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Lack of Profits a Troubling Sign for Cloud Providers

Is the cloud bubble about the burst?

23Jun

The picture is clear and it’s not very pretty. Cloud computing providers are struggling to turn a profit. This may come as a shock to many who have heard nothing but great things about the state of the cloud. After all, estimates from IHS Technology put the amount of money businesses are expected to invest in the cloud at more than $230 billion by 2017. Those kind of numbers make the cloud market out to be a healthy and vibrant one, but just because enterprises are willing to invest in the cloud doesn’t mean cloud providers are being particularly successful. In fact, for many cloud computing providers, the losses are mounting up, and the ramifications could be felt for many years to come.

Future cloud-computing-technology from Dell

Some are dubbing this the new “cloud bubble,” one which bears some similarity to the infamous dot-com bubble that burst in the early 2000s. That bubble was marked by the rapid growth of internet companies despite operating at significant losses. The same can be said of numerous cloud service providers. One such example of this is Box Inc. Box has had trouble turning a profit ever since it began back in 2005. In a recent filing to the SEC, Box admitted it did not “expect to be profitable for the foreseeable future.” Recent history has shown this to be true, unfortunately. In 2011, Box incurred a net loss of more than $50 million. That number went up to more than $110 million in losses in 2013 and nearly $170 million in 2014. Reports from this year don’t make the future look any brighter. In its first quarterly report, Box’s higher operating expenses and large investments in security have lead to bigger losses -- more than $35 million from 2015’s first quarter alone.

Were this an isolated incident, perhaps there wouldn’t be so much fretting over the cloud market, but sadly, instances of losses are the rule rather than the exception. Workday, a company specializing in cloud-based software, still operates at a loss despite going public in 2012. The projected earnings for Workday indicate the company is unlikely to see a profit in 2015. NetSuite is another example of a cloud company that went public years ago and has yet to turn a profit. Of course, these companies are small compared to a major competitor like Salesforce, but even that cloud provider is having difficulties. Despite having around $4 billion in revenue, Salesforce still experienced more than $200 million in losses in 2014 with no sign of profit in sight. Even if Salesforce did earn a profit, the company is still $2.5 billion in debt.

But what about the biggest player in the game: Amazon? Recently Amazon announced it had earned an impressive $1.6 billion in net sales last year for its cloud computing service. While some may see that as reason to be optimistic, analysts at Citi Research predict it will operate at a loss this year, just like the $120 million Amazon Web Services lost in 2014. The one bright side to this is that the same report estimates AWS will turn a profit by 2016. The same can’t be said of other cloud providers, though.

There’s no single reason for these cloud struggles. Some blame it on the overemphasis on investments in sales and marketing on not on the actual product. Others believe the constant price wars lead smaller cloud providers to keep slashing prices, forcing them to operate at a loss just to survive. Whatever the reason, the impact of a cloud bubble bursting will be felt all over the IT sphere. So what can IT professionals do to prepare should the worst happen?

A lesson may be found in the aftermath of recent closures from cloud companies like Nirvanix and Megacloud. In those cases, customers were notified and told to withdraw their data from the cloud quickly. Those who delayed found their data was soon lost. From this, IT workers can learn that they should always have an exit strategy which involves classifying data by importance and having a plan in place to get that data out of the cloud as quickly as possible. Backups of the most critical data and apps should also be kept at different locations or with different providers.

Much of IT’s strategy will also come down to who they choose as a cloud provider. Companies like Amazon and Microsoft won’t be going out of business in the near future, and their business models don’t solely depend on their cloud divisions. The lesson, as always, is to be cautious when picking a provider and always have a disaster recovery plan in place. Should the cloud bubble burst, IT workers will need all the important data and apps at hand to make sure their businesses remain up and running.

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