforce also revised its 2023 revenue outlook to $30.9-31 billion, down from its previous guidance of $31.7-31.8 billion. Marc Benioff, co-founder and co-CEO of Salesforce, told analysts in a conference call last month: “Sales cycles may be lengthening, higher-level management is reviewing deals… Almost everyone I spoke with was taking a more measured approach to their business. We expect these trends to continue in the near term.”

China’s covid disease

During the two economic crises of a global nature before covid-19, China continued to grow. During the dotcom/telecom crash around 2000, while the US telecom market was severely affected, China began to invest heavily in telecom. Similarly, China was only slightly affected by the 2008 global financial crisis.

However, at present, China’s cloud infrastructure market is facing more intense growth than other major markets. This market in China is dominated by offers from its technology giants, namely Alibaba, Huawei, Tencent and Baidu. Cloud infrastructure spending in mainland China fell to $7.3 billion in the first quarter of calendar year 2022 and remained there in the second quarter. On a year-on-year basis, growth fell below 20% in the second quarter, for the first time, according to research firm Canalys. All the top four players, which occupy 79% of the market, saw slower growth in the last two quarters.

Long in the clouds

However, the main reasons for the current slowdown in growth are unlikely to persist. As concerns around the macroeconomic slowdown tighten spending, uncertainties could push the move to the cloud, as Microsoft pointed out in its recent conference call. Similarly, the slowdown is partly the result of heavy investments made during the pandemic. As growth picks up, more investment is likely to flow. In China too, investment is likely to increase as the recent covid-19 outbreak is brought under control.

Technology research and consulting company Gartner predicts that cloud solutions will overtake traditional solutions by 2025. In a February 2022 report, it said that 51% of IT spending on application software, software infrastructure, business process services and systems infrastructure markets will shift from traditional public cloud solutions by 2025. The long-term rationale for cloud adoption remains strong.

www.howindialives.com is a database and search engine for public data

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