IDC: Public Cloud software at 2/3 of all enterprise applications revenue in 2026; SaaS is essential!

IDC forecasts that worldwide revenue for enterprise applications will grow from $279.6 billion in 2022 to $385.2 billion in 2026 with a five-year compound annual growth rate (CAGR) of 8.0%. Nearly all this growth will come from investments in public cloud software, which is expected to represent nearly two thirds of all enterprise applications revenue in 2026.

While the process of migrating from on-premises applications to the cloud can take years, enterprise software vendors and their customers will continue the transition to the cloud as this is an essential part of business operations in the digital world. Companies that do not pursue this technology will sustain losses due to profound opportunity costs as their competitors adopt cloud technologies and the use of application programming interfaces (APIs), moving beyond the reach of technological holdouts with on-premises or homemade solutions.

“It’s no longer enough for businesses to sit back and rely on their technological debt of software and hardware assets to keep the company running. In the digital world, enterprise software needs to constantly innovate to keep up with demand for speed, scale, and a resilient business,” said Heather Hershey, research director, Worldwide Digital Commerce at IDC. “Organizations must invest in new tools to keep their application portfolio up to date as they move into the digital era, automating all processes while also leveraging innovation and a wealth of data to become a more creative and resilient company in the digital realm.”

In addition to the ongoing cloud migration, IDC has identified a number of other significant market developments that are driving growth in the enterprise applications market.

  • SaaS and cloud-based, modular, and intelligent applications are no longer “nice to have” but are instead essential for business. Organizations that want to stay in business need AI-driven software that is cloud enabled, modular, and intelligent.
  • Application programmable interface technology will continue to be the backbone of the enterprise applications market. APIs will always resonate as a sound investment to companies that understand the pivotal role they play in connecting all the disparate code bases that make up the modern world.
  • Phasic migration to cloud with TaskApps augmentation will continue, particularly in B2B enterprises. TaskApps and low-code/no-code development tools are being used to close gaps, extend processes, or change up the business at a faster pace throughout the transition to digital first.
  • New global regulations around data privacy and ethics have changed the way organizations collect and use data, pushing governance to the forefront of the conversation. Compliance has become a differentiating factor for enterprises that prioritize trustworthiness.

“The digital world is completely altering the way software is utilized and incorporated into the organization from modularity to APIs to low code/no code to business process automation to TaskApps and even with innovation,” said Mickey North Rizza, group vice president, Enterprise Software at IDC. “Organizations are stretching their visions from filling technology gaps to optimizing processes globally to going the last mile with complete differentiators for their clients. The business world is finally starting to leverage the opportunity technology brings to it.”

Photo Credit: Unsplash

The enterprise applications market is a competitive market that includes software specific to certain industries as well as software that can handle requirements for multiple industries. Enterprise applications can be delivered as a pre-integrated suite of applications (featuring common data and process models across functional areas) or as standalone applications that automate specific functional business processes, such as accounting, human capital management, or supply chain execution. The enterprise applications market consists of the following secondary markets: enterprise resource management, customer relationship management, engineering applications, supply chain management applications, and production applications.

The IDC report, Worldwide Enterprise Applications Software Forecast, 2022–2026: Digital Era Software on the Rise (Doc #US48563522), presents a five-year forecast for worldwide enterprise applications revenues, including spending by geographic region and deployment type (public cloud and on premises). The report also provides insight into the market’s evolution through 2026, including deployment models, trends, and significant market developments.

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In a separate report titled Worldwide Quarterly Enterprise Infrastructure Tracker: Buyer and Cloud Deployment, IDC sas that spending on compute and storage infrastructure products for cloud deployments, including dedicated and shared IT environments, increased 24.7% year over year in the third quarter of 2022 (3Q22) to $23.9 billion. Spending on cloud infrastructure continues to outgrow the non-cloud segment although the latter had strong growth in 3Q22 as well, increasing at 16.5% year over year to $16.8 billion. The market continues to benefit from high demand and large backlogs, coupled with an improving infrastructure supply chain.

