Bright clouds

Let us start with some big news. According to The Wall Street Journal (WSJ), big tech firms are investing $214 billion in data centers as they compete for the cloud computing market.  Oracle, which once used to make fun of the very idea of cloud, is now making big bets on it. As WSJ writes, Oracle “announced its largest deal ever, a roughly $28.3 billion purchase of electronic-medical-records company Cerner Corp. that vaults the business-software giant deeper into healthcare technology”. It demonstrated promoter Larry “Ellison’s desire to elevate Oracle in the fast-growing, cloud-computing business where the company has long lagged behind other tech companies including Amazon, Microsoft, and Google, analysts said”. Amplifying the point I made about scale in the last article, WSJ goes on to say that “Healthcare has emerged as a big battleground for cloud companies, analysts say, because the industry is so big—U.S. healthcare spending accounts for nearly 20% of the country’s gross domestic product—and has often been slow to adopt the latest digital tools”. At present, Oracle is a small player in the business in cloud. As WSJ notes, “Among U.S. companies, Amazon continues to dominate with 46.5% global market share in 2020, followed by Microsoft at 14% and Google at 4.8%, according to market research firm International Data Corp”. ((https://www.wsj.com/articles/oracle-to-pay-more-than-30-billion-for-cerner-11640006531?mod=hp_lista_pos1)

Scale, scale, scale

The significant point here is that the business of and in cloud is all about scale which inevitably entails large investments, as is clear from the figure of $214 billion. It is important to remember that Amazon had amassed a huge infrastructure for its own business, which formed its technological capital to commence the business of cloud, and this was true of Google and Microsoft too. And we know that scale begets scale; the $214 billion is over and above the existing investments. Assuming an exchange rate of Rs 75 to a dollar, that works out to Rs 16,05,000 cr. Clearly, this is not the kind of investment that Indian IT companies can afford to make. Fortunately, there is money to be made in services in helping clients ‘move’ their applications to the cloud (since it is not a simple matter). Those who follow the fortunes of the IT industry will recall discussions around 2010 onwards over how the data centre business has become a commodity business and that Indian IT companies should opt out of it. Interestingly, the technology business, even as it creates giants, also lets loose a proliferation of small to medium size intermediaries who find business in the many services that keeps the system running. Microsoft would not have been able to build its global business without the extensive network of franchisees that it has and this is true of the business in and of cloud too.

In my last article on ‘Clouded thinking’, I had pointed out that if companies were accessing the cloud, it was because someone was offering it which meant that the cloud became a viable business. I was merely pointing out the other side without which a story is incomplete, but often missed by most in their tendency towards leaning on one side. This is a simple truth: if someone is offering a service it is because they have identified what they are convinced is a sustainable business opportunity. They could be proven wrong, as does happen oftentimes in business but in the case of cloud, those who have entered and entrenched themselves and those who are entering are on strong grounds.

Different strategies

Microsoft, a little late to enter (relative to Amazon), adopted a different strategy of taking an equity stake in several start-ups to build a stronger presence that it enjoys now and Google is following suit. It “has taken equity stakes over the past year in companies including Univision Communications Inc. and CME Group Inc., in turn winning multiyear commitments to its cloud service worth as much as $1 billion or more” ((https://www.wsj.com/articles/google-and-tech-rivals-tap-cash-reserves-to-realize-cloud-ambitions-11640773806?mod=tech_lead_pos2). “Google’s deals have covered customers in a range of sizes and sectors. In the span of a little more than a year, it has invested $1 billion in the futures-exchange company CME Group; $450 million in the home security provider ADT Inc.; and undisclosed sums in the Spanish-language media company Univision and the healthtech startup Tempus Labs Inc. All have signed long-term cloud computing contracts with Google”. Analysts see this as making Google the most aggressive challenger in the cloud space as it goes after Microsoft and the market leader, Amazon. Microsoft too was a little late in recognizing the huge potential in building a business in the cloud. It will be interesting to see how others react to Microsoft and Google’s strategy of winning deals through equity stake. It is a very clever strategy – it wins business and has the chance to enjoy capital gains when its equity stake gains in value! What better way to use the mountain of cash! This strategy has been followed in India for more than two decades by one of the biggest publishing houses which took equity stake companies with promise but not enough liquidity to pay for advertising campaigns; they used the arrangement to advertise through the many vehicles owned by the publishing giant. As they grew, so did the value of the investment! Others, while critical in the initial stages, followed suit. The strategy has now gone global!

Clearly we are in for interesting times ahead and I would like to end with a suggestion. Telecom companies can pose a threat, since the networks have been carrying much more than voice and data for more than a decade, the business being driven more by software than the network itself. Ten years ago, AT&T began offering software to its clients followed quite soon by Bharti Airtel. Following this development while working with TCS, I coined the term ‘TelCloud’ describing the coming together of telecom and cloud. I haven’t seen any reason to change my view.

Takeaways

Investment in cloud is acquiring staggering proportions

Demand and supply influence each other; one tempting the other

Different strategies are at play; the future holds interesting battles

Telecom companies are the ‘others’ who can challenge