Computing Applications Technology strategy and management

The Cloud as an Innovation Platform for Software Development

How cloud computing became a platform.
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  2. References
  3. Author
  4. Footnotes
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Since the early 2000s, advances in networks and virtualization technology have made Web delivery of software applications possible on different types of hardware and software. As a result, we have seen increasing use of Internet or "cloud-based" servers as the primary way organizations and individuals use software applications (see "Cloud Computing and SaaS as New Computing Platforms," Communications, April 2010). Many software developers have continued to build applications using hardware-based operating systems. Today, however, the trend is clear that cloud-based services have become a new platform not only for using software applications but also for building them.

In addition to hardware-based operating systems such as Google Android, Microsoft Windows, Apple’s iOS, and Linux, now we must include Amazon Web Services (launched in 2006, initially to sell Amazon’s excess computing and storage capacity), the Google Cloud and App Engine (launched in 2008), and Microsoft’s Azure (launched in 2010) as popular platforms for applications development. But cloud computing as an applications development platform did not occur overnight. The evolution occurred gradually as the cloud service vendors began opening up their proprietary infrastructures to third-party software engineers who wanted to build new applications and use tools or services specific to those hosting environments.a

The trend is clear that cloud-based services have become a new platform not only for using software applications but also for building them.

There were also network effects associated with this gradual transition that made the new development environments increasingly popular and valuable: As more tools and services as well as third-party applications became available, more application developers chose to build new software for specific Web environments, which led the platform owners and third-parties to make more tools, services, and applications available. Much like the app stores for smartphone software, Amazon, Microsoft, and Google, as well as other firms, now boast app stores for their cloud-based applications and development tools.b

An early movement toward using Web environments for applications development came from companies that delivered software products as a service. In particular, Salesforce.com, founded in 1999, created a customer relationship management (CRM) product configured not as packaged software but as software delivered over its own servers and accessed through a customer’s browser. In 2005, Salesforce launched a website called AppExchange that functioned as a transaction platform and online store for companies to share, buy, and sell applications or tools that work particularly well with the Salesforce CRM product. Salesforce then created an innovation platform when it launched Force.com in 2008 as a development and deployment environment using Salesforce’s SaaS server infrastructure and growing set of software engineering tools.

Various companies would go on to offer other public hosting services for SaaS products but Amazon quickly became the market leader for hosting as well as Web-based applications development. It had over 400,000 developers registered as early as 2008 to use Amazon Web Services (AWS).6 AWS was particularly attractive because it was not tied to a single product and was especially good for developing online retailing applications. Amazon also made several critical services available to its cloud users, including data storage, computing infrastructure, messaging, content management, and customer billing. In recent years, AWS has expanded to include computing resources (EC2 for virtual servers and Lamda for running code); database, data storage, and content delivery services; networking administration and security services; code deployment facilities; analytics, application, and mobile support services; and a growing number of enterprise applications.c

Microsoft in 2019 offered a similar collection of tools and services for its hosting service users and application developers. Its shift to the cloud began in 2010, when Microsoft began to offer Azure as an online service consisting mainly of Windows Live and Office Live. Azure initially appeared to be a weak competitor to Amazon and Google because of Microsoft’s strong preference for the packaged software business model. That preference gradually changed as increasing numbers of Microsoft customers asked for software delivered as a service and preferred to pay via short-term licenses and annual subscriptions.d

Google was an early innovator in Web services but lost ground to Amazon and Microsoft probably because it lacked the experience, and the strategy, to sell services to enterprises. Most of what Google offers its users (except advertisers) it offers for free. However, this may change in the future. Google is now spending billions of dollars to upgrade its cloud infrastructure and marketing efforts, with the intention of attracting more enterprise users for its services.1

As we look back, though, it is Microsoft that most stands out for its successful shift in strategy under CEO Satya Nadella that led the company to repackage many of its key software products and development tools as online services.3 For example, Azure made available all the services that had been ported to the online versions of Windows and Office as well as Microsoft SQL Server, Microsoft CRM, .NET services, and Sharepoint services. These Web offerings made it possible for customers to continue using Microsoft’s products as Web services rather than buy new versions of the packaged software. At the same time, Microsoft enabled its customers to integrate Microsoft services with products from other vendors, thereby positioning Azure as a relatively neutral hosting environment and innovation platform. On Azure, software engineers can use various programming languages and not just Microsoft’s proprietary .NET environment.

Microsoft’s cloud revenues have continued to rise as customers built new applications using the Azure Web services and ran them on the Azure platform rather than on Windows. Microsoft lumps several cloud services together, but one estimate is that, in fiscal 2018, Microsoft had revenues of approximately $23 billion from Azure out of total company revenues of $110 billion. The Azure business in 2018 and 2019 was also growing at annual rates between 70% and 90%.5,8 This growth has helped propel Microsoft beyond Apple and Amazon to become the most valuable publicly listed company in the world, with a market value over $1 trillion.

We can expect further growth but also intensifying vendor competition between Microsoft and Amazon, especially for enterprise users.

For the past 10 years or so, industry analysts have been tracking cloud software revenues in increasing detail, with annual reports on the different market segments. "Software as a Service" refers to software products delivered via the Web and priced generally on a subscription or on-demand basis, with the full applications stack and data running on the software company’s cloud servers. "Platform as a Service" (PaaS) refers to features that users access via the cloud while managing their own software applications and data on internal (on-premises) company servers. These features include middleware applications, the operating system and updates, data storage, networking, and tools for developing new applications. PaaS covers the new cloud-based innovation platforms. There is also "Infrastructure as a Service" (IaaS), which generally refers to when customers manage their own applications, databases, middleware, and operating systems while receiving some basic services via the cloud. These other services include virtualization (the ability to run different applications in a software environment that emulates different hardware platforms), data storage, and networking.9

The total size of the information technology market in 2018, including software, hardware, and services, was estimated to be approximately $3 trillion.2 Cloud revenues remained a relatively small part of this total number but were growing 20% to 30% annually: SaaS revenues in 2018 were estimated at over $55 billion; IaaS revenues approximately $45 billion; and PaaS revenues just under $11 billion. Public cloud services cut across all three categories, with AWS by far the market leader in recent years. Gartner and Goldman Sachs put AWS’s mid-2019 market share at 47%, followed by Microsoft (22%), Alibaba (8%), and Google (7%).8

Among these companies, Microsoft’s Web business was growing the fastest. We can expect further growth but also intensifying vendor competition between Microsoft and Amazon, especially for enterprise users. Both companies offer the most popular cloud platforms and marketplaces for software development as well as powerful IaaS platforms for running those applications. There is now little doubt that Microsoft—which made its fortune from packaged versions of Windows and Office—has successfully made a transition in its business model from desktop software to the cloud.

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