Spending on shared cloud infrastructure reached $16.8 billion in the quarter, increasing 24.4% compared to a year ago. IDC expects to see continuous strong demand for shared cloud infrastructure with spending expected to surpass non-cloud infrastructure spending in 2023. The dedicated cloud infrastructure segment grew 25.3% year over year in 3Q22 to $7.1 billion. Of the total dedicated cloud infrastructure, 45.2% was deployed on customer premises.

For the full year 2022, IDC is forecasting cloud infrastructure spending to grow 19.6% year over year to $88.1 billion – a noticeable increase from 8.6% annual growth in 2021. Non-cloud infrastructure is expected to grow 10.7% to $64.7 billion. Shared cloud infrastructure is expected to grow 19.0% year over year to $60.9 billion for the full year while spending on dedicated cloud infrastructure is expected to grow 21.2% to $27.3 billion for the full year.

About IDC:

International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. With more than 1,300 analysts worldwide, IDC offers global, regional, and local expertise on technology, IT benchmarking and sourcing, and industry opportunities and trends in over 110 countries. IDC’s analysis and insight helps IT professionals, business executives, and the investment community to make fact-based technology decisions and to achieve their key business objectives. Founded in 1964, IDC is a wholly owned subsidiary of International Data Group (IDG), the world’s leading tech media, data, and marketing services company. To learn more about IDC, please visit www.idc.com. Follow IDC on Twitter at @IDC and LinkedIn. Subscribe to the IDC Blog for industry news and insights.

References:

https://www.idc.com/getdoc.jsp?containerId=prUS50029423

https://www.idc.com/getdoc.jsp?containerId=prUS50037523

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  1. FT- 17 January 2023: Microsoft’s $10bn bet on ChatGPT developer marks new era of AI
    Tech giants race to stake out their place in new field of generative artificial intelligence
    by Richard Waters and Tabby Kinder in San Francisco

    The $10bn investment that Microsoft is considering in San Francisco-based research firm OpenAI looks set to become the defining deal for a new era of artificial intelligence.

    If the US software giant is right about the far-reaching implications of the technology, it could also trigger a realignment in the AI world as other tech groups race to stake out their place in the new field of generative AI.

    OpenAI grabbed global headlines last month with the launch of ChatGPT, an AI system that can answer queries and produce text in natural-sounding language.

    But Microsoft executives believe the technology behind the service will soon have a deeper impact throughout the tech world.

    “These [AI] models are going to change the way that people interact with computers,” said Eric Boyd, head of AI platforms at Microsoft. Talking to a computer as naturally as a person will revolutionise the everyday experience of using technology, he added.

    “They understand your intent in a way that hasn’t been possible before and can translate that to computer actions,” Boyd said in an interview with the Financial Times before news of the possible deal.

    Microsoft’s potential investment, first reported by the newsletter Semafor last week and confirmed by two people familiar with the situation, would see it take a significant minority stake that would value OpenAI, after the investment, at $29bn. Microsoft declined to comment.

    The potential landmark investment comes as venture capitalists are rushing to back the latest AI trend at a time when previous investment fads like blockchain and cryptocurrencies have faded.

    Microsoft made its first $1bn investment in OpenAI in 2019, sealing a role as the tech platform for the firm’s highly demanding AI models and giving it first rights to commercialise its technology.

    The software giant has already used OpenAI’s technology in a number of its own products, though its executives say this only scratches the surface of what will come next.

    Its cloud customers have been able to pay for access to GPT-3, a text-generating AI model, since 2021. Dall-E 2 — part of a wave of image generating systems that took the AI world by storm last year — is the foundation of a recent Microsoft graphic design product called Designer, and has also been made available through the Bing search engine.

    Meanwhile Codex, a system which prompts software developers with suggestions of which lines of code to write next, has been turned into a product by GitHub, a Microsoft service for developers.

    The speed at which AI tools like this are passing from advanced research to everyday product may be unparalleled in tech history, according to AI experts. Codex was introduced in an OpenAI research paper only in the middle of 2021, but within a year Microsoft had turned it into a commercial subscription service.

