Cloud Swallowing The Software Business

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Includes: ADBE, AMZN, BOX, CRM, GOOG, HPQ, IBM, MSFT, ORCL, WDAY
by: Dana Blankenhorn

Summary

The first half of the cloud decade was about infrastructure. The second half is about software.

Software as a Service is expected to overtake infrastructure as the main cloud play.

Microsoft, Oracle and Workday are among the best ways to play this trend.

The first half of this decade in the cloud has been about clouds scaling, about cloud infrastructure, and sometimes about cloud platforms.

The second half of the decade will be about cloud swallowing the software business.

That's bad news for companies like Amazon.Com (NASDAQ:AMZN), which is mainly focused on infrastructure, and on Box (NYSE:BOX), which is mainly focused on storage. It's great news for companies like Microsoft (NASDAQ:MSFT), which announced last week Windows 10 will be entirely cloud-based, and Oracle (NYSE:ORCL), which is steadily swallowing the faux-cloud industry pioneered by Salesforce.com (NYSE:CRM).

Nearly every recent market research study issued over the last few months has told the same story. Software as a Service, or SaaS, is expected to become the most commonly-deployed cloud service over the next five years, vying with security as the key growth area. SaaS will be a $106 billion market in five years, up from $72 billion last year. Cloud is replacing in-house delivery of software at a staggering rate. By 2018, 60% of enterprises will have at least half their infrastructure running on clouds.

Rather than cloud moving from public to private and hybrid models, market researchers now think that software companies are moving workloads out of data centers and into their own clouds. That is the primary strategy of Microsoft, Oracle, Salesforce, and Adobe (NASDAQ:ADBE), which calls its offering the Creative Cloud. The question is the degree to which these companies can attach the working files and stored files of customers, with software as the bell cow, and the betting right now is that they will.

We are past the point of focusing on new workloads going to cloud. The price wars of the last few years have used that market to create a glut of capacity. Traditional IT vendors are now using the cachet of cloud to grab the business they previously had and move it slowly to the new platform. Analysts think this is going to work. (It should be noted that these are the same analysts who a few years ago were predicting that "private cloud" would overtake the public cloud, so take it with a grain of salt.)

It's the assumption that SaaS will overtake Infrastructure as a Service, or IaaS, that has Oracle co-CEO Mark Hurd claiming that Oracle will lead "the cloud market." What he means is that SaaS is being redefined as cloud and that Oracle will become the leading player in SaaS. Microsoft may argue the point, but both companies are primarily putting existing businesses onto their cloud vendors, not creating new businesses.

Is there hope, then, for Amazon and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in the new environment? Yes, there is, namely a feature race on virtual machines that is aimed, not at enterprise customers, but at software companies developing their own cloud applications. The best way to assure this may be for these players to buy some of the cloud application players. The trouble is this has been the long-time strategy of such players as Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM), as well as Oracle.

This means that, for speculators, the best bet in the cloud today might be a company like Workday (NYSE:WDAY), whose stock has gone nowhere over the last year, but which has developed a business with over $800 million in revenue for fiscal 2015 based on a cloud application. For 2015 expect a SaaS merger boom as cloud players look to lock-in alliances.

For investors, meanwhile, your best play is to bet that the market researchers are right, and that companies like Microsoft, Oracle, and Salesforce.com can do what they're expected to, and use SaaS to swallow the cloud. Just remember that the researchers have been wrong before.

Disclosure: The author is long AMZN, GOOG, GOOGL.

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.