Artificial intelligence has taken the world by storm since the rise of ChatGPT earlier this year. Cloud computing is playing a pivotal role in this AI boom by providing the necessary computing resources and infrastructure to train and deploy AI models at scale.

According to data from moomoo, the index that tracks cloud computing service providers has surged by 56% this year, surpassing the Nasdaq's average increase of 37%. Notably, Amazon was up by 75%, Microsoft by 56%, Salesforce by 88%, and Adobe by 81%.

Since Amazon blazed the trail in cloud computing back in 2006, the industry has grown remarkably. Now, with the added impetus from a booming AI industry, cloud computing may be poised for even greater growth potential.

In this article, we'll be pouring over the cloud computing service industry from the following perspectives:

1. Overall landscape

2. Cloud Computing classification

3. Investment considerations

1. Overall landscape

Simply put, cloud service providers offer computing resources that can be used on-demand and paid for based on usage. This eliminates the need for users to buy and maintain their own hardware, allowing them to scale up or down based on business needs efficiently.

As a result, the cloud computing services industry has grown significantly, with 90% of organizations having adopted some form of cloud services, according to the estimate of O-Reilly, a technology and business training company. Gartner, an American research and advisory firm, projects that the cloud services market could surpass the traditional IT market by 2025 as demand for traditional IT services continues to shift towards cloud services.

Looking at the market size and growth rate of the cloud computing service industry, according to data from Statista Market Insights, the global market has grown from $135.27 billion in 2016 to $481.07 billion in 2022, with an estimated compound annual growth rate (CAGR) of approximately 23.5%. The organization predicts that the market size for cloud computing services will reach over $1 trillion by 2028, with an expected CAGR of 14.1% over the next few years.

When it comes to leaders in the cloud market, according to data from the Synergy Research Group, in the second quarter of 2023, Amazon's AWS holds the highest market share at 32%, ranking first. Microsoft's Azure comes in second with a market share of 22%, while Google Cloud ranks third with an 11% market share.

2. Cloud Computing Classification

The cloud computing services industry can be divided into three main categories: Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS).

IaaS serves as the foundation of the cloud computing industry. Cloud service providers deliver core resources such as computing power, storage, and networking to their users. According to Statista Market Insights, IaaS had a market size of about $114.5 billion in 2022, averaging a 35.9% annual growth rate over the past six years. It is estimated to reach a market size of $359.8 billion by 2028, growing at a rate of about 21.0%. Major players in this segment include Amazon, Microsoft, Alibaba, and Google. Amazon ranks first with a 40% market share, followed by Microsoft with a 21.5% market share.

PaaS, short for Platform as a Service, provides a software development and deployment platform that runs on top of cloud infrastructure. By utilizing resources from IaaS, PaaS constructs an application deployment and integration platform, thus creating a more manageable and deployable software development environment for developers.

According to Statista Market Insights, PaaS has grown at an average rate of approximately 35.2% over the past six years, reaching a market size of $85.89 billion in 2022. The organization predicts that its market size will increase to $244.1 billion by 2028, growing at a rate of around 19.0%. Major players in this market segment include Amazon and other giants.

SaaS, or Software as a Service, delivers cloud-based software applications to users without requiring any installation. These services are mainly utilized in areas such as customer relationship management (CRM), enterprise resource planning (ERP), and e-commerce fields. By subscribing directly to SaaS services, users can avoid the high costs associated with purchasing and maintaining hardware and software.

Statista Market Insights points out that SaaS has grown at an average rate of approximately 18.2% over the past six years, reaching a market size of approximately $280.68 billion in 2022. The organization forecasts that its market size will increase to $457.95 billion by 2028, growing at a rate of approximately 8.5%. The competitive landscape of this sub-industry is relatively dispersed, with well-known players including Salesforce, Microsoft, SAP, etc.

