Amazon, Microsoft And IBM: What Cloud Questions Must Be Answered In 2015?

Summary

• The public cloud is expected to become a $190 billion market by 2020, and cloud infrastructure services will be a big reason why.
• AMZN, MSFT and IBM are numbers 1, 2, and 3, respectively, in cloud infrastructure services.
• After a wild 12-month span for these cloud leaders, each have something to prove in 2015, which could dictate their performance over the next five years.

Forrester Research estimates that between the years of 2013 and 2020 the public cloud market will grow from $58 billion to $191 billion. A large chunk of that growth will come from cloud infrastructure services, a segment that accounts for roughly 20% of the public cloud market and is growing at nearly 50% annually with $14.5 billion in trailing 12-month revenue according to Synergy Research. Within this cloud infrastructure services space lies market leaders Amazon.com (AMZN), Microsoft (NASDAQ:MSFT) and IBM (IBM), respectively, according to Synergy Research's most recent data. Note: Synergy Research's data accounts for infrastructure as a service, platform as a service, and hybrid/private cloud in its rankings.

But in a highly competitive industry, where big valuations and revenue growth is at stake, each of these noted companies have some big questions to answer in 2015.

Can Amazon.com increase appeal with enterprise customers?
Amazon.com's Web Services (AWS) business is undoubtedly the cloud infrastructure services market leader. Synergy Research estimates that AWS controls 27% of the cloud infrastructure services market, and despite having just over $1 billion in quarterly revenue from the segment, Evercore estimated in November of 2013 that AWS was worth $50 billion, mainly due to its growth prospects.

However, a lot has changed since November 2013. For one, AWS' market share of the cloud infrastructure space has fallen from well over 30% to 27%, as its growth has underperformed the likes of Microsoft and IBM. In essence, one could assume that much of Amazon.com's stock losses in 2014 were in connection to the share loss of AWS and the asset's devaluation.

Granted, AWS still has a comfortable lead over its competitors, and if it can hold 27% then the asset stands ready to generate substantial revenue growth over the next five years. However, with AWS already having more than one million active customers using its cloud, the company will have to prove that it can continue to increase functionality and scale in 2015.

What I mean is that many of Amazon.com's cloud competitors like Microsoft, Cisco (CSCO) and IBM already have an enormous presence with enterprise customers, many of which have not embraced AWS on a large scale to perform daily functions. That's not to suggest that AWS doesn't have thousands of enterprise customers, but rather those customers tend to use many cloud service providers simultaneously, not AWS exclusively.

With AWS' customer base having minimal upside, can the company keep its revenue growth pace on par with the industry in 2015 despite not having the same enterprise services presence as competing cloud service providers? This will be the biggest question for AWS as investors saw proof in 2014 that AWS competitors can steal market share.

Was 2014 a fluke for Microsoft?
Microsoft has been one of those noted Amazon.com competitors, leveraging its near 91% share of the desktop space with Windows, including a leading presence with enterprise customers, to steal market share. Microsoft has continued to gain ground on Amazon.com's comfortable lead in cloud infrastructure as a service, laaS, allowing the company to grow its market share in cloud infrastructure services from 7% to over 10% throughout 2014, behind revenue growth well over 100%.

Microsoft's success in the cloud rests on Azure and the company's ability to keep expanding its services for enterprise customers. Microsoft has leveraged Azure with its Hyper-V, Office 365, Windows Server and System Center to drive enterprise customers to its platform. However, Amazon.com has a comfortable lead over Microsoft in this arena, and much of Microsoft's future success rests on how well it continues to build and expand its Azure platform with SaaS applications.

That said, much of what Microsoft creates in the cloud, including its growth in customers, was dictated by the company's willingness to partner with other high profile enterprise service companies last year. These include partnerships with Cisco in data centers, with Salesforce.com's (CRM) CRM solution with Windows operating systems and Azure, and an expanded partnership with SAP (SAP) to provide the former with the latter's software solutions for the cloud and big data.

In essence, Microsoft formed these partnerships last year to accelerate the growth process with Azure and its cloud offerings, and so far, Microsoft has come out on top. However, after forming such high profile partnerships, and expanding its product offerings throughout last year, can Microsoft make a large push to solidify its place as the No. 2 company in cloud infrastructure services? Can it further challenge Amazon.com for the No. 1 spot long-term? Or, was last year a fluke, a result of forming the noted partnerships, thereby creating a short-lived boost to revenue, growth that will fizzle in 2015? These questions will certainly be answered quickly in 2015.

Will IBM's acquired cloud assets grow organically?
Unlike Amazon.com and Microsoft who built their cloud platforms from the ground up - although Microsoft has since partnered with other companies to bolster its cloud offerings - the majority if not all of IBM's cloud business has been acquired. In essence, this makes the questions surrounding IBM's cloud business in 2015, which has an 8% share, rather evident.

Specifically, back in June 2013, after IBM paid $2 billion to acquire cloud computing company SoftLayer, management noted that it had already spent $4.5 billion on more than a dozen acquisitions to bolster its cloud software and services business. Throughout 2013, IBM spent more than $3 billion on acquisitions, most of which were related to the cloud. Then in 2014, many of IBM's acquisitions have also been related to the cloud, such as Cloudant and CrossIdeas. So while IBM has grown its cloud revenue by 80% throughout the last year, and is now on a $3.1 billion revenue run-rate for the next 12 months, much if not all of that growth has been acquired.

This sparks the question of whether or not IBM can ever grow its cloud business organically, and at a rate that is appeasing to shareholders? Theoretically, investors could estimate that IBM has spent nearly $10 billion on the cloud and has nothing but $3.1 billion in revenue over the next 12 months to show for it, and poor organic growth. Albeit, IBM is certain to spend big bucks on the cloud in 2015, but unless IBM plans to spend another $5 or $10 billion, investors will know quickly in 2015 whether new customers are gravitating toward its cloud services or if it is simply buying existing businesses with slow growth. The answer to that question could be important in whether investors view IBM as a legitimate player in the cloud.

Something to think about
With all things considered, I personally like Microsoft as the best play on future cloud growth for both its presence with consumers and enterprise customers. Certainly, Amazon.com has the most server capacity, by far, and its Business Intelligence presence (through AWS Marketplace) remains light-years ahead of the competition. However, Microsoft proved in 2014 that through partnerships and organic growth, it can become a legitimate threat to Amazon.com. Furthermore, Amazon.com's lost market share suggests that AWS has more to lose than it does to gain.

Microsoft, primarily a software company, has a great shot to produce another monster year in 2015. Meanwhile, Amazon.com should perform well with AWS, but for IBM, I wouldn't take any bets on its cloud at this point in time. Nonetheless, each company has a lot to prove in 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.