2014 Outlook for Cloud technology in Big Data and Mobility Wayne Collette, CFA, Senior Portfolio Manager Cloud technology is a significant and ongoing trend affecting the technology industry. A new breed of software and internet companies are leveraging new technology and capitalizing on the growth of the cloud. Big Data and Mobility sectors are especially affected by the faster pace of advances and innovation in Cloud technology. What is the Cloud? Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources such as networks, servers, storage, applications and services, that can be rapidly provisioned and released with minimal management effort or serviceprovider interaction. Simply, it is a utility model for building, deploying and accessing applications, much the way one uses electricity in a home delivered by wire from a faraway power plant. Cloud computing generally includes three different layers or services: Infrastructure as a service (IaaS), Platform as a service (PaaS) and Software as a service (SaaS), as seen in Exhibit 1. Exhibit 1: Cloud computing service layers Source: RBC Capital Markets Software as a service Platform as a service Infrastructure as a service This market is expected to reach almost $150 billion in five years, up from $60 billion in 2012 at a compounded annual growth rate of 19%. Software and the Cloud Over the past three decades, software has grown as a percentage of gross domestic product (GDP) from less than 25 basis points (bps) in the 1980s to about 200 bps today, based upon U.S. data. With the accelerating trend of
network-based computing through the Cloud, software is likely to gain several more percentage points of GDP in the years ahead. Cloud software is sold as a subscription. The enterprise is effectively renting software rather than buying it. However, the data stored within the application is often of a mission critical nature, such as customer contact information in a sales force automation application or financial data in an enterprise resource planning (ERP) system. The magnitude of the monthly or annual subscription is often a fraction of its licensed software equivalent, with the added benefit that an enterprise doesn t need to manage the information technology (IT) environment. The net effect of outsourced, low-cost, mission-critical software is a long-term recurring revenue stream for the vendor. Over time, this revenue stream creates more value than traditional on-premise software, given that customer lifetime value can be several times greater. The rapid growth of SaaS and subscription models will continue in the coming years, as the generationally more effi cient economics of the Cloud model translate into far greater adoption of software. There are broad opportunities for what can be delivered as a service. Exhibit 2 illustrates cloud computing as a series of tasks that are accessed via a variety of endpoints including desktops, laptops, tablets, phones and more. Exhibit 2: Cloud computing endpoints Servers Laptop Infrastructure Network Content Compute Desktops Monitoring Block storage Application Finance Object storage Collaboration Queue Communications Database Identity Phones Tablets Source: RBC Capital Markets
Big Data and the Cloud The cycle of declining costs in computing, storage and networking is generating massive growth in the volume of captured data, which is roughly doubling every two years. IDC estimates that in 2011 the world generated 1.8 zettabytes (1.8 trillion gigabytes) of data and they expect a 44-fold increase to 35 zettabytes (35 trillion gigabytes) by 2020. This creates a huge opportunity for analytical software that helps businesses make better data-driven decisions. At the same time, protecting this data is becoming increasingly important and diffi cult, amid security threats that grow more sophisticated and pervasive in nature. The Cloud model provides a naturally effi cient mechanism for identifying threats, protecting assets and distributing defensive code through the network. The term Big Data itself is misleading because it implies only large volumes of data. This is only partially true. As shown in Exhibit 3, Big Data represents not only the volume of data but also the variety and velocity of data: Winners in the Big Data world will be able to handle large and growing volumes of data from a wide variety of sources and will do it at great speed. Exhibit 3: Big Data includes the variety, velocity and volume of data Variety & unstructured Structured Structured Big data Batch Streaming data Velocity With the rise of client-server technology and cloud computing, businesses generate a signifi cant amount of data from ERP, CRM and human resource management systems applications from vendors such as Oracle, Salesforce.com and SAP. These transactional or structured data are stored in relational databases (Oracle) and analytic databases (Teradata) and analyzed with business intelligence tools from Oracle (Hyperion), SAP (Business Objects) and IBM (Cognos). Structured data represent data that share similar characteristics and typically reside in relational databases and spreadsheets. The majority of Big Data growth, however, is likely to be unstructured data from sources such as social media, log fi les, text documents, pictures, videos and more. New companies are developing technologies to access and analyze unstructured data. There is enormous market growth potential in the coming years as companies look to access, analyze and implement strategies based upon this unstructured customer data. Mobility and the Cloud Cell phones are more commonly used to access information than even two years ago. What may not be appreciated is the level of priority that mobility holds. A recent study discovered that 45% of 18-to-34-year-olds consider mobile to be their fi rst choice of device when interacting with online content, placing the platform ahead of laptops and PCs. A main driver behind this trend is the ease of use, speed and accuracy of data provided by the Cloud through applications (apps). Terabytes Zettabytes Volume Source: Deutsche Bank
In the last fi ve years the market for mobile apps has exploded. Apple has the longest standing app store, with more than 1 million apps available for download, hundreds of thousands of app developers, more than 60 million apps downloaded since inception and more than $15 billion in gross bookings over the last three years. Gartner estimates the number of app downloads will grow at a 27% compound annual growth rate (CAGR) over the next four years. Growth is driven primarily by continued penetration of smartphones globally and increasing spend per user. Most mobile applications, like Google Search, Google Maps, Yelp and TripAdvisor, provide information and transactions via the Cloud and the Internet. Conclusion Software, Big Data and Mobility, especially as they relate to the Cloud, will be signifi cant forces of change and growth. They are major areas of investment opportunity and risk. Identifying the companies that will benefi t and those that will face challenges as these forces continue to shape the technology world will be key to investment success in the technology sector. The market prices of technology and technology-related stocks tend to exhibit a greater degree of market risk and price volatility compared with other types of investments. These stocks also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation and/or obsolete products or services.
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