Cloud: Will It Bring Technological Sunshine for Long?

Cloud has become the buzzword of the technology world, capturing the imagination of both the consumer and the producer. Even though technological innovation moves at lightning speed, promising progress every day, cloud technology seems to have established itself as a steady frontrunner of technological progress. The present as well as potential benefits of moving towards operating on a Cloud have become increasingly attractive to both businesses as well as individual consumers. This Cloud revolution has come in due time as well, just as the technology sector has been struggling to climb out of the 12 year bear market, further dampened by the recession. The real question is though, whether Cloud can help usher in a relatively long term upward trend in the technology sector or whether those investing in this trend have their head in the Clouds.

So what is Cloud? According to the National Institute of Standards and Technology “Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.” Essentially, Cloud computing allows users to store their data in a “cloud,” somewhere away from their computer. This allows the customer to minimize the costs of hardware, application requirements, maintenance, and professional services. There are several segments of the Cloud software field that are marketed to consumers: software as a service (SAAS), platform as a service (PAAS), and infrastructure as a service (IAAS). SAAS, in particular has been extremely popular with both firms and private individuals and has established itself as the most developed and largest market segment. Cloud SAAS can be delivered to consumers on a varying degree of data privacy: including public (data is accessible to everyone), private (data is protected by a firewall), and hybrid (the combination of the two). Most importantly, Cloud software can theoretically be accessed from any computer with Internet access, enabling the user to stay connected to his or her data at any time at any location. The convenience of Cloud is especially important for large firms and companies that need to supply at times thousand of employees with relevant software.

The significant cost-savings and ease of access benefits make Cloud one of the most promising technological breakthroughs of the past decade, according to Cloud enthusiasts. The growth that could be brought about by companies associated with the Cloud could even potentially revitalize the technology sector itself. This industry, while constantly producing innovation, has staggered in terms of equity value growth over the past decade. The 12-year bear market in technology stock has been dampened even further by the recession and is now facing pressure from the European slow-down. Many companies in the software field in particular have seen their revenues decline which has reflected in their stock price. However, Cloud technology revenues will grow at a compound annual growth rate (CAGR) of 27.6% throughout 2012, and are expected to reach $72.9 billion by 2015.

The reason why Cloud’s success is so significant to the technology world as a whole is that its production and distribution traverse several sectors of the industry. Development and implementation of cloud software includes expertise from firms involved in software, storage and computing power, and platform providers that give site developers tools to build and host applications. There are firms that specialize in each one of the particular tasks, and some do all three. Thus, increased utilization of Cloud software in both the private and the commercial sector means a lot of business growth for multiple sectors of the technology industry. Many companies have already capitalized on that by implementing both vertical and horizontal integration through mergers and acquisitions of relevant companies. This is not an entirely new trend, as M&A activity in the technology sector has been growing over the past few years. In fact, what we have actually seen in 2011 is a fall in software mergers and acquisitions by numbers in as well a simultaneous significant rise in deal value: the average deal value of software firm deals rose 48%. This may indicate an already apparent drive towards consolidation in the software, and particularly cloud sector. While Cloud related M&A has indeed been strong and may be driving much of the software sector activity it may not be relied on for a long time.

So can Cloud sustain the exceptional growth that it has seen over the past years and continue to propel the software industry forward? Not necessarily. Cloud adoption is indeed expected to continue and grow even further, but it is unlikely to ever fully replace the traditional on-premise software. There are several characteristics of Cloud (and particularly SAAS) that impede its integration. First of all, Cloud’s limited ability to customize will not suit all users of enterprise software. Second, users may be hesitant to migrate sensitive data onto third-party systems under third-party control. Several hacker organization attacks in 2011 (including actions by Anonymous) have made this a particularly pertinent consideration. Finally, other concerns about SAAS include availability and performance, which are the responsibility of the SAAS vendor. Thus, because of these factors on-premise software solutions will always have an advantage for certain clients.

However, despite the fact that Cloud may not be the long-term growth driver in the technology sphere for long, it may be a boon for the investor for the moment. Software companies that have adopted their technology to Cloud can be a good bet for investment since they have shown their innovating edge and the drive to keep up with innovation. Their revenues will most likely see growth as a result of adoption of Cloud technology (or acquisition of subsidiaries that will help them provide it) and a wider dissemination of their product. SAAS provision, will particularly benefit these companies. Second, companies that currently provide on-premise software that could be provided on a Cloud basis are also good bets: they will likely succumb to the trend and offer the SAAS option soon, increasing their product line and hopefully customer base. Adobe, for one, is an example of such a company. When trying to decide which software company would be a good SAAS investment, look for solid companies with a lot of available cash-they are prime suspects for a future SAAS development.

Cloud software delivery has certainly shown itself to be a trend of persistent growth over the past years. Its rapid dissemination has driven much growth in the software sector and can perhaps even buoy stock values of an industry that has experienced a 12 year bear market. However, Cloud should not be hailed as the savior of the technology sector- it may already be close to peaking in M&A activity as well as soon approaching a plateau in adoption. For now though, Cloud is sure to bring some sunshine to the clever investor’s portfolio.

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