Forecasting the Cloud Market: How the Sausage is Made

Before I joined ZapThink in 2001, I was an analyst at IDC. I wasn’t there for long, but I did manage to attend their analyst training course. Perhaps the most intriguing lesson I learned from this boot camp was how IDC goes about building their market models, which are the central tool they use to predict the growth of markets. Essentially, the market model is an immense Excel spreadsheet, with a separate row for the revenues for each vendor in the entire IT universe.

Group vendors into separate, distinct markets (or do so for individual products, when vendors compete in multiple markets). Assign each of your analysts to interview each vendor once a year in the analyst’s assigned market, in the hopes that the vendor will reveal their true revenues for the year in question. Put the resulting numbers in the spreadsheet, add them all up, and you are able to calculate a reasonable estimate for the size of the given market.

Predicting the future growth of a market, however, is another story. Here’s the secret: select all the cells for a given market for the last couple of years and drag to the right. Voila! You’ve just predicted the market for however many years into the future you care to estimate. That’s all there is to it.

In essence, this drag-to-the-right technique extends the current annual growth rate (CAGR) into the future for each company in the model. Of course, some will grow faster than others, some will prevail and others will fail miserably, but the theory is that such variations will balance each other out. Next, publish your predictions for, say, three years out and watch the press, VCs, and startup entrepreneurs whip themselves into a frenzy.

The Pitfalls of Predicting the Cloud Market

The primary weakness of the drag-to-the-right crystal ball, of course, is the old adage that past performance doesn’t guarantee future results. Throw a global recession into the mix, say, and you might as well chuck your spreadsheet and start over. But there’s an even greater problem with predicting a market like Cloud Computing. Because Cloud is an emerging market, the big spreadsheet market model doesn’t work at all. Here, then, are the pitfalls to avoid:

Emerging markets diverge. Take the Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) markets. Instead of remaining as three distinct market categories, vendors love breaking out new variations: Integration-as-a-Service, Big Data-as-a-Service, Identity-as-a-Service, and so on. Each of these splinter markets might be considered a subset of one of the three core service models, until such time as the marketplace itself decides otherwise. The same divergence has struck the Public vs. Private Cloud markets, as players break out separate Hosted Private Cloud, Enterprise Public Cloud, and Virtual Private Cloud markets.

Emerging markets overlap. No one would disagree that Amazon Web Services (AWS) is an IaaS player. But what about, say, AWS Elastic Beanstalk? That’s PaaS. Or Amazon Payments? Yup, SaaS. So do you include the revenues for those individual services in the IaaS number or not? Such overlaps are slippery and dynamic, and throw a wrench into any kind of spreadsheet-type number crunching.

Emerging markets evolve. Remember the Business-to-Business Integration (B2Bi) market from the 1990s? Well, it’s still around, but now we call it Integration-as-a-Service. Or perhaps Cloud Integration. Oops, wait a minute: now B2Bi is actually a function of a Cloud Service Brokerage (CSB). Only the market hasn’t really figured out what it wants a CSB to be yet.

Vendors play games. Vendors will call their products anything they think you’ll shell out money for, and they’ll jump on any market bandwagon they think has momentum. Back in the 1990s nobody wanted to pay for software to manage application programming interfaces (APIs), but then in the 2000s the Web Services market took off, and a few dozen vendors started calling themselves Web Services Management vendors. It didn’t matter that Web Services are nothing but standards-based, contracted APIs. But then SOA caught the attention of the market so the same vendors became SOA management vendors. Then as companies struggled with SOA, the selfsame vendors reinvented themselves as players in the SOA governance market. Now that SOA is old news, what do they call themselves? API management vendors!

Analyst firms collude with vendors. It’s a poorly kept secret in the IT marketplace that Gartner’s magic quadrant is pay-for-play. This collusion is especially blatant when an emerging market is involved. In fact, vendors occasionally pay Gartner to invent new markets so that the vendor can be the magic quadrant leader. This approach worked for the Enterprise Service Bus (ESB) market, but didn’t fare so well for the Integrated Services Environment (ISE) market. You’ve never heard of the ISE market? Precisely my point.

Sometimes emerging markets overlap an established market. Microsoft recently reported a billion dollars of Cloud revenues, but this number reportedly included revenues for various software licenses for customers who said they were going to use them for Private Clouds. Does that mean that Microsoft isn’t counting those revenues in their software revenue numbers? Either way, Microsoft is being disingenuous: either they’re double-counting such revenues, or they’ve shifted numbers from a sleepy, traditional market to a hot emerging market simply to inflate their Cloud numbers.

Sometimes emerging markets aren’t markets at all. ZapThink clarified this issue for the SOA market in our seminal 2004 Service Orientation Market Trends report. At that point in time there was a clear distinction between ESBs and traditional middleware: ESBs supported Web Services while traditional middleware did not. But as we correctly predicted, it would only be a matter of time before all middleware supported Web Services. Sure enough, today there really isn’t a “non-ESB middleware” market category. In other words, the SOA market has become the enterprise middleware market, or perhaps there is no such thing as a SOA market at all, depending upon your perspective.

Cloud Computing is on the same trajectory. It’s not really a market or set of markets at all. It’s part of a paradigm-shifting trend that is reinventing how organizations large and small purchase, provision, utilize, pay for, and think about IT resources. Eventually, everything will be the Cloud, which from the market sizing perspective means that nothing will be the Cloud.

The ZapThink Take

The industry analysts’ market sizing crystal ball may be shinier than yours, but look inside, and it’s no clearer than anybody else’s. Predicting the future, after all, is a fool’s game, especially when something as dynamic and multifaceted as an emerging market is involved. Face it: market size predictions are almost always wrong, the only exception being when the analyst simply gets lucky.

Nevertheless, for several years at the beginning of the 2000s, ZapThink gazed into our own crystal ball and published market size predictions. We were the first in line to tell anybody who’d listen that we were really just guessing, just like anybody else in the clairvoyance business. But it didn’t matter. Our customers, the press, and the broader ZapThink audience still wanted our numbers.

Fundamentally, people don’t want analyst market size predictions because they believe the numbers are accurate. People want such guesses because they need a prediction from a disinterested third party they can use in their business plans, or their annual reports, or their VC pitches. In fact, very rarely does anybody ever go back to check old predictions to see how well they turned out, because it doesn’t really matter. Predictions aren’t really about the future at all. They’re about the present.

The moral of this story, of course, is to take any predictions about the growth of the Cloud Computing market with an immense grain of salt. It’s impossible even to define what the Cloud market really is, let alone make a reasonable prediction as to how it’s going to grow. If you need a juicy number for your VC pitch, then fine—but remember, VCs understand the vagaries of this fortune teller game all too well. Suffice it to say, however, the Cloud is here to stay, and will only grow in significance, even though putting a number on its growth is at best a wild guess.

Image credit: Chris Gladis