Cloud overtakes on-prem data centers in 2020
Cloud has been slowly closing in on on-premises solutions and finally overtook the latter in 2020. The latest findings from the Synergy Research Group show that enterprise spending on cloud services saw explosive growth in 2020, resulting in a $40 billion increase — the biggest in 10 years. (Source)
In March 2021, US-based market intelligence Synergy Research Group published their most recent findings on enterprise spending on cloud and data centers. The report revealed that enterprises invested nearly $130 billion in cloud services globally — increasing last year’s total enterprise spending by 45% ($85 billion). At the same time, enterprises worldwide continue the trend of lowering spend on data center hardware and software, reducing total expenditure to just $90 billion in 2020 (another 6% drop).
Taking a step back and looking at the enterprise spending habits of the last decade reveals two very obvious market trends. First, cloud services have seen an explosive and consistent year-on-year increase in enterprise spending since 2010, indicating equally explosive growth. And second, on-premises data center spending has been fairly stagnant.
Why the sudden growth in cloud spending?
Although cloud services have seen substantial growth consistently in the past decade (52% on average), 2020’s explosive growth wasn’t “natural”. One of the biggest (and more obvious) factors in this jump was the global pandemic.
COVID-19 forced many enterprises to shift to cloud compute due to a number of reasons. For instance, many businesses could not deploy remote working solutions on their existing on-premises solutions, either due to lacking security and device management or simply due to lack of scalability. Additionally, travel restrictions and worldwide quarantines meant that on-prem data centers around the world were running on significantly fewer personnel — limiting disaster recovery and IT support.
Furthermore, cloud computing is a blanket term covering numerous technologies, which did not grow uniformly. For instance, behind the increased cloud spend, Platform-as-a-Service (PaaS) which includes cloud IoT and analytics saw the biggest growth. On the other hand, managed private cloud expenditure saw a slight decrease.
Why did on-prem expenditure fall so much?
The average annual spending growth for on-premises solutions was just 2% but it fell by 6% in 2020 — why? Well, as we mentioned, COVID-19 obviously played a very big role in this drop. However, internal factors also played a role. For instance, cloud computing has been more affordable for enterprises in almost every industry for a while now and it was very likely to decrease, irrespective of a global health crisis. Granted, the pandemic increased the extent of the decrease.
Cloud versus on-prem
It’s important to understand that the market share between cloud services and on-premises services isn’t a pie — one having more share doesn’t mean the other has to have less. In fact, if anything the pie is only growing. As the data storage and computing needs increase worldwide, businesses are looking for more servers, most of which happen to be in cloud infrastructure due to lower costs, lower administrative overhead, better out-of-the-box security, etc.
However, businesses are still diverting a certain percentage of data to on-premises data centers due to a myriad of reasons, including slow digital transformation and security. The percentage depends on the industry and business itself, it can be less than 10% and in some cases, more than 90%. According to John Dinsdale, a Chief Analyst at Synergy Research Group, “60% of the servers now being sold are going into cloud providers’ data centers and not those of enterprises”.
In other words, even if cloud infrastructure is overall the better option for businesses, it’s not capable of handling every single use case. As a result, we’re going to continue seeing explosive growth in cloud infrastructure as the majority of enterprise needs are handled by it. At the same time, on-prem data centers will continue facing reduced enterprise spend, albeit very slowly — in an almost stagnant fashion.
What to expect next year?
Judging from historical performance, it would be safe to assume that the two trends discussed will very likely continue into next year. However, as vaccine rollout has already begun in most parts of the world, we can also expect COVID-19 to have less influence. This less severe impact of the pandemic will very likely “normalize” both the growth and decline figures in cloud and on-prem spending respectively. On top of this, the data reveals that cost has been a major consideration in budget allocation which favors cloud services as they are more affordable for the majority of use cases.
That said, it’s very difficult to make more granular predictions as enterprise spending is directly related to workloads and workloads are volatile and highly dependent on market conditions. As Dinsdale puts it, “the concept of ‘workloads’ is such a fungible issue, especially when you try to quantify it”. For instance, IoT might see explosive growth next year which would favor cloud infrastructure. On the other hand, it’s also possible that cloud vendors drop the ball on business apps software and are unable to compete with on-prem solutions on that front.