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Spotlight on the cloud
Highlighting industry trends
8th March 2016
Agenda
Time Agenda Speaker
16:00 – 16:30 Registration and champagne reception
16.30 – 16:35 Welcome Charlotte Walker-Osborn, Global
Head of Technology, Media and
Telecoms
16:35 – 17:15 Headline results Charlotte Walker-Osborn and
Paula Barrett, Global Head of
Privacy and Information Law
17:15 – 17:35 Insights and commentary Olivier Wolf, TMT Sector Head, EY
Transaction Advisory Services
17:35 – 17:55 Insights and commentary Alastair McAulay, Director of
Disruptive IT, PA Consulting
17:55 – 18:00 Closing remarks Charlotte Walker-Osborn
18:00 – 19:00 Drinks and canapés
Headline Results
Charlotte Walker-Osborn, Global Head of Technology, Media & Telecoms
Paula Barrett, Global Head of Privacy & Information Law
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−The Survey and report were conducted and written in collaboration with The Lawyer Research Service, a division of The Lawyer
−The survey was undertaken in December 2015 and January 2016
−It was completed by 350 cloud providers, purchasers and industry advisors worldwide
− Responses from purchasers were gathered from a cross-section of sectors
About the research
Highlighting Industry Trends
Spotlight on the Cloud
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
− Infrastructure as a Service
− Platform as a Service
− Software as a Service
“as a”
A common understanding
Cloud
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
− 77% of enterprises utilised cloud by the end of 2014
− 89% of enterprises are predicted to use some form of cloud by the end of 2016
(Vodafone’s Cloud Barometer 2015)
− Cloud market worth US$56.6 billion in 2014
− Approximately 10 times the market size in 2008
(Bessemer Venture Partners)
Clouds are on the rise
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Spend on cloud is on the rise
Cloud spend is significantly increasing…
77% of surveyed purchasers expect their spend to increase during the next 18 months
Only 1% forecast a decrease in spend
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
What is driving the increase in adoption?
What are the main benefits your business offers to
customers adopting its cloud services? (Providers)
Scalability
Increased delivery agility to support its business
New capabilities/increased ability to innovate
Lower cost
More flexible cost
Allows the internal IT department to focus on significant businesschallenges/strategic projects
Improved service levels
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Overall
Sector analysis
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
0% 10% 20% 30% 40%
Financial services
Professional services (excl.financial services)
TMT
From which industries are you experiencing
greatest demand for cloud services? (European cloud providers - top three sectors only)
Europe v US (top 3)
Sector analysis
0% 5% 10% 15% 20% 25% 30% 35%
Financial services
Pharmaceuticals andbiotechnology
TMT
From which industries are you experiencing
greatest demand for cloud services? (US cloud providers - top three sectors only)
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
What types of cloud are being adopted?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Public, Private or Hybrid?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Public, Private or Hybrid?
Negotiating cloud contracts…
… still not a done deal
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Where did it all go wrong?
Contracting without tears?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Why do Purchasers Walk Away?
• Over 30% of purchaser respondents stated concern over where data is hosted and/or accessed from, or lack of information about that, triggered them walking away
• Top 3 issues for walk away cited as data related from purchasers
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−A bigger obstacle in practice than many might like to believe
−No longer an esoteric technical issue
−Changing legal and political dynamic
−Data Residency• Post Snowden era – access to data by third party governments
• Russia
• Expansion of privacy laws around the World containing location controls
−Post Safe Harbor transfer environment• further scrutiny on surveillance
• transfer mechanisms to protection personal data under review
• continued uncertainty particularly harmful for cloud deals
• new “privacy shield” proposals under consideration
Times have changed and transparency is vital
Data and Location
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−The joint second most common reasons for cloud deals breaking down for purchasers: concerns over inadequate breach reporting
−Growth in mandatory breach reporting rules globally
−High profile breaches hitting the headlines
−Increasingly stringent reporting requirements • New EU GDPR requirements
−Practical issues on reporting for providers
−Wording on reporting merits close scrutiny by both customer and provider
−Under new EU rules, both customer and provider will gain direct responsibilities for security• Issues in relation to assessing what is adequate protection• Likely to see more specific statements on security and reporting• Driving greater due diligence on this aspect earlier in the deal
Clear, documented commitments on both required
Data Security & Breach Reporting
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Where did it all go wrong
Contracting for cloud without tears?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−50% of those surveyed said they walked away from a deal because of the Data Protection terms
−Evidencing how real this has become as a barrier to deals concluding
−Growth in some providers seeking to differentiate and gain market share on their “privacy friendly” contracting approach
−Changes in data protection legislation with drive further contracting changes
−Under new EU rules, both customer and provider will gain direct responsibilities• No longer a “customer” only issue• Providers will need to address to protect their own compliance
risk and liability
An Increasing Imperative to Get This Right for Deal Closure
Contracting on Data and Security
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Customer perspectives
Data Security Requirements
Customers want increasing detailed commitment on security and testing
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Stronger commitments emerging from providers
Data Security Requirements
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Contracting terms which caused the purchaser to walk away
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Mismatched expectations?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−similar issues high on list
−pricing notably higher than for customer
−security cited as lower, but will that change?
