Public cloud industry heading for banking-style bailout - Canalys

Cash-haemorrhaging public cloud players 'too big to fail', industry warned at Canalys EMEA Channels Forum

Canalys chief executive Steve Brazier has warned that the public cloud market could be heading for a downfall as dramatic and disastrous as that of the banks at the beginning of the financial crisis.

Speaking at the analyst's EMEA Channels Forum event taking place in Cannes this week, Brazier told delegates: "On public infrastructure-as-a-service, I am going to give you a very clear warning: hundreds of millions of dollars are being spent on public cloud infrastructure, but we do not know of anyone [in that space] who is profitable."

He claimed that public cloud's poster boy, Amazon Web Services (AWS), has put a $2bn (£1.2bn) drag on its parent company's financials over the past year. In its upcoming quarterly results Amazon is forecasting a loss of between $410m and $810m, said Brazier, which can largely – if not wholly – be chalked up to the cash-draining effect of AWS.

"Amazon's capital expenditure last quarter was $1.29bn – up 59 per cent," explained the Canalys boss. "Their capital expenditure is growing faster than their revenue. We do not know if Google or Microsoft are [in a] better [position], but we expect they are similar. Meanwhile, Rackspace is essentially trying to get out of public infrastructure-as-a-service."

Brazier warned that with prices dropping and costs rising, the public cloud space could be heading for a nasty fall.

"We see the potential for a similar collapse in the public cloud market [as was seen in the banks], and there will be serious consequence," said Brazier. "We have built a business with inherent systematic risk."

Microsoft and Google have the balance sheets to fight on for a long time, but others are more precariously placed. A major concern is that "we have built a business model where businesses are too big to fail", according to Brazier. Given the quantity and nature of data stored in public clouds, governments may once again have to issue bailouts, he warned.

"We caution you that you should not be recommending [public cloud] to your customers," he said.

Delegates were also advised that "the business models for software-as-a-service do not look much better". Brazier cited a number of high-profile case studies for this assertion, including Microsoft's core hosted offering Office 365.

"An [on-premise] licence was almost 100 per cent margin; now they are consuming about five per cent of the world's server [capacity] to build out their infrastructure, and that is starting to drag on their financials."

Brazier also pointed to another of the SaaS world's giants – Salesforce.com – as an exemplar of the perilous profit-and-loss equation of the market as it stands.

"It is a brilliant marketing machine, but has lost money for the past 13 quarters," he said. "Their [current] goal is to get their sales and marketing expenses down to 105 per cent of their revenue."