Eversheds 'Spotlight on the Cloud' - headline results presentation and key speaker commentary

Spotlight on the cloud

Highlighting industry trends

8th March 2016

Agenda

Time Agenda Speaker

16:00 – 16:30 Registration and champagne reception

16.30 – 16:35 Welcome Charlotte Walker-Osborn, Global

Head of Technology, Media and

Telecoms

16:35 – 17:15 Headline results Charlotte Walker-Osborn and

Paula Barrett, Global Head of

Privacy and Information Law

17:15 – 17:35 Insights and commentary Olivier Wolf, TMT Sector Head, EY

Transaction Advisory Services

17:35 – 17:55 Insights and commentary Alastair McAulay, Director of

Disruptive IT, PA Consulting

17:55 – 18:00 Closing remarks Charlotte Walker-Osborn

18:00 – 19:00 Drinks and canapés

Headline Results

Charlotte Walker-Osborn, Global Head of Technology, Media & Telecoms

Paula Barrett, Global Head of Privacy & Information Law

Eversheds LLP | 09/03/2016 |Eversheds LLP | 09/03/2016 |

−The Survey and report were conducted and written in collaboration with The Lawyer Research Service, a division of The Lawyer

−The survey was undertaken in December 2015 and January 2016

−It was completed by 350 cloud providers, purchasers and industry advisors worldwide

− Responses from purchasers were gathered from a cross-section of sectors

About the research

Highlighting Industry Trends

Spotlight on the Cloud


− Infrastructure as a Service

− Platform as a Service

− Software as a Service

“as a”

A common understanding

Cloud


− 77% of enterprises utilised cloud by the end of 2014

− 89% of enterprises are predicted to use some form of cloud by the end of 2016

(Vodafone’s Cloud Barometer 2015)

− Cloud market worth US$56.6 billion in 2014

− Approximately 10 times the market size in 2008

(Bessemer Venture Partners)

Clouds are on the rise


Spend on cloud is on the rise

Cloud spend is significantly increasing…

77% of surveyed purchasers expect their spend to increase during the next 18 months

Only 1% forecast a decrease in spend


What is driving the increase in adoption?

What are the main benefits your business offers to

customers adopting its cloud services? (Providers)

Scalability

Increased delivery agility to support its business

New capabilities/increased ability to innovate

Lower cost

More flexible cost

Allows the internal IT department to focus on significant businesschallenges/strategic projects

Improved service levels


Overall

Sector analysis


0% 10% 20% 30% 40%

Financial services

Professional services (excl.financial services)

TMT

From which industries are you experiencing

greatest demand for cloud services? (European cloud providers - top three sectors only)

Europe v US (top 3)

Sector analysis

0% 5% 10% 15% 20% 25% 30% 35%

Financial services

Pharmaceuticals andbiotechnology

TMT

From which industries are you experiencing

greatest demand for cloud services? (US cloud providers - top three sectors only)


What types of cloud are being adopted?


Public, Private or Hybrid?


Public, Private or Hybrid?

Negotiating cloud contracts…

… still not a done deal


Where did it all go wrong?

Contracting without tears?


Why do Purchasers Walk Away?

• Over 30% of purchaser respondents stated concern over where data is hosted and/or accessed from, or lack of information about that, triggered them walking away

• Top 3 issues for walk away cited as data related from purchasers


−A bigger obstacle in practice than many might like to believe

−No longer an esoteric technical issue

−Changing legal and political dynamic

−Data Residency• Post Snowden era – access to data by third party governments

• Russia

• Expansion of privacy laws around the World containing location controls

−Post Safe Harbor transfer environment• further scrutiny on surveillance

• transfer mechanisms to protection personal data under review

• continued uncertainty particularly harmful for cloud deals

• new “privacy shield” proposals under consideration

Times have changed and transparency is vital

Data and Location


−The joint second most common reasons for cloud deals breaking down for purchasers: concerns over inadequate breach reporting

−Growth in mandatory breach reporting rules globally

−High profile breaches hitting the headlines

−Increasingly stringent reporting requirements • New EU GDPR requirements

−Practical issues on reporting for providers

−Wording on reporting merits close scrutiny by both customer and provider

−Under new EU rules, both customer and provider will gain direct responsibilities for security• Issues in relation to assessing what is adequate protection• Likely to see more specific statements on security and reporting• Driving greater due diligence on this aspect earlier in the deal

Clear, documented commitments on both required

Data Security & Breach Reporting


Where did it all go wrong

Contracting for cloud without tears?