    According to GitHub chief executive Thomas Dohmke, 40 per cent of the code created by developers who use the service, called Copilot, is automatically generated by the AI system, halving the time it takes to create new code — a huge leap in efficiency after a decade of largely ineffective efforts to boost developer productivity.

    “It’s a mind-blowing productivity statistic,” said Dohmke.

    Much of OpenAI’s tech stems from the creation of so-called large language models, which are trained on huge amounts of text. Unlike earlier forms of machine learning — which has dominated AI for the last decade — the technique has led to systems that can be used in a wider variety of circumstances, boosting their commercial value.

    “The real power of these models is they have the capability to do so many different tasks at the same time,” said Boyd at Microsoft. He added that makes it possible to do so-called “zero-shot” learning — using the AI for new tasks without needing to train them.

    Google and other tech giants, as well as a number of start-ups, have also ploughed resources into creating giant AI models like this. But since GPT3 stunned the AI world in 2020 with its ability to produce large blocks of text on demand, OpenAI has set the pace with a succession of eye-catching public demonstrations.

    Microsoft executives are looking to use the technology in a wide range of products. Speaking at a company event late last year, chief executive Satya Nadella predicted that generative AI would lead to “a world where everyone, no matter their profession” would be able to get support from the technology “for everything they do”.

    Generative AI is set to become a central part of “productivity” applications like Microsoft’s Office, said Oren Etzioni, an adviser and board member at A12, the AI research institute set up by Microsoft co-founder Paul Allen.

    All workers will eventually use productivity software that presents relevant information to them, checks their work and offers to generate content automatically, he said.

    The potential upheaval this could cause in the software world has not been lost on Microsoft’s rivals, who see the technology as a rare opportunity to break into markets dominated by Big Tech.

    Emad Mostaque, head of London-based Stability AI, which made a splash last year with the launch of its open-source image generating system, claimed his organisation was building a “PowerPoint killer” — an AI tool that is designed to make it much easier to create presentations than the widely-used Microsoft application.

    That makes the move both defensive and offensive for Microsoft, as it tries to protect established products like Office while also mounting a stronger challenge in markets like internet search.

    With its potential OpenAI investment, meanwhile, Microsoft is also trying to use its technology and financial muscle to position itself as the main platform on which the next era of AI will be built.

    “The amount of cloud computing power [OpenAI] needs is beyond the capability of a start-up” or venture capital investor to support, one of the company’s investors said. That meant OpenAI had little choice but to seek financial backing from one of the handful of tech giants, this person added.

    Microsoft has sought to use its first investment in OpenAI to get a head start, building what it describes as a supercomputer to train the research firm’s giant AI models. The same technology platform is also now used by Facebook parent Meta for its AI work.

    Nadella claimed recently that the head start it got from working with OpenAI meant that calculations carried out by its AI supercomputer cost only around half as much as its biggest rivals. Any cost advantage could be key: analysts at Morgan Stanley estimate that the higher cost of natural language processing means that answering a query using ChatGPT costs around seven times as much as a typical internet search.

    Microsoft’s biggest cloud computing rivals have also been seeking to align themselves with some of the most promising generative AI companies, though none of the other start-ups in the field has produced AI models with the scale or range of OpenAI.

    Amazon’s cloud division has a three-year deal to act as the computing platform for Stability AI. Another AI start-up, CohereAI, which was founded by three researchers from Google, reached a deal in 2021 to use the search company’s computing platform to train their own AI.

    If a handful of tech giants become the central platforms for — and investors in — the start-ups building the next generation of AI technology, it could stir concern among regulators.

    One person familiar with Microsoft’s investment plans conceded that its alliance with OpenAI was likely to come under close scrutiny, but added that the minority investment should not provoke any regulatory intervention.

    But as owners of the cloud computing platforms needed to support the coming age of generative AI, it seems inevitable that Big Tech will have a significant say in what comes next.

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