Overall, based on data from Statista Market Insights, SaaS currently has the largest market size, while IaaS is expected to grow the fastest. Despite having the smallest market size, PaaS is growing steadily in between.

3. Investment considerations

Overall, the cloud computing service industry is a growth sector. Although its growth rate has gradually decreased with the market's expansion, it remains relatively high. Therefore, from an investment perspective, taking a long-term approach may be a consideration.

When paying attention to the cloud computing industry, it may be important to consider its different market segments and adopt distinctive approaches for each one.

In the case of IaaS, the key factor to consider may be the resources a market player can utilize. This is because IaaS provides basic computing and storage resources, and the hardware required by the upstream companies is similar. Therefore, the services offered by different providers are highly homogeneous, making it difficult to differentiate based purely on technical features.

As such, those who offer the lowest prices are more likely to win customers. As these companies attract more customers, their economies of scale increase, allowing them to reduce costs further, increase profit margins, and gain a larger competitive advantage. For example, Amazon's AWS reduced its prices nearly nine times per year on average from 2011 to 2020.

Therefore, when it comes to IaaS companies, it may be important to focus on their resource advantages. In general, large influential companies that have been in the business for some time tend to have significant advantages in channels, customer base, and business synergy, allowing them to occupy a large market share. This may partly explain why the IaaS market is mainly dominated by industry giants such as Amazon, Microsoft, and Alibaba.

For PaaS companies, the key factor to consider may be the participants' technical strength and ecological advantages.

This is because PaaS platforms typically serve enterprise customers whose software development and operating platform requirements vary across industries, company sizes, and stages of growth.

To meet enterprise customers' diverse needs, PaaS products must offer high complexity, high performance, and developer-friendly features to stand out in a competitive market.

In order to lower costs, PaaS companies need to create standardized modules, which involve identifying common requirements from past partnerships. Additionally, the marketing and sales of PaaS products depend heavily on previous collaborative channels and trusting relationships. As a result, similar to IaaS, larger companies with earlier beginnings, robust technological expertise, and well-established ecosystems possess notable advantages in the PaaS industry.

Since tech giants largely dominate IaaS and PaaS, the SaaS sector may be the main competitive landscape for most companies in the cloud computing service industry. Companies that can provide significant customer value and offer standardized software services within the SaaS industry are typically more competitive.

Firstly, a SaaS application should provide economic benefits to its clients, either by improving their customer acquisition efficiency and thus increasing revenue or by enhancing operational efficiency and thus reducing costs.

In general, SaaS applications that help customers increase revenue have more quantifiable effects, and clients can easily perceive changes in revenue after using the services. Conversely, cost-saving applications may not be as easy to perceive.

As a result, SaaS applications that can help their clients increase revenue may have higher customer values than those that help their clients reduce costs. Providers of such services are more likely to grow. A typical example of this may be Salesforce.

Software that is easier to standardize, such as tools-based software like Adobe, is also generally more scalable. On the other hand, software that is complex and requires extensive customization during implementation can be challenging to expand.

This is because standardized SaaS applications often have lower implementation costs, where the cost of serving ten thousand users may only be slightly higher than serving a thousand. Consequently, their revenue growth rate may significantly exceed their cost growth rate. Once they reach a certain scale, they may have considerable profit margins.

On the other hand, highly customized SaaS software has higher implementation costs. Their revenue generally grows at a similar speed to their cost, which could limit their profit potential.

To summarize, the cloud computing industry is one of the major beneficiaries of the AI boom and has seen considerable growth this year.

The global cloud computing service industry may be expected to reach a market size of trillions of dollars in the coming years.

The cloud computing industry can be divided into IaaS, PaaS, and SaaS, with SaaS being the largest market and IaaS showing the highest expected growth rate. In the IaaS and PaaS sectors, large companies usually have significant advantages, while the SaaS sector presents more opportunities for smaller companies.

SaaS applications that bring more customer value and are highly standardized may have a competitive edge.