'Other Clouds' in the Cloud Market: Survival and Breakthrough in the Shadow of Giants

Amazon Web Services (AWS) causes market fluctuations with the slightest shift; Microsoft's moves also always attract attention. As the cloud ecosystem continues to grow, the two cloud giants effectively dominate the tone of the Infrastructure as a Service (IaaS) market. In the United States, combined with Google's efforts to increase market share, the cloud market appears to have many choices, but in reality, it does not.

A group of consulting firms rush to fill the implementation gap, while third-party solution providers focus on channel services. Enterprises implementing cloud services often only know to ask the "big three" for quotes. This $50 billion market places hyperscale cloud providers at the top, yet overlooks companies offering alternative cloud solutions in the shadow of the giants.

Analysts believe that niche companies relying on individual developers and small businesses do not have a sufficient long-term value proposition. But alternative providers disagree.

Market Landscape: Giants Dominate, Others Scramble

According to Gartner's latest public IaaS market data, in 2018, Amazon held 48% of the market share, Microsoft held 16%, and China's Alibaba held 8%. The remaining "others" category accounted for 23% in total, but no single company in that group held more than IBM's 1.8%.

"It's hard for other providers to make significant gains in market share; this is basically a three-horse race in the Western world," Gartner Senior Director Analyst Raj Bala told CIO Dive. Providers lacking resources like Oracle have limited room to grow in the market. The IaaS space requires massive hardware investment—providers must expand infrastructure to meet demand and reduce latency.

Smaller vendors often leverage the infrastructure of colocation providers such as Equinix, Cyxtera, and Iron Mountain rather than building their own data centers. Bala noted: "Providers that only do one or two specific things have a bleak outlook." Companies like DigitalOcean and Vultr focus on serving software developers who deploy consumer applications, but Bala believes that serving only such customers makes it difficult to create meaningful business scale.

The Survival Strategy of Alternative Providers

Despite the market being dominated by giants, alternative providers still attempt to carve out niche markets. Gartner expects IaaS revenue to reach $50 billion in 2020. If a company can capture 1% of the market share, its cloud revenue could reach $500 million.

"The market is so large that there is plenty of room," Linode Vice President of Marketing Blair Lyon told CIO Dive. He believes that smaller providers, though "a small part of the market, are growing well."

Gartner did not disclose the specific vendors in the "others" category in its report, but its Cloud IaaS Magic Quadrant provides clues. The 2019 report included Oracle—a company that has seen low market penetration since launching its public cloud IaaS in 2015. Oracle, which achieved operating income of $13.5 billion in fiscal 2019, is expanding its infrastructure by adding five new regions. It currently operates cloud services in 21 independent locations, with a goal of having 36 cloud regions by the end of 2020.

The 2017 IaaS Magic Quadrant listed eight niche vendors: Skytap, Joyent, NTT Communications, Interoute, Fujitsu, CenturyLink, Rackspace, and Virtustream. They later disappeared from the report because Gartner tightened its criteria, focusing only on hyperscale vendors offering integrated IaaS and PaaS.

Melanie Posey, Research Vice President and General Manager at 451 Research, said that many companies overlook other cloud vendors offering IaaS, which can no longer compete head-on with hyperscale vendors in terms of scale. But if enterprises do not need the "extras" of hyperscale vendors, they might choose DigitalOcean or French cloud provider OVH; alternatively, as existing customers of IBM or CenturyLink, they may continue using services from their original technology providers.

Providers such as Rackspace and IBM have shifted to the hybrid multi-cloud market, helping enterprises experiment with cloud services while maintaining existing systems. Some alternative providers were founded before the cloud boom and already have a stable core customer base. Linode was founded in 2003, three years before AWS. As the cloud has evolved, this small provider has grown alongside it. Lyon believes that some aspects of cloud computing will simplify, but hybrid multi-cloud and edge computing will add complexity, opening up the market for alternative providers.

