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Overview
Key Findings
■ Public cloud adoption is growing at a rapid pace for infrastructure as a service (IaaS), platform as
a service (PaaS) and SaaS services. A major portion of the traffic travels across the internet, but
network quality remains inconsistent, which can impact application performance significantly.
■ Major communications service providers (CSPs) have made good progress setting up direct
network connections to leading cloud providers. However, the majority of the CSPs worldwide
have been slow to roll out the service due to low cloud adoption in their markets.
■ CSPs slow to introduce the service risk losing their competitive advantage to the early movers,
including global CSPs offering direct cloud connections, as well as alternative providers with
enhanced internet services, when their market opens up.
Recommendations
Communications technology service providers must take the following steps to address enterprise
demand for cloud connectivity:
■ Prioritize investments to maximize market capture by establishing direct cloud connections to the
hyperscale cloud providers (where most of the current demand is) before extending the
connectivity to secondary players.
■ Enhance the direct cloud connection service with other on-demand services, including software-
defined
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■ Shorten the time to market by partnering with competing providers, including both global CSPs for
extended geographic reach and alternative providers with innovative solutions to provide a
complete solution to meet enterprises’ varied needs.
Introduction
Cloud adoption is rising rapidly. While this is led by developed markets, the trend is beginning to filter
into developing markets. Demand is strong across all services, including infrastructure as a service
(IaaS), platform as a service (PaaS) and software as a service (SaaS). Revenue rose 30.8% to $128.5
billion in 2018. This is expected to grow to $290.6 billion in 2023, a compound annual growth rate
(CAGR) of 17.7%.
Consequently, reliance on cloud is becoming more critical than ever. Until recently, most enterprises
depend on the internet to gain access to cloud services. However, the internet is designed to be a
best-effort service. While it continues to improve globally, it will always lack the consistency and
predictability needed for mission-critical applications.
With enterprises putting more applications in the cloud, this needs to change. To solve the problem,
major CSPs (such as AT&T, Orange Business Services and Verizon) have installed direct network
connections to major cloud providers such as Amazon Web Services, Microsoft Azure and Google
Cloud Platform, enabling their customers to bypass the internet and get a direct connection to the
cloud providers.
These connections are dedicated dual network links that extend from the CSP’s Multiprotocol Label
Switching (MPLS) or Ethernet WAN networks. Customers using the CSP’s MPLS or WAN services can
easily order and provision the services on demand via the customer portal. These connections often
come with a dynamic bandwidth feature, with support for usage-based pricing. This is to align the
network bandwidth with cloud utilization.
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The major CSPs are in line with the cloud market trend. However, most CSPs, especially those in
developing markets like Indonesia, Thailand and the Philippines for example, have been slow to
introduce the service. They will face competition from both major CSPs as well as alternative
providers such as Equinix, CoreSight and Megaport, offering a choice of competing solutions.
There is a new urgency for CSPs to roll out the service or risk being isolated from the rising cloud
adoption trend. CSPs must introduce the direct cloud connections service early, even if cloud
providers are not in their markets and demand for cloud connectivity is still low. The aim is to support
early cloud adopters, and get a head start in the market, so as to be well-positioned for growth when
the market opens up.
Market Trend
Cloud Adoption Accelerating, Increasing the Need for Enterprise-Grade Connectivity
IaaS revenues are expected to grow from $29.2 billion in 2018 to $78.1 billion in 2023, a CAGR of
21.7%. Demand is strongest for Amazon Web Services (AWS) and Microsoft Azure, but this is
beginning to extend to Google Cloud Platform and other emerging providers such as Alibaba Cloud,
IBM Cloud and Oracle Cloud. (See “Forecast: Public Cloud Services, Worldwide, 2017-2023, 3Q19
Update.”)
PaaS is expected to grow at similar pace in the same period — from $23.6 billion to $63 billion. While
there is broader range of players, this segment is being increasingly led by the hyperscale IaaS
players, which are integrating PaaS tightly with their IaaS platform to provide simplified consumption
and a seamless experience between the two services.
SaaS
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global SaaS services, including Microsoft Office 365, Salesforce and Workday. SaaS is expected to
grow from $75.5 billion to $149.5 billion, a CAGR of 14.6%.
Cloud is becoming more business-critical than ever. As such, enterprises will want connectivity to
cloud to provide correspondingly high availability and performance, backed by service-level
guarantees for assurance. In addition, enterprises want to address their concerns over sensitive data
flowing via the internet, which may compromise security, privacy and governance requirements.
While internet quality was tolerated as a trade-off in the past, more enterprises are looking at
switching back to traditional network services such as Multiprotocol Label Switching (MPLS) or
Ethernet WAN, which provides enterprise-grade network services, with guarantees for jitter, latency
and packet loss. Running sensitive data over private networks also reduces the exposure to security
breaches.
Adoption Drivers
Enterprises have been deploying dedicated network connections to cloud providers for several years,
typically on an ad hoc or tactical basis. Consequently, deployment has been low and patchy.
However, adoption is expected to pick up significantly over the next two years and then accelerate
during the next three to five years. The adoption will be driven by several key enabling factors:
■ Better understanding of the direct cloud connection approach and its benefits
Adoption Trends
The trend is beginning to manifest in the marketplace. In the past 12 to 18 months, more enterprises
have been including direct cloud connections in their request for proposal (RFP) when their WAN
contract is up for renewal. At this stage, customers typically require only connections to their main
cloud providers, including the hyperscale players and leading SaaS providers.
