This section is sponsored. Sponsored content is paid for and produced by an advertiser rather than interactive investor (ii). ii does not endorse any particular product. If you are unsure if an investment is suitable for you please seek advice from an independent financial adviser. Sponsored content (whole pages or sections within a page) will always be marked by a green "Sponsored" tag and have a green border.

Cloud computing: A business necessity

sponsored by Polar Capital |

Ben Rogoff, Director of Technology at Polar Capital Technology Trust, on how cloud computing is driving digital transformation for business.

In just a decade, cloud computing has become the default computing platform, with 88% of organisations now adopting a cloud-first strategy. What began as a way of increasing flexibility and reducing IT costs, has morphed into a strategic necessity for companies to become more agile and access infrastructure capabilities they do not have themselves.

Cloud computing allows companies to access virtually limitless computing power and storage on a pay-as-you-go basis. Any organisation – from a start-up to a government – can access world-class computing resources cheaply and quickly. The computing infrastructure itself is owned and operated by the “hyperscale” cloud companies Amazon, Microsoft and Google. When individuals stream videos, play games, use social networks and bank online, they are often using physical computing resources sitting in the cloud. Instagram is an example of an application that uses cloud computing to store photographs.

More importantly for us, it also allows businesses to save the cost of having to own, maintain and manage their own hard drives or servers while still having the ability to provide full computing capabilities. Cloud computing is a key part of businesses’ digital transformations as they modernise not just to evolve but to survive.

Where are we now?

The cloud computing industry is dominated by three big players. Amazon Web Services (AWS) is Amazon’s cloud platform that was launched in 2006 and is the market leader. To give an idea of the scale of the business, in Q4 2018 alone it generated $6.7 billion (£5.4 billion) in revenues, up 45% on the previous year, with a profit margin just shy of 30%. Azure, which launched in 2010, is Microsoft’s equivalent that recorded $3.1 billion (£2.5 billion) in revenue over the same timeframe (76% y/y). Google’s GCP (Google Cloud Platform, which includes G Suite/Google Apps) produced $2.7 billion (£2.2 billion) up 102% year-on-year.

Three main categories of cloud computing service have developed: Infrastructure as a Service (IaaS); the significantly larger Software as a Service (SaaS); and the intermediate Platform as a Service (PaaS), where the consumer provides the software and the provider provides the network, server and operating system.

IaaS is essentially the storage and network building blocks of any cloud service. It has quadrupled in value over the past three years to be worth more than $42 billion (£34 billion). As often happens with disruptive technologies, we appear to have hit an adoption sweet spot – having taken 10 years to reach the first $10 billion in revenue (2006-2016), IaaS is now adding $10 billion (£8 billion) revenue every 1-2 years. While growth must invariably slow at some point, the market is expected to sustain growth rates of around 30-35% which, at the higher end of forecasts, means the IaaS market could be worth as much as $150 billion (£122 billion) by 2023. SaaS has also continued to deliver strong growth over the past year and is forecast to expand by more than 20% annually to around $235 billion (£191 billion) by 2023.

Survival of the biggest and brightest

The IaaS market is rapidly forming around a handful of companies. A year ago, research firm Gartner produced an IaaS “magic quadrant” of 15 leading cloud companies; this year there are just six. Gone are the telcos and managed service providers leaving three vendors who, thanks to their massive scale, deliver high levels of performance, fault tolerance and availability. Of these, AWS has an estimated 61% market share and Azure 23%.

trillion (£1.5 trillion) is up for grabs. Fortunately, either scenario should provide plenty of runway to sustain cloud growth well into the next decade.

IT budgets continue to be reallocated away from legacy areas such as hardware and infrastructure software in favour of cloud, cybersecurity and workflow automation. This will continue to weigh on and work against incumbents such as Dell, Oracle and HP and in favour of cloud vendors such as Amazon, Microsoft and Google. Overall device growth is just 1.6% this year following a flattish 2018. Having peaked in 2011, the PC market has been declining ever since, with units falling a further 1.3% last year. Tablets peaked in 2014 when 250 million units were shipped but sales have since declined for 16 consecutive quarters – units declined 6% in 2018. The smartphone market continues to falter amid high penetration and a slowing pace of innovation, with units declining 1% last year with growth of 1.4% expected between 2017 and 2022.

At an IaaS level, storage spending is expected to decline by 1.8% per annum through 2022 despite expectations of a 10-fold increase in data creation between 2017 and 2025. This is because the cost of data storage is declining at a commensurate rate: $100 (£81) next year will buy you 20-40% more gigabytes of storage than $100 will this year. The outlook for mainframes also looks problematic, with more than half of CIOs using mainframes today expecting to move off them within the next five years. While servers remain a bright spot, this largely reflects hyperscale demand and pass-through of higher server component prices (which are currently reversing). Even within software, budgets continue to be reallocated away from legacy areas such as infrastructure.

Like electricity before it, the cloud has become both the source of and saviour from disruption, with cloud computing now providing the infrastructure to help businesses drive their digital transformation.

Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion.  It shall not and does not constitute an offer or solicitation of an offer to make an investment into any fund or Company managed by Polar Capital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligible counterparties. The law restricts distribution of this document in certain jurisdictions; therefore, it is the responsibility of the reader to inform themselves about and observe any such restrictions. It is the responsibility of any person/s in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction.Polar Capital Technology Trust plc is an Investment Company with investment trust status and as such its ordinary shares are excluded from the FCA’s (Financial Conduct Authority’s) restrictions which apply to non-mainstream investment products. The Company conducts its affairs and intends to continue to do so for the foreseeable future so that the exclusion continues to apply. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Funds Plc – Automation and Artificial Intelligence Fund, Polar Capital PLC – Global Technology Fund or Polar Capital Technology Trust plc which is an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager.  In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, this document may only be distributed and shares may only be offered or placed in a Member State to the extent that (1) the fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD; or (2) this document may otherwise be lawfully distributed and the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, the Fund has not been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in any member state of the EEA. However, such approval may be sought, or such notification or registration may be made in the future. Therefore, this document is only transmitted to an investor in an EEA Member State at such investor’s own initiative. SUCH INFORMATION, INCLUDING RELEVANT RISK FACTORS, IS CONTAINED IN THE COMPANY OR FUND’S OFFER DOCUMENT WHICH MUST BE READ BY ANY PROSPECTIVE INVESTOR.

Statements/Opinions/Views: All opinions and estimates constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. This material does not constitute legal or accounting advice; readers should contact their legal and accounting professionals for such information. All sources are Polar Capital unless otherwise stated.

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein. 

Holdings: Portfolio data is “as at” the date indicated and should not be relied upon as a complete or current listing of the holdings (or top holdings) of the Company or Fund. The holdings may represent only a small percentage of the aggregate portfolio holdings, are subject to change without notice, and may not represent current or future portfolio composition. Information on particular holdings may be withheld if it is in the Company or Fund’s best interest to do so. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document.  A list of all recommendations made within the immediately preceding 12 months is available upon request. This document is not a recommendation to purchase or sell any particular security.  It is designed to provide updated information to professional investors to enable them to monitor the Company or Fund.

Polar Capital

Polar Capital is a specialist, investment-led, active fund management company.
We offer investors a wide range of regional and sector-based funds built using a fundamental, research-driven approach, run by dedicated, specialist investment teams. 
The Company manages three sector-based investment trusts, covering some of the largest sectors in the world: technology, healthcare and financials. 

sponsored articles from Polar Capital