Cloud Computing Reachs $100 Billion, but Who Makes Money?

By Douglas A. McIntyre Published Oct 14, 6:51AM EDT

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The cloud computing market has become so large that it will produce over $100 billion in sales this year. The business is cutthroat enough that many competitors may not make money. As the fight for market share continues, margins will come under more and more relentless pressure.

Global Industry Analytics forecasts the size of the entire market worldwide at $127 billion in 2017. The reasons for that size are primarily the cost savings that companies realize by cutting expenses for running in-house IT operations. The investments for a standalone company to start and maintain IT infrastructure are low due to the cloud, because the costs are carried by companies that maintain and market cloud services. And the burden of future improvement to enterprise IT operations also gets pushed to cloud providers.

The most pressing issue facing cloud providers is that so many very large companies have entered and are trying to dominate the market. Global Industry Analytics reports the competition includes most large tech companies and several medium-sized ones:

Key players in this marketplace include Akamai Technologies Inc., Amazon Web Services LLC, CA Technologies, Dell Inc., ENKI, Flexiant Ltd., Google Inc., Hewlett-Packard Development Company L.P., IBM Corporation, Joyent Inc., KloudData Inc., Layered Technologies Inc., Microsoft Corporation, Netsuite Inc., Novell Inc., OpSource Inc., Oracle Corporation, Rackspace Hosting Inc., Red Hat Inc., Salesforce.com Inc., Skytap Inc., Terremark Worldwide Inc., Yahoo! Inc., among others.

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Amazon.com Inc. (NASDAQ: AMZN) is acknowledged to be the industry leader. Its Amazon Web Services (AWS) should produce $10 billion in revenue this year, which would give it about 10% of the global market. AWS should post $1.5 billion in operating income. Unfortunately, Amazon does not report how much of its corporate costs would apply to AWS if it were a standalone business. This is true of most of its competitors. However, Rackspace Hosting Inc. (NYSE: RAX) produces most of its revenue from cloud computing. Its revenue in the most recent quarter was $164 million, up 13% from the same period a year earlier, which is hardly impressive growth. Its net income for the quarter was $29 million. That puts its margin at 17%, which is modest for a software-based company. Rackspace’s market performance has been pitiful. Over the past two years, its share price has dropped 45%, against an S&P 500 gain of 18%. Maybe part of the drop is because Rackspace is too small to matter. Or alternatively, the market does not believe in the cloud computing market.

With at least eight of the world’s largest tech companies fighting to have the largest part of the cloud computing model, prices will be critical to growth. New features may gain some customers, but International Business Machines Corp. (NYSE: IBM), Amazon and Salesforce.com Inc. (NYSE: CRM) have too much tech fire power to allow competition to keep a lead in major features of long.

As the industry shakes out, part of the shaking model will be advantages based on price.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.