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Software Winners In a Post-Pandemic World – Microsoft Checks All the Boxes
COVID-19 has forced software companies and their suppliers to refocus efforts around prioritizing systems and workflows that are nearly 100% digital in nature. As a result, Info-Tech has observed the quick emergence of six market themes that are highly relevant after COVID-19. This note series will profile key vendors and how they fit into the post-COVID-19 world.
In this note series we are classifying companies as either “Cure” or “Treatment” based on how they fit into the post-COVID-19 world. A Cure company is deemed to be critical in nature, providing an immediate solution to mission-critical problems, and is expected to drive strong demand post pandemic. Treatment companies are important but more discretionary in nature. They increase overall health and productivity, but in our opinion, the spend for these solutions can be deferred. Spending on Cures has already started to accelerate during the pandemic, while Treatment companies will benefit later, from pent-up demand, as the recovery takes root and digital transformation accelerates.
Six Key Market Themes for a Post-Pandemic World
The themes that will likely garner a greater share of technology spend as we move through the pandemic and emerge post pandemic are:
|
Theme |
Cure or Treatment |
|
Cloud |
Cure |
|
Remote Work |
Cure |
|
E-commerce |
Cure |
|
Workflow Planning |
Cure |
|
DevOps |
Treatment |
|
Digital Engagement |
Treatment |
A seventh market theme that is benefitting from the COVID-19 disruption is cybersecurity. Cybersecurity is interwoven across the six core themes noted above, among others, and will be profiled separately. While cybersecurity spend has notably increased with the shift to remote work, it was already the number-one area for IT spend increases forecasted for 2020, and thus has been amplified. The surge in security spend may prove to be of a temporary nature as the focus on endpoint protection, virtual firewalls, and overall network security concerns are rapidly addressed to accommodate the remote workforce.
Workflow planning and e-commerce top the “Cures” list categorically as they have been and continue to play key roles in navigating the pandemic where people are now working from home and most office or site-based work has been or was temporarily shuttered. While these are slowly starting to reopen with restrictions, flare-ups, evolving company policies, and regional regulations will likely see a larger number of staff working remotely well into 2021.
In the Treatment bucket, digital engagement and DevOps possess an enhanced value proposition as they provide a path to the customer and employee visibility, improved productivity, and improved enablement through software between and across teams. As IT spend normalizes, we expect these categories to accelerate with an initial sharp rebound due to pent-up demand.
Foundational Themes Defined
Cloud (Cure): Cloud encompasses multiple delivery layers, primarily IaaS, PaaS, and SaaS, along with private and hybrid cloud models. Public cloud will continue to absorb workloads that require large-scale compute power (e.g. AI or big data). Additionally, more mission-critical/Tier1/sensitive workloads are moving to the public cloud as security fears are waning and overall confidence in public cloud resilience is on the rise. According to the Flexera/RightScale State of the Cloud Survey, 53% of respondents’ workloads are in the public cloud today, growing to 60% in the next 12 months. Over 90% of IaaS market share will be split between Microsoft, Google, and Amazon, with Amazon the current leader at 45% market share. For the Platform as a Service (PaaS) market, the growth rate is estimated at ~22-25% through 2025 with Microsoft taking the market share lead at ~32%. Enterprises will continue to shed on-premises data centers in favor of public cloud infrastructure in the near term, especially in light of workloads migrating to containers or new data-intensive workloads such as AI.
Key Vendors: Amazon, Google, Microsoft, IBM, VMware
Remote Work (Cure): Multiple product categories fall under this market theme, as the shift to remote work has immediately raised the profile on this set of solutions that include:
- Unified Communications as a Service (UCaaS)
- Communication Platform as a Service (CPaaS)
- Videoconferencing
- Collaboration Applications (Teams, Zoom, Office, etc.)
Remote work is now an indispensable capability for organizations of all sizes and across all industry segments. Bank of America’s (BoA) June 2020 Server and Enterprise Survey indicates that spending will increase roughly 7% on remote work solutions compared to pre-existing 2020 budgets, with a focus on videoconferencing, email, and file sharing capabilities. The complexity of a cloud-based communications stack includes the connectivity layer (cloud + PSTN), infrastructure, application services, and user experience. Many incumbent vendors are simply struggling to adapt to this new delivery model (e.g. Cisco, Microsoft and Avaya).
