Does Cloud Revenue Matter?

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The transition from on premises software services to cloud services is complicated in terms of revenue models. It is especially difficult for technology vendors with on premises legacy software. It is not surprising that public companies have difficulty shifting from an on premises to cloud strategy. In addition, there is no SEC requirement to break down revenue between cloud and on premises software revenue. When you think about the fact that customers want hybrid environments — a combination of on premises and cloud, it makes it complicated to analyze revenue. Is a hybrid cloud all cloud revenue.

I had an interesting discussion with Barb Darrow senior writer at Fortune Magazine other day. She has been trying to figure out how to make sense of how vendors classify cloud revenue. Barb was asking me about the techniques that various technology vendors use when reporting their cloud revenue. In short, we discussed the fact that it is becoming increasingly difficult isolate cloud revenue. In addition, many technology vendors use their own cloud services as a platform to sell to their customers. If a vendor hosts a software offering on their own cloud, it will internally charge for the cloud hosting – the software organization will book an expense while the cloud side books the expense as income.

Let’s take the example of Amazon. Amazon’s AWS (Amazon Web Services) is viewed as the leader for public cloud services. In addition, many customers use AWS’ compute and storage cloud services as a primary way to create and manage new applications. However, I suspect that Amazon, like many competitors have an interesting way of calculating cloud revenue. Amazon itself is likely AWS’ largest customers. It appears to me that Amazon is most likely counting its own use of its cloud as cloud revenue. Therefore, this would skew their market share and revenue numbers. One could argue that Amazon would have to purchase cloud services from someone else. However, before Amazon went into the cloud business, it has already invested in its own private cloud infrastructure to support its retail business.

I suspect that it will be difficult over the foreseeable future to figure out how to count vendors’ cloud revenue. But does it really matter in the long run? From a cost/benefit basis, companies that are building a cloud based services business are seeing the financial benefit of owning their own clouds. These companies will likely use a variety of public cloud services for non-revenue services. In addition, in the future businesses will increasingly mesh together a hybrid of public, private, and a variety of managed services to operate their business. In the end, it isn’t about clouds – it is about computing as a means to an end.

Judith Hurwitz

Hurwitz & Associates is an enterprise software strategy and consulting firm focused on emerging technologies including cloud computing, big data and analytics,cognitive computing, security, service management, and distributed computing. Our organizations focuses on helping organizations to quantify the business and technical benefits of these technologies for customers. We offer services that help companies go to market more effectively with their technologies. We also provide education and strategy for companies wanting to take advantage of technologies to improve innovation Our group has written six For Dummies books including Big Data, Hybrid Cloud, Service Management, and Service Oriented Architectures.