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Cloud Consolidations Propel the Industry Forward

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As providers move to scale up, acquisitions are the key to success.

With the cloud infrastructure market booming, cloud providers must develop winning strategies to compete for market share and presence. As new companies emerge, some succeed while others fail. Building successful distribution channels, whether through direct sales or a channel model, is expensive and time consuming. The current cycle of competition is like an enormous game of “musical chairs,” with providers jostling for a dwindling—yet still plentiful—number of seats. As smaller, less-financed companies fall out of the running, this constant churn puts small providers in a desirable or, in some cases, necessary position to sell their companies. In a market this big and still accelerating, the potential for consolidation creates tremendous investment opportunities for private equity investors and their cloud providers to source and acquire these numerous smaller players that want or need to exit.

In less than a decade, the cloud infrastructure market has generated staggering numbers. Since 2011, the IaaS market has grown more than 40 percent per year. While that figure has leveled off somewhat, the market size remains enormous and is still projected to grow more than 25 percent per year through the end of the decade. In 2017 alone, Gartner forecasts the global cloud market to exceed $125 billion. Other estimates have the market approaching (or passing) the $200 billion mark by 2020. Within the next five years, more computing power will be deployed by IaaS / PaaS cloud providers than by enterprise data centers, and cloud revenue is expected to match or exceed that of traditional servers. It is safe to say that within ten years, cloud infrastructure services will significantly replace traditional hardware for many, if not most, enterprises and SMBs.

With the cloud infrastructure market so ripe, conventional wisdom says that the big players will pluck the sweetest fruit and leave only the low-hanging morsels for smaller providers to fight over. This is not really the case, though. Super-scale cloud infrastructure providers such as AWS and Azure are primarily focused at the top of the food chain, and while they are, indeed, making huge inroads into the enterprise space, they do not dominate the entire market. Instead, their enterprise activities are actually spurring general interest in the cloud from small and medium-sized businesses, and as a result, stimulating a vast middle market of SMBs ready to receive the cloud’s value prop—a $25+ billion opportunity in which emerging, service-oriented cloud providers can flourish.

Viewed as a whole, the cloud services market for SMBs—where the vast majority of IT decisions are made—far outweighs the much smaller number of enterprise businesses looking for hosted infrastructure. And while size still matters to an SMB searching for a provider, mega-clouds are clearly not a practical option due largely to the lack of infrastructure engineering talent at companies with less than 200 employees. At its core, the SMB is still a value-oriented market, and their desire for robust yet cost-effective cloud solutions allows companies other than the big players to develop good, “high-level” cloud capabilities that address their needs. This middle market is where companies like Green Cloud reside.

With no geographic borders and few obstacles to startup, it is relatively “easy” for an experienced entrepreneurial team to build a successful cloud company with ~$5 million of capital outlay. Within a few years, smaller cloud providers can realize an impressive $5–8 million in business. As these granular-level companies grow, however, they must scale in order to compete, but scaling past revenues of $10 million takes substantial time, sales and marketing expertise, capital investment, and certainly some luck. Some companies have (or find) the resources to grow, and many of those will ultimately succeed; many others will fail or plateau. Eventually, companies who fail to scale will either go under, or a larger company will come along and buy them out.

So, what happens when a company reaches the ceiling of their capability? The most viable option is to look for a strategic partner to merge with, preferably a larger company with more capacity. Done properly, such consolidations provide the investors with a reward for their hard work and allows the larger cloud provider to expand operations via the acquisition. In the past year, our industry has experienced a tremendous number of such acquisitions—mostly through data centers and hosting companies—but the current wave of consolidation is just beginning.

At Green Cloud, we see a big wave of acquisitions ahead over the next 12–36 months. Our immediate growth strategy is to continue investing in our channel network of more than 400 partners across 46 states, while also leveraging the consolidation trend to scale up and broaden our national footprint. Our tactical goal over the next few years is to acquire smaller companies to rapidly add financial scale and data center provisioning, sales presence, and partner network expansion. We view such acquisitions as the most practical route to augment our rapid, organic growth in the near-term. For other providers looking to scale rather than exit, I suspect you’ll agree that Green Cloud’s strategy is a sound one to follow.

Regardless of what comes, we’re still in the market’s infancy at this point. We love what AWS and Azure are doing by educating the market and helping businesses learn about cloud, and they are leaving a massive opportunity for Green Cloud and our partners. And there is plenty of room for many more companies like Green Cloud, because cloud infrastructure remains a healthy, thriving industry tailor-made for entrepreneurs. If you’re not involved with cloud infrastructure in your business, then do it! If you’re already a cloud provider that needs to scale to stay competitive, now is a good time to consider either acquiring a smaller company, or selling your business and taking a pay-out. If you’re a mid-level provider with resources, or a venture-capital firm, this is a brilliant time to invest. If you’re an MSP or VAR, it’s critical that you incorporate cloud into your business model because recurring revenues can drive more value for your business than anything else.

The cloud is a great bet because the market is still growing, the technology is still evolving, and there is still a lot of healthy competition out there. Here’s to a prosperous 2017 in the cloud!