−50% of those surveyed said they walked away from a deal because of the Data Protection terms

−Evidencing how real this has become as a barrier to deals concluding

−Growth in some providers seeking to differentiate and gain market share on their “privacy friendly” contracting approach

−Changes in data protection legislation with drive further contracting changes

−Under new EU rules, both customer and provider will gain direct responsibilities• No longer a “customer” only issue• Providers will need to address to protect their own compliance

risk and liability

An Increasing Imperative to Get This Right for Deal Closure

Contracting on Data and Security


Customer perspectives

Data Security Requirements

Customers want increasing detailed commitment on security and testing


Stronger commitments emerging from providers

Data Security Requirements


Contracting terms which caused the purchaser to walk away


Mismatched expectations?


−similar issues high on list

−pricing notably higher than for customer

−security cited as lower, but will that change?

Differing perspectives? Mismatched expectations?

What do Providers think are the reasons?


Some thoughts around M&A in the cloud

Conclusions


−A surprisingly large number of cloud sales deals break down at the contract negotiation stage

− Customers and vendors have differing views as to why agreement can not be reached

−Eversheds’ view is that more engagement around difficult issues at the outset would lessen these figures significantly and save time and money on both sides

Conclusions

Olivier Wolf

TMT Sector Head, EY Transaction Advisory Services

Confidential

Olivier Wolf March 2016

Spotlight on the Cloud EY Perspectives – Eversheds Conference

1 Confidential – all rights reserved– Ernst & Young 2016

►Olivier Wolf, TMT Sector Head, Transaction Advisory Services

►A leading advisor to the cloud computing and managed hosting industry in Europe

– Transactions – commercial due diligence

– Strategic advice

►Today:

– Key trends

– Outlook for suppliers over the next five years

Introduction

1 1


Agenda

2 2

►Defining the Cloud

►Market Trends

►Future Outlook for Suppliers


Our definition

► An IT product is defined as Cloud based on the way a customer buys and consumes it

► Cloud relates to IT hardware (IaaS), platforms (PaaS) and software (SaaS) products

► aaS (as a Service) is synonymous with outsourced cloud and has the following primary characteristics

► Rented access, not owned

► Opex not capex spend

► On-demand and highly flexible buying

► Access through network or internet

Definitions of the cloud are still confused


Agenda

4 4


►Market Trends



Key tailwinds

Impact on market value 2015 -2020

Migration from on-premise

Migration from

colocation

New tech start ups /digital natives

Growing data and content volumes

Data sovereignty

Price

Number of users Usage Price

Cloud / IaaS market drivers

1 2 3


Platform as a Service (PaaS)

Software as a Service (SaaS)

Applications

Data

Runtime

Middleware

O/S

Virtualisation

Servers

Storage

Networking

Applications

Data

Runtime

Middleware

O/S

Virtualisation

Servers

Storage

Networking

Applications

Data

Runtime

Middleware

O/S

Virtualisation

Servers

Storage

Networking

Applications

Data

Runtime

Middleware

O/S

Virtualisation

Servers

Storage

Networking

Applications

Data

Runtime

Middleware

O/S

Virtualisation

Servers

Storage

Networking

Facility Facility Facility Facility Facility Hard

ware

layer

Infrastructure

Managed /owned by user Managed/owned by vendor/combination of vendors

Managed/owned by vendor or user

Third-party hosting (including cloud / IaaS)

In-house or owned DC

Colocation

Number of users

Migration

IT is increasingly being hosted on third party infrastructure

1


Off-premise infrastructure

market

€38bn

Colocation 66%

3rd party hosting

34%

€962bn

IT Infrastructure

market 12%

Total IT spend

Other IT spend 88%

Off-premise 32%

In House 68%

€117bn

IT Infrastructure market

The IT infrastructure

market is worth c.€117bn

65-70% of IT infrastructure

spend is still in-house

Outsourced IT infrastructure is

comprised of three primary models.

IaaS accounts for c.30% of this

Market size by segment, 2015 (€bn)

…although it is still a small part of the total IT infrastructure market

Number of users 1


Growth of data and content volume – Example drivers Source: Oracle, Gartner, IDC, EY research

M2M traffic per month, TB per month

2014

500

0

2019

1,000

2017 2016 2015 2018

1,500

40

2017 2016

60

80

2015 2014

103% CAGR

0

10

20

30

40

50

2008 2010 2012 2014 2016 2018 2020

42% CAGR

30% CAGR

Global data in Zettabytes

Global mobile app revenues, US$bn

15

20

25

30

35

40

45

50

55

2012 2013 2014 2015 2016 2017

Global consumer internet video, Exabytes per month

29% CAGR

2012 2013 2014 2015 2016 2017

60

40

22% CAGR

Online gaming IP traffic, Petabytes per month

2013 2014 2015 2016 2017 2018

1.5

1.0

2.0

2.5

3.0

31% CAGR

Cloud based global Intelligence Market size, US$bn

The need for infrastructure is clear and will continue to grow

2 Usage


Data sovereignty and low latency are the key reasons cited for key players’ expanding their DC footprint into Europe Announcements of DC openings and incentive for key players