Key Vendors: Zoom Video, Ring Central, Twilio, Five9, Vonage, LivePerson, Nuance, Genesys, Cisco, Microsoft, Avaya, Google
Workflow Planning (Cure): Use of software to automate the planning, creation, and execution of a business process workflow in a production environment with the goal of connecting people and information across functions within an organization to allow for efficient collaboration. An effective workflow links people across departments with visibility into the related application or network performance, ultimately, bringing the critical information to the correct people for problem resolution. On-premises, legacy workflow planning tools fall short when seeking to address the complex and interrelated IT processes, people, and financial issues faced by today’s remote workforce. Cloud-based modern systems, such as ITSM from ServiceNow, bypass the shortcomings of the manual, process-based, on-premises systems of the past. Modern cloud-native systems can scale up and process inputs in a dynamic fashion, enabling quicker and more effective responses to clients, both internal and external. Workflow planning technology is applicable to a multitude of business processes, leveraging IT as the backbone.
Key Vendors: ServiceNow, Workday, Atlassian, Coupa, Microsoft, Digisign, Adobe
E-commerce (Cure): Several factors have already been at play in the steady migration of B2C retail away from brick and mortar (B&M) to an online shopping experience. Key factors include: 1) improved delivery/shipping services, 2) higher conversion rates (click to pay) due to targeted advertising, and 3) expansion of retail categories moving online and with new business models such as subscription-based programs. As of 2019, online comprised ~11% of all retail sales worldwide while in the US this number was higher at 19% and higher yet still in China at 40%. COVID-19 is accelerating this trend further.
Recent Bank of America credit and debit card usage shows a growth in spend online of 24% YoY as of March 2020 and a 44% increase in early April at the peak of the US lockdown. This trend of moving commerce online is now shifting to include B2B transactions. Organizations must establish an e-commerce channel that compares favorably to the B2C consumer experience.
Key components to this success will include:
- Multiple channels and form factors for purchasing (mobile, desktop, app)
- Personalized customer experience, leveraged and bolstered by AI and customer data to create a tailored experience (recommendation engines, search prediction, order history, optimized delivery channels)
- Seamless integration with payment vendors coupled with low-cost shipping (integrations to ERP/CRM)
- Expansion options for e-commerce functions (e.g. marketplace for third-party apps)
Key Vendors: Shopify, Amazon, Alibaba
Digital Engagement (Treatment): Transforming to a digitally enabled organization with flexible and agile technology frameworks is key to minimizing front-office process disruptions in the areas of sales, service, and marketing. The digital engagement suite of solutions encompasses CRM (think 360-degree view of the customer) and unified digital marketing solutions addressing all channels (web, social, ads, apps, email, messaging, mobile). Bringing customer service closer to the customer through digital channels (email, chat, VOIP, SMS, social media, blogs, etc.) is a must-have imperative in the post-pandemic era. Sales teams require the tools to sell remotely, such as cloud-based CRM. Marketing teams are pivoting spend away from in-person events, with travel at a standstill, and traditional ad channels and redirecting these dollars towards digital marketing channels and functions such as search engine optimization (SEO), social media marketing, and email marketing.
Key Vendors: Salesforce, Adobe, Zendesk, Hubspot, Freshworks, Veeva, Workday, Zoho, Microsoft
DevOps (Treatment): In layman’s terms, DevOps can be defined as a unified process that sits at the intersection of R&D and/or IT’s development and operations functions with the goal of enhancing efficiency optimization, agility, product security, and performance across the development and application lifecycles.
With workloads moving to the cloud (public, private, hybrid) as part of digital transformation efforts and the paradigm shift from monolithic applications to distributed architectures (containers, microservices), the application environment has become exponentially more complex to manage. Layer in the recent and sharp shift to remote workforces distributed globally, the shift to e-commerce, and spikes in mobile and internet usage as key means to drive revenue in the COVID-19 economy and the trend towards DevOps adoption has only increased in urgency for most IT organizations. As development and operations boundaries blur, these new teams require a new set of tools to manage these new processes and in an Agile manner! DevOps platforms may consist of tool(s) that enable collaboration, workflow planning, project tracking, code building & development, continuous integration, continuous delivery, deployment/release management, and overall monitoring/reporting.
