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The Cloud Race: Public vs Private


The cloud space is abuzz with speculation. The “2016 State of Cloud Survey” brought out some interesting trends. The numbers have been variously interpreted, sometimes conflictingly, by the experts. Each cloud deployment model has its own industry backers who bet on it achieving market leadership/dominance in the future. These predictions stem from an expert/expert group(s) perception of industry dynamics. But, contrasting forecasts tend to complicate things for enterprise IT decision makers. Whether you are already leaning towards a particular model or completely open-minded, how do you decide which one is for you?

So, is the Glass ‘Half-full’ or ‘Half-empty’? Let’s find out.

Before we launch into our own expert view of how the numbers are to be read, we will briefly look into the various deployment models.

Cloud Deployment #1: The Public Cloud

Public clouds offer IT resources on rent to enterprise users. In this model, physical infrastructure is owned and operated by public cloud vendors and shared amongst enterprise users. Third-party providers are responsible for maintenance of data centers and all software updates. Public cloud is perfectly suited to Small and Medium businesses (SMBs) and for enterprises with variable workloads. Public cloud allows faster deployment, reducing time to market significantly. Its pay-as-you-go model and low-cost make IT provisioning easy for startups and SMBs. Public cloud hosting also provides almost infinite scalability to your application when needed. The suitability of public cloud to an enterprise depends on a host of factors. Costs, workload characteristics, scalability,security needs, and management demands are the important ones. Typically, businesses avoid using public clouds for mission-critical workloads or workloads with high security requirements.

Gartner predicts the public cloud services to grow 16.6% in 2016 to a total of $205 billion up from $175 billion in 2015. The highest growth is to be in Infrastructure as a Service (IaaS) segment.

Cloud Deployment #2: The Private Cloud

Private cloud is a cloud deployment model in which infrastructure is dedicated to a single organization. Private clouds can be on premise or remote data centers of a service provider. Similar to public cloud services private cloud too can provide scalability and self-service but the architecture is proprietary. Private clouds provide greater control to IT managers and higher security to enterprise workloads compared to public clouds. For enterprises dealing with strict regulations on data protection private clouds are ideal. Private clouds also offer greater customization of the compute, storage and networking infrastructure to specific IT requirements than public clouds. As a result, private cloud is best for businesses that require direct control over their environments.

The Rightscale “State of Cloud Survey 2016” reported a significant increase year-on-year growth in private cloud adoption which went from 63% to 77%. 31% of the enterprises participating in the survey were revealed to running more than 1000 VMs, a jump from 22% last year. All major private cloud providers also posted strong growth with VMware continuing its lead.

Cloud Deployment #3: The Hybrid Cloud

Hybrid clouds combine the best of both public and private clouds. With hybrid cloud deployment, you can use the public cloud for non-sensitive workloads and private cloud to house business critical applications. If any of your applications experience a surge you can use cloud bursting to requisition more resources from the public cloud. Hybrid deployment model allows greater flexibility to organizations with diversity in workload and security concerns.

Hybrid cloud model can be flexible, agile and very cost effective. The RightScale 2016 State of the Cloud Report survey revealed hybrid cloud adoption rose from 58% to 71% year-over-year.

So, who is winning the race?

“It’s impossible to private-cloud everything” – is the reason enterprises will look to implement public and hybrid models according to Michael Warrilow of Gartner

Private clouds are a solid architectural option for enterprises that want to realize the value of cloud without sacrificing control over IT infrastructure. Some enterprises use the private cloud option to assess the suitability of workloads for public cloud and to push the transition to public cloud by a few years. The future is only going to be brighter for public clouds, while private cloud will still have takers, it will only command a tiny share of the cloud market. Private clouds might even see most of their growth only as a part of hybrid cloud and multi-cloud deployments.

Now let’s look at what the numbers say.

What the Revenues Reveal About the Future

Amazon Web Services (AWS), the 600-pound gorilla of cloud space is showing a 50% (YoY) growth rate and is expected to do so for several more years. More importantly Amazon (its parent) posted a phenomenal jump in profits from $92 million to $857 million!! Some of this profit is surely from AWS which earned $2.88 billion in revenues and spent $2.02 billion in operating expenses leaving $718 million as operating income in Q2 (2016). Also, if we put together the numbers from the last 4 quarters, AWS earned $9.94 billion in revenue.

Another major cloud provider Azure (Microsoft Azure) also reported an impressive growth rate and revenues said to be upwards of 120% and $10 billion respectively. Some of these come from Microsoft Office 360. But if we peg Azure revenues minus Office 360 at a conservative $2.5 billion for the year, and if the cloud giants continue to grow at the current 50% growth rate, the future looks something like this:

By 2020, AWS and Azure will post around $100 billion in revenue, maybe a few billion short if the growth rate drops.

If we compare this with how private cloud vendors are doing, no single vendor is making more than $100 million through OpenStack, if we believe the reports from Wikibon (an analyst firm). The total revenues of all private cloud vendors may very well be below $2-3 billion in that case.

Analyst firm Wikibon believes that no vendor is making more than $100 million via OpenStack. If that’s anywhere near true, the sum total of all vendors has to be less than $2 billion.

Beyond the Numbers

The numbers do not explain why private cloud services are falling behind in the race. We believe the answer lies in: Innovation. Major public cloud vendors have moved beyond pure IaaS offerings. Newer entrants like Google have pushed the envelope with PaaS and machine learning services which are called top of stack services. Public cloud vendors are innovating new services that will power the future of enterprise IT. The key characteristics inherent in these services are beyond the scope of any single enterprise or private cloud. Firstly, the massive scale of public cloud is perfectly suited to provide the large data sets needed to provide machine learning services, something single enterprises would find hard to replicate. Secondly, network effects generated by supporting so many data inputs and customer use-cases will surpass any such effects probable in a private cloud catering to a single enterprise.

What Lies Ahead

Public clouds are evolving fast and they are well-suited to current business environments which seek lesser time to market, agility and scalability. Private clouds too are perfect for certain business contexts and will expand but not as much as public clouds.

A few years from now, it is very likely most cloud deployments will be public clouds. But this doesn’t mean private clouds will cease to exist! They will always have a slice of the cloud market, which however will be dominated by public clouds.