As cloud computing continues to grow rapidly, and as enterprises and SMBs move more and more of their software applications to the cloud, the underlying IT infrastructure on which these applications run, also need to expand. This growth in Infrastructure-as-a-Service (IaaS) is being further fuelled by increased demands for agility, flexibility and ROI.

The overall global spending on public cloud services is estimated to mushroom from close to $77B in 2010 to $210B in 2016[1]. In this, IaaS is expected to grow the fastest at a CAGR of over 40% from 2011 to 2016. In comparison, Platform-as-a-Service (PaaS) is expected to grow at a CAGR of around 27% and Software-as-a-Service (SaaS) at a CAGR of 19.5% during the same period. The entry barrier in terms of capabilities is relatively low for entering the IaaS business, and with hosting being a common need, the demand for cloud infrastructure is high.

The high growth, and relatively lower entry barriers, has resulted in large number of players entering the IaaS space. These companies can be bucketed in to three broad categories:

  • Pure-play IaaS vendors
  • Large IT majors
  • Telecom companies.

While pure play IaaS vendors continue to grow, there are facing increasing competitive and market pressures.

Amazon Web Services (AWS) the 800 pound gorilla in the IaaS space have been growing rapidly and continues to redefine the contours of the IaaS market. In traditional IT infrastructure markets the largest vendors tend to focus on, and derive most part of their business from, the larger enterprise clients. However, in the IaaS space, AWS has made big inroads in the SMB space, while also making inroads into enterprise clients. Apart from Amazon, the telecom companies are also increasing their IaaS play, and the sheer scale of their operations make them strong competitors in the IaaS space. The IT infrastructure vendors, especially the server and storage hardware vendors are also very aggressive in the IaaS market, and many of the IT vendors are also pushing their IaaS offering as part of a larger cloud stack play. Increasing competition and demanding customers, has led to shrinking profit margins for most of the IaaS vendors.

The pure play IaaS vendors such as RackSpace are in some ways getting squeezed between these three competitive forces (AWS, Telecos, and IT infrastructure vendors). Most of the pure plays do not have the wherewithal to move up the cloud stack. There is very little to differentiate their IaaS offerings and IaaS offerings are increasingly commoditized, and threat of commodity pricing is real. Already IaaS vendors are facing margin pressures.

In order to stay relevant, pure-play IaaS vendors need to look for new avenues to continue engaging with customers by providing new growth opportunities including High Performance Computing (HPC) in the cloud, Big Data in the cloud and other PaaS options. These can be value additions for customers with low-cost benefits, better service and cangenerate high margins apart from retaining, growing and expanding the customer base. However, these are not easy for the pure play IaaS vendors as their core expertise is in operating large data centers, and not really in other parts of the IT stack.

In this scenario, the survival of pure-play IaaS vendors is becoming harder. We could see consolidation in this space, with the larger IT vendors eyeing the pure play IaaS vendors as a way of adding significant IaaS capabilities in their endeavour to play across the cloud stack.

[1] Source: Gartner Predicts Infrastructure Services Will Accelerate Cloud Computing Growth, Forbes, Feb 19 2013

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