Enterprises whose business is largely domestic in nature typically require connectivity within their
own markets, like the U.S. or China, for example. In contrast, global multinational companies require
connectivity in all major geographic regions, including North America, Western Europe, and
Asia/Pacific. Cloud providers typically host their services in a few key locations within each region.
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accessing a cloud service in Hong Kong or Japan; while a Malaysian Indonesian company could be
accessing a cloud service in Singapore. Demand from this segment is low but is expected to rise
over the next three to five years.
As such, enterprises buy more bandwidth than they require, resulting in underutilization of resource
and inflating their costs. Most need to connect to several major cloud providers, often in different
locations, increasing complexity and costs further. Due to these inhibitors, this approach is not widely
adopted across enterprises.
The major CSPs are multicloud-ready. Initially, they focused on connecting the leading cloud
providers in all major locations globally. They have since expanded their connections to secondary
players, including Alibaba Cloud, IBM Cloud and Oracle Cloud. However, deployment is on a more
measured pace due to limited demand.
In addition, the major CSPs are colocated in Equinix Cloud Exchange, which will provide them access
to cloud providers hosted in Equinix’s facilities. Equinix is the leading cloud exchange provider
hosting many cloud providers. The CSPs typically establish direct connections to the large cloud
players and via Equinix’s automated exchange to the smaller cloud players.
■ Enabling the service with software-defined network (SDN) to provide dynamic bandwidth, enabling
customers to flex bandwidth on demand to align with cloud utilization.
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■ Enhancing the customer service portal with better monitoring, analytics and reporting; giving
customers more visibility and control over network performance.
■ Integrating the service with software-defined wide-area network (SD-WAN) and other network
function virtualization (NFV) services (such as router and firewall) under a single cloud service
portal, with service chaining to provide an integrated service experience.
Major CSPs are beginning to integrate legacy managed services into the cloud service portal,
enabling customers to have easy access to related services. These include security services such as
network intrusion detection and prevention, unified threat management, log monitoring and
management; application performance monitoring, as well as WAN optimization and acceleration.
Revenue from direct cloud connection is relatively small, compared to total connectivity revenue.
However, it extends the value of CSPs’ core MPLS services, which has limited differentiation. The
service is also part of a broader range of services that include SD-WAN and NFV services, which will
position CSPs beyond basic infrastructure services.
However, demand from these enterprises is beginning to change. While IaaS is less of a priority for
migration to cloud, a growing number of enterprises are showing greater willingness to use an
offshore cloud service for PaaS and SaaS. When they have gained experience, their propensity to
migrate to cloud is expected to increase significantly.
The hyperscale providers are planning to expand their presence in developing markets, including
Southeast Asia markets such as Indonesia, Malaysia and Thailand, for example. While this is still a
work in progress, their coverage in underserved markets will improve within the next two to three
years. Once they are present, cloud adoption in these countries is expected to pick up quickly.
Most CSPs operate only within their own country. They will face increasing competition from global
CSPs, which are enabling domestic enterprises to access cloud providers worldwide through their
global MPLS networks. When hyperscale cloud providers enter these markets, global CSPs will
already have a head start, and local CSPs may find it hard to catch up.
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A major competitor is Equinix, which operates Equinix Cloud Exchange. Equinix is a global player with
data centers in many major locations, including regional hubs such as London, Paris and Frankfurt in
Europe, and Singapore, Hong Kong, Japan and Australia in Asia/Pacific. Due to its geographic
coverage and carrier-neutral position, many cloud and SaaS providers host with Equinix.
Equinix is a major partner for CSPs. Many CSPs have network connections to Equinix’s data centers,
where they establish direct connections to cloud providers either on a bilateral basis or via Equinix’s
automated cloud exchange. For connections via Equinix’s exchange, the CSPs can establish a
bilateral connection once the demand for a specific cloud provider grows.
Secondary cloud exchanges are emerging, with some operating at regional or local levels only. Some
examples are CoreSite Open Cloud Exchange, Global Cloud Xchange and NEXTDC AXON. Global
Cloud Xchange is a global player. In contrast, CoreSite is focused on the U.S. while NEXTDC is
focused on Australia.
Other rising providers include Megaport, Teridion and Cato Networks. They offer enhanced internet
performance through different techniques, including superior peering with local data centers and
major cloud providers worldwide, or using overlay routing mesh and SD-WAN to improve traffic
performance and predictability.
Each approach has its own downsides. For example, Equinix does not connect to cloud providers
outside of its data centers, which may not be sufficient for some customers. Providers that offer
enhanced internet performance cannot guarantee network performance which is comparable to
traditional network services, even if the quality is significantly better than the general internet.
CSPs can take a phased approach toward deployment, focusing on leading cloud providers in the
first phase, and then extend to other cloud providers in the second phase. CSPs should also study
the merits of optimizing the internet for cloud connectivity, which can be paired with the direct cloud
connection service in order to provide a complete cloud connectivity solution.
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Evidence
■ Information and briefings provided by CSPs
■ Public information
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