Differing perspectives? Mismatched expectations?
What do Providers think are the reasons?
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Some thoughts around M&A in the cloud
Conclusions
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
−A surprisingly large number of cloud sales deals break down at the contract negotiation stage
− Customers and vendors have differing views as to why agreement can not be reached
−Eversheds’ view is that more engagement around difficult issues at the outset would lessen these figures significantly and save time and money on both sides
Conclusions
Olivier Wolf
TMT Sector Head, EY Transaction Advisory Services
Confidential
Olivier Wolf March 2016
Spotlight on the Cloud EY Perspectives – Eversheds Conference
1 Confidential – all rights reserved– Ernst & Young 2016
►Olivier Wolf, TMT Sector Head, Transaction Advisory Services
►A leading advisor to the cloud computing and managed hosting industry in Europe
– Transactions – commercial due diligence
– Strategic advice
►Today:
– Key trends
– Outlook for suppliers over the next five years
Introduction
1 1
2 Confidential – all rights reserved– Ernst & Young 2016
Agenda
2 2
►Defining the Cloud
►Market Trends
►Future Outlook for Suppliers
3 Confidential – all rights reserved– Ernst & Young 2016
Our definition
► An IT product is defined as Cloud based on the way a customer buys and consumes it
► Cloud relates to IT hardware (IaaS), platforms (PaaS) and software (SaaS) products
► aaS (as a Service) is synonymous with outsourced cloud and has the following primary characteristics
► Rented access, not owned
► Opex not capex spend
► On-demand and highly flexible buying
► Access through network or internet
Definitions of the cloud are still confused
4 Confidential – all rights reserved– Ernst & Young 2016
Agenda
4 4
►Defining the Cloud
►Market Trends
►Future Outlook for Suppliers
5 Confidential – all rights reserved– Ernst & Young 2016
Key tailwinds
Impact on market value 2015 -2020
Migration from on-premise
Migration from
colocation
New tech start ups /digital natives
Growing data and content volumes
Data sovereignty
Price
Number of users Usage Price
Cloud / IaaS market drivers
1 2 3
6 Confidential – all rights reserved– Ernst & Young 2016
Platform as a Service (PaaS)
Software as a Service (SaaS)
Applications
Data
Runtime
Middleware
O/S
Virtualisation
Servers
Storage
Networking
Applications
Data
Runtime
Middleware
O/S
Virtualisation
Servers
Storage
Networking
Applications
Data
Runtime
Middleware
O/S
Virtualisation
Servers
Storage
Networking
Applications
Data
Runtime
Middleware
O/S
Virtualisation
Servers
Storage
Networking
Applications
Data
Runtime
Middleware
O/S
Virtualisation
Servers
Storage
Networking
Facility Facility Facility Facility Facility Hard
ware
layer
Infrastructure
Managed /owned by user Managed/owned by vendor/combination of vendors
Managed/owned by vendor or user
Third-party hosting (including cloud / IaaS)
In-house or owned DC
Colocation
Number of users
Migration
IT is increasingly being hosted on third party infrastructure
1
7 Confidential – all rights reserved– Ernst & Young 2016
Off-premise infrastructure
market
€38bn
Colocation 66%
3rd party hosting
34%
€962bn
IT Infrastructure
market 12%
Total IT spend
Other IT spend 88%
Off-premise 32%
In House 68%
€117bn
IT Infrastructure market
The IT infrastructure
market is worth c.€117bn
65-70% of IT infrastructure
spend is still in-house
Outsourced IT infrastructure is
comprised of three primary models.