Player

# of new DCs publicly announced

for Europe New locations

2016/17

► IE x3

►ES x2

►UK x1

6

2016

►UK x2

►DE x1

► IE x1

4

2016 ►n/a 0

2016 ►n/a

Incentive

►Serve customers locally

►Meet demand for data sovereignty

►Ability to bid for government contracts

►Meet demand for data sovereignty

0

Timeline

2 Usage

4

4

3

9

Existing DCs in Europe


-20%

Our analysis suggests real like-for-like prices declines for cloud are starting to slow down Average price per Gigabyte RAM (index)

3 Price

78

100

76

79

100

60

65

Oct-13

70

50

Jul-13

80

100

90

Jan-15 Apr-15 Jan-14 Apr-14 Jul-14 Oct-14

105

Jul-15

75

85

95

-3%

SAMPLE

Dedicated IaaS

Public IaaS


There are two fundamental types of cloud infrastructure, both relevant for different needs Benefits of the different types of cloud infrastructure

Best for buyer need Good for buyer need Reasonable for buyer need Less suitable for buyer need

Dedicated IaaS Public IaaS

Automated physical servers with private network best used for essential workloads and low

latency requirements

Virtual servers on shared infrastructure with public network, best used for on demand and highly

scalable requirements

Security

Performance

Cost effectiveness

Scalability / flexibility

Hardware customisation

1

2

3

4

5

Continuity 6

Key performance

criteria

Data residency 7


The market is forecast to grow by 40% p.a.

VPS +29% 40% CAGR

Public Cloud +45%

54

2020 2019

42

2018

32

2017

23

2016

16

2015

11

Dedicated Servers +21%

Dedicated Cloud +47%

Global cloud market forecast (€bn)


Agenda

13 13


►Market Trends



The level of service offered on top of the infrastructure is a key differentiator for suppliers

Supply-side positioning

High

Level of

Service

No infra.

Ownership

Infra-oriented

players

Infrastructure

focus

Infrastructure pure players:

► Business model: focused on core

infrastructure delivery (dedicated / virtual

servers) at lower costs

► Key success factor: operational efficiency

A

Low

A

B

C

Infra. Pure players

Service-led infra.

owners

Cloud builders /

integrators

Service-led infrastructure owners

► Business model: focused on the delivery of

premium value-added services on top of

core infrastructure

► Key success factor: Upsell capability /

engineers

B

Value-added Resellers

► Business model: Infrastructure resellers

bundled with managed services

► Key success factor: TBD

C

Dedicated Public


Cloud-Builders are particularly attractive to SMBs and small enterprises

Cloud builder Infrastructure run and managed by one supplier

Customer applications

Infrastructure

Illustrative

Third-party pure plays


Key messages

Cloud Infrastructure giants rolling out internationally

Cloud-builders consolidating local markets

Traditional players shifting business model

► Large players building capacity

► Local presence popular given sovereignty issues

► High-quality products at competitive pricing key

► Partnerships with cloud-builders essential

► Service-led cloud solutions using third party infrastructure

► Infrastructure agnostic

► Dis-intermediation of service and owned IT

► Popular with mid-large companies

► Partnerships with cloud infrastructure giants key

► Traditional colocation companies shifting to new models

► Telecom players starting to exit

► Shift towards cloud-builders


Thank you


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Alastair McAulay

Director of Disruptive IT, PA Consulting


Contact details

Charlotte Walker-Osborn Global Head of Technology, Media and Telecoms and Technology Sector Head T: +44 121 232 1220 M: +44 779 907 5756 [email protected]

Paula Barrett Global Head of Privacy and Information T: +44 777 575 7958 M: +44 20 7919 4634 [email protected]

Olivier Wolf Partner and TMT Sector Head, EY Transaction Advisory Services T: +44 20 7980 9169 M: +44 771 0027 621 [email protected]

Alastair McAulayDirector of Disruptive IT, PA ConsultingT: +44 20 7730 9000M: +44 772 5062 687 [email protected]


Final Questions?

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eversheds.com©2016 Eversheds LLPEversheds LLP is a limited liability partnership