Lyon pointed out that to succeed, alternative providers need to handle about 80% of mainstream workloads, including core primitives, compute, storage, databases, bare metal, virtual private networks, global infrastructure, on-demand support, and more. The remaining 20% is left to specialized use cases where hyperscale vendors excel, such as gaming, machine learning, or quantum computing, which are not needed by ordinary enterprises. Alternative cloud providers may not be the place where Nike or Johnson & Johnson deploy all their workloads, but they are "excellent multi-cloud options for specific needs," whether for test environments or failover.

Value Proposition: Segmentation and Differentiation

Bala noted that enterprise contracts carry higher value, and it is not uncommon for large companies to commit $30 million annually to AWS. However, if a company only sells three or four virtual machines to software developers, its market opportunity is unlikely to reach $5 billion to $10 billion. Bala believes that any two vendors in the cloud market have complementary characteristics: Microsoft is weaker at attracting startups, while AWS excels; Google performs poorly in the enterprise market, but Microsoft's core is precisely the enterprise; although both DigitalOcean and AWS focus on developers, AWS is stronger in the enterprise market.

Although hyperscale vendors offer everything that alternative providers do, niche markets still exist. "Other" vendors hope to capture the overlooked market of independent developers and small and medium-sized enterprises, while also using lower prices and avoiding lock-in effects as selling points. Linode has approximately 1 million customers worldwide, many of whom are small developers and development teams. Fortune 50 companies like Comcast are also its customers, but not as core infrastructure providers. Linode operates in 11 regions and plans to add two new regions in South America and Europe this year. Half of its customers are in North America, with the rest distributed across Europe and Southeast Asia.

DigitalOcean similarly fills a niche market, with 500,000 customers using its cloud Droplets as the foundation for building applications. "There is definitely a need for other cloud providers. As the big three continue to grow, I think a large portion of the market will be underserved," DigitalOcean Vice President of Engineering Al Sene told CIO Dive. He added that if a company has annual revenue of $100,000, it is difficult to attract the attention of large service providers. DigitalOcean recently announced a restructuring plan, cutting some positions, but the company emphasized its high-growth business, with annual recurring revenue of $275 million.

Specialization and Long-Term Prospects

For some alternative providers, specialization holds the highest potential value. Wasabi Technologies, founded in 2017 by David Friend and Jeff Flowers, co-founders of backup software company Carbonite, offers object storage services. Wasabi provides general-purpose cloud storage, designed to be fully compatible with Amazon S3, but at one-fifth the price. Friend stated that Wasabi's focus on storage is a long-term value proposition. The company reports 13,000 customers, with revenue growing fivefold in 2019 (without disclosing specific financial figures or storage volumes), and customers come from data-intensive industries such as universities and research institutions.

"The business model is simple: we build data centers, fill them with user data, and then build more data centers," Friend said. Wasabi operates data centers in five colocation facilities—three in the United States, one in Europe, and one in Japan—and plans to double its infrastructure footprint this year. Friend compared the cloud race to the mainframe business of the 1960s and 1970s, when IBM dominated all data centers until the market began to diversify. He believes that Amazon, Microsoft, and Google carry lock-in risks; if customers use AWS, they must use its storage, compute, CDN, and a range of other services. The market should allow enterprises to choose the best services and integrate across providers.

Friend stated that ten years from now, most of the world's data will be stored in the cloud, and Wasabi hopes to capture as much as possible. "When the dust settles, a few companies will store most of the world's data, and we want to be one of them."

However, Posey believes that operating as an "anti-hyperscale" player is a short-term value proposition. Although the market accommodates other providers, it is difficult to survive as independent competitors. These companies need to achieve a certain scale to support a hybrid multi-cloud value proposition, but "the DigitalOceans and Linodes of the world—I'm not sure they can do it." Posey noted that many such cloud companies have mid- or long-term exit strategies involving a sale, with potential buyers being professional services firms or global system integrators, where cloud tools would become part of a larger toolbox. In the interim, companies like DigitalOcean focus on individual developers or small and medium-sized enterprises, winning by volume and filling the market gaps not covered by hyperscale vendors. Posey said: "This may not be a winning strategy, but I'm also not sure whether these small companies are considering long-term independence."