THIS IS AN ADVERTISING FEATURE
The cloud computing space has been generating massive amounts of attention. From a growth perspective, this makes sense[1]:
- Overall Size of Market: The public cloud services market is expected to total more than $214 billion when the figures for 2019 are finalised.
- Growth of Market: The Infrastructure-as-a-Service (IaaS) segment of cloud is expected to have grown nearly 30% during 2019. If you haven’t heard of “IaaS”, that’s ok, just think of “Amazon Web Services” or “Microsoft Azure” as some of the biggest players in IaaS. In 2019, the U.S. Department of Defence even entered into a $10 billion contract with Microsoft Azure to move to the cloud, offering yet another proof point on the perceived convenience and security of using cloud-based infrastructure[2].
Software is Eating the World (and Cloud is Eating Software)
In August of 2011, Marc Andreessen, a prominent Silicon Valley venture capitalist, wrote the phrase “software is eating the world” within a Wall Street Journal article[3]. Even then, now more than eight years ago, the case was clear that companies in Silicon Valley were relying less and less on delivering a physical “product” and more and more on delivering some type of software over the internet.
A particular trend that we find exciting regards large, established companies changing their business models and shifting to the cloud. In fact, we’d actually challenge anyone reading this article to think of a software company today that doesn’t use a cloud-based delivery model. There are important benefits for the customer and the software company.
- The customer doesn’t pay as large an up-front cost and instead can choose to subscribe to software that will be used over time. Sometimes, payments can even be tied to usage.
- The software company receives more regular revenue streams based on subscriptions instead of needing to convince customers to continually buy new versions of products.
Readers don’t need to merely take our word for it though. Here are two large companies that have touched and continue to touch the lives of millions of consumers that have transitioned to cloud-based delivery models.
Adobe[4]
Even if you haven’t heard directly of Adobe, chances are, you have dealt with a “PDF” document on a computer. These letters stand for “portable document format” and when this became the defacto standard for file viewing on computers, it contributed to making Adobe the second largest personal computer software company in the world in 1997, behind only Microsoft.
However, the drivers of Adobe’s success in its earlier history would not be able to sustain that success indefinitely. A dramatic shift in strategy began in 2009. In the past, customers would buy perpetual licenses to use popular software packages, like photoshop. The company took a risk after a series of acquisitions, launching its Creative Cloud software in 2012, where customers would instead pay monthly subscriptions to have access to the platform. By May of 2013, Adobe’s cloud software had more than 700,000 paid subscribers, massively outperforming the company’s expectations.
Microsoft
I remember the excitement around the release of Windows ’95, when you would come home with some disks and instruction manuals to hopefully install the software. Microsoft was in a tough position at this time, needing to convince customers to continually upgrade every few years. The customer was hoping the software would continue to work properly for their needs. Today, many laptops don’t have built-in disk drives, and subscribers to Microsoft’s Office 365 receive automatic updates and troubleshooting. Microsoft replaced big product releases with more stable, recurring subscription revenues.
When customers get better services and businesses stabilise their revenues, the cloud clearly represents the future of software delivery and we believe investors may want to make the “shift to cloud” in their portfolios as cloud companies may be an avenue for more specific exposure to technology with a different set of growth prospects going into the next decade.
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This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
[1] Source: For both bullets, “Gartner Forecasts Worldwide Public Cloud Revenue to Grow 17.5% in 2019.” Gartner Press Release. 2 April 2019.
[2] Source: Lardinois, Frederic. “In a Victory over Amazon Microsoft wins $10 billion JEDI Cloud Contract.” TechCrunch. 26 October 2019.
[3] Source: Andreessen, Marc. “Why Software is Eating the World.” Wall Street Journal. 20 August 2011.
[4] Source: Gupta, Sunil and Lauren Barley. “Reinventing Adobe.” Harvard Business School. 20 January 2015.
