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Fit to burst: Is there a Cloud bubble?

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In March 2000, the economy took a major hit as the stocks of numerous internet companies dropped. The resulting downturn has been referred to as the dotcom bubble, a stock slump so severe that the American economy eventually suffered a recession. Internet businesses of all types closed their doors once that bubble burst. Fifteen years later, it’s easy to look at what happened and wonder why we didn’t see it coming, but as the saying goes, hindsight is 20/20.

The real tricky part is identifying a bubble that we’re currently in. That brings us to today’s cloud computing landscape. There’s no denying the rapid growth of public clouds and various cloud services in the past few years. The cloud’s popularity has exploded and its impact on the business world is clear, but are we on the verge of another bubble, this one of the cloud variety? It’s tough to determine for sure, but the signs are there for those willing to pay them mind.

Of course, cloud service providers will balk at the idea of a cloud bubble, let alone that the bubble is about to burst. They’ll point to the positive signs in the cloud market, signs that are tough to ignore. Take the massive growth of the cloud, for instance. A report from IHS shows that in 2013, cloud-related business spending reached $145 billion. The report goes on to estimate that cloud spending will climb dramatically, reaching $235 billion by the year 2017. All in all, from 2011 to 2017, cloud-related business spending will triple. This growth is mainly fueled by demand for the product. Companies want to use the cloud, and the barriers to using it are getting lower seemingly every day.

As positive as these signs are, they carry with it some harsh reality. Perhaps the most important point to take away from current cloud growth is that fact that many cloud companies simply aren’t profitable. Some cloud providers even lose money at a tremendous rate. Box Inc., who went public in 2014, has posted net losses every year since 2005. By January 2014, the company had a total deficit of more than $350 million dollars. Since 2007, NetSuite hasn’t posted a profit either. Workday is in a similar situation. These aren’t isolated cases either. While enthusiasm may be present for adopting cloud computing, the fact remains that profitable companies are few and far between. The prevailing theory is that to survive, one must grow, but that’s bringing in more problems.

Cloud providers are looking for customers, and to do that, many are engaging in cloud price wars. To gain more market share, major cloud providers like Amazon and Google are slashing prices, sometimes by more than half. To compete, other smaller providers have needed to cut their own rates. The problem is that the likes of Google, Microsoft, and Amazon can afford these dramatic reductions, while smaller companies have no choice but to adopt an unsustainable model. The more intense these battles become, the more prices go down, and the longer smaller businesses have to operate at a loss.

This competition results in a need for comparatively smaller providers to bring in as many customers as possible, but that strategy is only adding to the losses. Some cloud providers, like Salesforce, spend millions to even billions of dollars in sales and marketing, leaving lower funds and fewer resources for research and development. In other words, the emphasis is on sales and not on the actual product. Complicating the situation is the rush of smaller cloud providers to gobble up as many small enterprises for customers as possible. Large companies are more reluctant to adopt public clouds, and when comparing the costs, they may find it more worthwhile to spend their money on building their own private cloud.

Factoring in all these variables paints a picture of an unstable market, where demand continues to grow but prices keep dropping. Most of the smaller providers find themselves in a no-win situation, competing for customers against tech giants with a global reach. The more companies continue operating at a loss while still growing, the larger the cloud bubble becomes. There’s no telling when the bubble will burst, but it’s becoming more and more difficult to ignore the signs. While many businesses want to receive the benefits of cloud computing quickly, predicting what the cloud market looks like over the next decade is tricky. It’s best to prepare now and hope the next burst won’t be as damaging as the dotcom debacle.

About the Author:

Rick Delgado is a technology commentator and writer.