Q&A: Gartner’s Sid Nag on IaaS Market Growth & Consolidation

At the tail end of July, Gartner released a study of revenue growth in the infrastructure as a service (IaaS) market that showed the sector continues to scale up fast as Amazon, for the moment, maintained its reign over its rivals. Gartner’s study showed 31.3% in overall revenue growth in 2018 for the worldwide IaaS public cloud services market to $32.4 billion.

That was up from $24.7 billion in 2017. Amazon remained the clear leader in this sector, generating nearly $15.5 billion in 2018 from IaaS, up from $12.2 billion in 2017, according to Gartner’s research. Its closest rival in the IaaS market, Microsoft, saw a little more than $5 billion in 2018 in IaaS revenue, compared with $3.1 billion in in 2017.

The findings in the report, "Market Share Analysis: IaaS and IUS, Worldwide, 2018," also showed that the presence of the five largest IaaS providers continued to grow, with Amazon, Microsoft, IBM, Google, and Alibaba collectively making up almost 77% of the worldwide IaaS market in 2018, up from less than 73% in 2017.

Sid Nag, vice president of cloud services and technologies research for Gartner, discussed the study with InformationWeek as well as expectations of further consolidation as the top five players leave less and less room in the IaaS market.

How is the lineup of players in IaaS shaping up? Will the consolidation you foresee come from providers being absorbed or simply dropping out of the market?

“I think you’re going to see a little bit of both. In North America the market has already consolidated, from my perspective. You have a few stragglers here and there, but if you look strictly at IaaS, I think that some of the folks that have not managed to do well are not going to be able to make it. The real challenge, for all cloud but most for IaaS, is the investment the provider must make to be competitive. IaaS is mostly building on massive amounts of data centers and things of that nature and that requires opening up the checkbook -- or having funds from an adjacent business.

“If you look at the European scene, it’s a little bit different. There are many more second-tier players that are still doing business and doing not so bad. The question really is how long they will be able to sustain themselves in this tsunami. That’s where you may see some consolidation. Let’s take, for example, a mandate like GDPR (General Data Protection Regulation), which is a data privacy law that was passed in the European Union. It requires a lot of investment to protect the data, store the data, and make sure data is private. Will the smaller and medium-tier folks be able to make an investment again?

“You have a lot of mid-tier players in Europe like OVH in France as well as a whole host of smaller players who were in the hosting and collocation business and then decided to offer an IaaS type of service. I think those guys are going to have great difficulty keeping up with the velocity of this market.

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“Even something like IBM, the growth is only at 24% in the IaaS business, and IBM has been struggling for a while now because they have gone through several restarts with the cloud program as well as with their leadership. I don’t know where IBM is going to land. At the last IBM Think conference, they talked about multicloud, Watson Everywhere, and they basically said, ‘We’re not going to compete in the IaaS layer with the big boys anymore. We’re going to shift the conversation to being an enabler multicloud from a services perspective: managed service, their GBS (Global Business Services) and GTS (Global Technology Services) business.’ I think they are basically admitting they’re not going to fight the IaaS battle at the street level.”

With the size and scale of the dominant IaaS providers such as Amazon, what is the likelihood there will be any changes in who makes up the largest five players in this market?

“I think you’re going to see erosion in Amazon’s market share. You’re already seeing that. It only grew 26.8% [in 2018 compared with 2017], whereas if you look at the next two or three competitors, Microsoft grew at 61% and Alibaba grew at 93% and Google grew at 60%. Clearly, the next three are catching up very fast. You’re going to see growth erosion and market share erosion for Amazon and that’s not a bad thing. When you are already three or four times the revenue of your nearest competitor, you’re going to see that as the market matures.”

Has the IaaS market reached a point where there is no room for new providers to try to break in?

“It would be extremely hard for anybody to get into the market. The reason for that is you need deep pockets to invest in capex to build out your cloud data centers. That’s really the biggest expanse, the sheer volume of dollars you have to shell out to create a regional presence across different countries and geographies. Investment in R&D is important because you have to have future parity but that’s not where the discussion stops. Engineering prowess is great, but engineering prowess coupled with scalability is also important. Unless a new competitor is willing to invest to achieve the level of scale that Amazon and its nearest competitors have, it would be extremely difficult.

“It’s a combination of scale, investment, and skills. Hiring people with the right set of skills to build out your cloud offerings is not easy. Containers, microservices, artificial intelligence, machine learning, data scientists -- these guys and gals demand a very high pay structure, if you can find them. There are many different kinds of barriers.”