IaaS accounts for c.30% of this
Market size by segment, 2015 (€bn)
…although it is still a small part of the total IT infrastructure market
Number of users 1
8 Confidential – all rights reserved– Ernst & Young 2016
Growth of data and content volume – Example drivers Source: Oracle, Gartner, IDC, EY research
M2M traffic per month, TB per month
2014
500
0
2019
1,000
2017 2016 2015 2018
1,500
40
2017 2016
60
80
2015 2014
103% CAGR
0
10
20
30
40
50
2008 2010 2012 2014 2016 2018 2020
42% CAGR
30% CAGR
Global data in Zettabytes
Global mobile app revenues, US$bn
15
20
25
30
35
40
45
50
55
2012 2013 2014 2015 2016 2017
Global consumer internet video, Exabytes per month
29% CAGR
2012 2013 2014 2015 2016 2017
60
40
22% CAGR
Online gaming IP traffic, Petabytes per month
2013 2014 2015 2016 2017 2018
1.5
1.0
2.0
2.5
3.0
31% CAGR
Cloud based global Intelligence Market size, US$bn
The need for infrastructure is clear and will continue to grow
2 Usage
9 Confidential – all rights reserved– Ernst & Young 2016
Data sovereignty and low latency are the key reasons cited for key players’ expanding their DC footprint into Europe Announcements of DC openings and incentive for key players
Player
# of new DCs publicly announced
for Europe New locations
2016/17
► IE x3
►ES x2
►UK x1
6
2016
►UK x2
►DE x1
► IE x1
4
2016 ►n/a 0
2016 ►n/a
Incentive
►Serve customers locally
►Meet demand for data sovereignty
►Ability to bid for government contracts
►Meet demand for data sovereignty
0
Timeline
2 Usage
4
4
3
9
Existing DCs in Europe
10 Confidential – all rights reserved– Ernst & Young 2016
-20%
Our analysis suggests real like-for-like prices declines for cloud are starting to slow down Average price per Gigabyte RAM (index)
3 Price
78
100
76
79
100
60
65
Oct-13
70
50
Jul-13
80
100
90
Jan-15 Apr-15 Jan-14 Apr-14 Jul-14 Oct-14
105
Jul-15
75
85
95
-3%
SAMPLE
Dedicated IaaS
Public IaaS
11 Confidential – all rights reserved– Ernst & Young 2016
There are two fundamental types of cloud infrastructure, both relevant for different needs Benefits of the different types of cloud infrastructure
Best for buyer need Good for buyer need Reasonable for buyer need Less suitable for buyer need
Dedicated IaaS Public IaaS
Automated physical servers with private network best used for essential workloads and low
latency requirements
Virtual servers on shared infrastructure with public network, best used for on demand and highly
scalable requirements
Security
Performance
Cost effectiveness
Scalability / flexibility
Hardware customisation
1
2
3
4
5
Continuity 6
Key performance
criteria
Data residency 7
12 Confidential – all rights reserved– Ernst & Young 2016
The market is forecast to grow by 40% p.a.
VPS +29% 40% CAGR
Public Cloud +45%
54
2020 2019
42
2018
32
2017
23
2016
16
2015
11
Dedicated Servers +21%
Dedicated Cloud +47%
Global cloud market forecast (€bn)
13 Confidential – all rights reserved– Ernst & Young 2016
Agenda
13 13
►Defining the Cloud
►Market Trends
►Future Outlook for Suppliers
14 Confidential – all rights reserved– Ernst & Young 2016
The level of service offered on top of the infrastructure is a key differentiator for suppliers
Supply-side positioning
High
Level of
Service
No infra.
Ownership
Infra-oriented
players
Infrastructure
focus
Infrastructure pure players:
► Business model: focused on core
infrastructure delivery (dedicated / virtual
servers) at lower costs
► Key success factor: operational efficiency
A
Low
A
B
C
Infra. Pure players
Service-led infra.
owners
Cloud builders /
integrators
Service-led infrastructure owners
► Business model: focused on the delivery of
premium value-added services on top of
core infrastructure
► Key success factor: Upsell capability /
engineers
B
Value-added Resellers
► Business model: Infrastructure resellers
bundled with managed services
► Key success factor: TBD
C
Dedicated Public
15 Confidential – all rights reserved– Ernst & Young 2016
Cloud-Builders are particularly attractive to SMBs and small enterprises
Cloud builder Infrastructure run and managed by one supplier
Customer applications
Infrastructure
Illustrative
Third-party pure plays
16 Confidential – all rights reserved– Ernst & Young 2016
Key messages
Cloud Infrastructure giants rolling out internationally
Cloud-builders consolidating local markets
Traditional players shifting business model
► Large players building capacity
► Local presence popular given sovereignty issues
► High-quality products at competitive pricing key
► Partnerships with cloud-builders essential
► Service-led cloud solutions using third party infrastructure
► Infrastructure agnostic
► Dis-intermediation of service and owned IT
► Popular with mid-large companies
► Partnerships with cloud infrastructure giants key
► Traditional colocation companies shifting to new models
► Telecom players starting to exit
► Shift towards cloud-builders
17 Confidential – all rights reserved– Ernst & Young 2016
Thank you
18 Confidential – all rights reserved– Ernst & Young 2016
EY | Assurance | Tax | Transactions | Advisory
About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
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The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
© 2016 Ernst & Young LLP. Published in the UK. All Rights Reserved.
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ey.com/uk
Alastair McAulay
Director of Disruptive IT, PA Consulting
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Contact details
Charlotte Walker-Osborn Global Head of Technology, Media and Telecoms and Technology Sector Head T: +44 121 232 1220 M: +44 779 907 5756 [email protected]
Paula Barrett Global Head of Privacy and Information T: +44 777 575 7958 M: +44 20 7919 4634 [email protected]
Olivier Wolf Partner and TMT Sector Head, EY Transaction Advisory Services T: +44 20 7980 9169 M: +44 771 0027 621 [email protected]
Alastair McAulayDirector of Disruptive IT, PA ConsultingT: +44 20 7730 9000M: +44 772 5062 687 [email protected]
Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |
Final Questions?
eversheds.com©2015 Eversheds LLPEversheds LLP is a limited liability partnership
eversheds.com©2016 Eversheds LLPEversheds LLP is a limited liability partnership