Key Vendors: Atlassian, ServiceNow, Microsoft (Azure DevOps), Micro Focus, Sumo Logic, GitLab, Jenkins, JFrog, Xray, Checkmarx, Chef, Ansible, Puppet, Electric Cloud, HashiCorp, Salesforce (MuleSoft), DynaTrace, AppDynamics (Cisco), New Relic, Datadog, Splunk, Elastic
Vendor Focus: Microsoft
Vendors can be both Cure and Treatment in this model, as some products may fit better in one bucket vs. the other. Microsoft is a vendor that literally checks all the boxes for our six key themes, placing them in this hybrid cure/treatment category.
|
Cloud |
Digital Engagement |
Remote Work |
Workflow Planning |
DevOps |
E-commerce |
|
|
Microsoft |
X |
X |
X |
X |
X |
X |
|
|
Azure |
Dynamics365, LinkedIn |
O365, Teams, Windows Virtual Desktop |
Microsoft Flow |
GitHub/Azure DevOps |
Dynamics365 Commerce |
Source: SoftwareReviews Cloud IaaS, Report not yet published
Microsoft is a multi-platform company that has been building the integrations and linkages across its product landscape with an aim to synergistically empower its customer base while effecting the ultimate in vendor lock. Satya Nadella has transformed the company in many different ways:
- Accelerated product development cycles (One engineering solution (1ES))
- Go to Market (GTM) shift from products to solutions
- Demand Channels: Client/Server, PC to Cloud, Gaming, Business Applications
All commercial focus has shifted from the legacy on-premises server and Windows platform towards cloud-based solutions that span all technology stack verticals (Azure, Commercial Office, Teams, Power Apps, Gaming, LinkedIn, GitHub).
Taken individually, Microsoft’s product offerings straddle the cure/treatment continuum and the company has already benefitted during COVID-19. Expectations are for further outsized performance during the back half of 2020 and into 2021. In fact, as this note is being authored, MSFT just released earnings for its Q4 FY20 with a whopping $38B in revenue, up almost 13% from last year, all during the peak of the pandemic!
Parts of the Microsoft product family fit the Cure profile and have become essential during the COVID-19 crisis, namely Windows Virtual Desktop and Teams, as well as components of the Azure cloud service. The primary growth driver for Microsoft continues to be Azure, which has and will benefit from a continued acceleration in cloud adoption.
The remainder of the highlighted product set fits firmly in the Treatment vertical, with Dynamics365, LinkedIn, Flow, GitHub, and Azure DevOps. These products are firmly positioned to provide a roadmap for enterprises seeking to enhance business workflows and development/delivery processes in a highly collaborative and remote world.
The Road Ahead
Key growth drivers across the Microsoft platform include Azure, Commercial Office, Gaming, LinkedIn, and GitHub, which collectively are chasing a massive ~$460B Total Addressable Market (TAM) by 2025. The intense focus on digital transformation initiatives has kicked these growth drivers into overdrive.
Microsoft is the leader in the public cloud PaaS (Application Platform as a Service, Database as a Service, and Application Integration as a Service) market with a 25% market share in 2019. While Amazon’s AWS is expected to maintain its massive 45% IaaS market share, it is expected that Microsoft and Google will capture a combined 40%+ of the market by 2025 while also controlling 32% of the PaaS market. Investor estimates predict Microsoft’s PaaS CAGR at 28% while this quarter’s Azure growth rate stalled a bit to 50% YoY down from 61% last quarter. Of note in Asia, Alibaba’s cloud is likely to gain share, but still remain smaller than its US-based competition.
Channel partners also emphasize a strong outlook based on the increasing adoption of commercial cloud (Azure, O365, and Teams). The accelerated trend of cloud adoption for Tier 1 workloads coupled with O365 E5 with Security/EMS is resonating with customers in a big way. In fact, recent data points call out that paid Office 365 seats now number 258M while growing at a 20% CAGR. Growth rates are bolstered by upgrades to E3/E5.