The Covid-19 pandemic is accelerating digitisation and changing the way companies use technology. Analysts from financial service providers UBS and Berenberg Bank dove into the sector. Which technology companies are benefiting the most from this development and which ones are benefiting the least?
Globally, the Covid-19 outbreak is the cause of considerable disruption to supply chains and the economy. UBS expects companies will need to adapt quickly and use software and ICT services in a completely different way than they used to. Digitisation was already on the rise and will accelerate after the pandemic, driven by four important themes: cloud adoption, remote working, DevOps and insourcing.
As usual, major technological shifts lead to winners and losers. Winners include new technology companies such as cloud providers, while service providers with a high exposure to legacy applications and legacy data centres bear the heaviest burden.
Lockdown measures have forced companies worldwide to have their staff work from home as much as possible. UBS expects that the number of remote workers will remain at a structurally higher level than before the pandemic. This means that consumers are also increasingly doing their groceries from home via the internet.
The move to the cloud grants businesses greater flexibility to manage their staff’s workload across multiple locations. It also enables them to reduce the time-to-market of their omnichannel offerings. Companies are expected to prefer public and hybrid clouds to private clouds. According to UBS, the global cloud services market will more than double in the coming years to 570 billion dollars (467 billion euros) by 2024.
Within the software and ICT services market, analysts consider hyper-scale cloud providers as the main beneficiaries. Amazon (AWS) is market leader. However, Microsoft Azure, Google Cloud, Alibaba Cloud and Tencent Cloud are growing rapidly and already hold approximately 63 percent of the market. AWS has the first mover advantage thanks to a seven-year lead over the competition and is the most comprehensive platform. According to UBS, Azure and Google Cloud are catching up with their enterprise and multicloud focus, respectively.
These trends also play into the hands of DevOps. DevOps integrates software development with operational business activities and enables businesses to develop products faster and bring them to market. Up to and including 2025, UBS expects more than 70 billion dollars of annual revenue in contracts with DevOps integration. This should lead to faster growth of collaboration tools, cybersecurity and SaaS providers. The future looks bright for New Relic, Dynatrace and Splunk, among others.
UBS estimates that by 2024 more than 24 million IT staff will be working remotely, perhaps even more than 32 million. Businesses will then have access to a larger pool of IT talent and take more IT services in-house.
In its baseline scenario, the investment bank assumes that spending on insourcing services will increase to 720 billion dollars in 2024, an average annual growth of 3.8 percent compared to 2019. In an optimistic scenario, the market would increase to 775 billion dollars, which would account for almost 20 percent of total IT spending.
The incourcing trend has been going on for a longer time at banks and telecom companies and other sectors are expected to follow. This will have a negative impact on external suppliers who are primarily engaged in supporting legacy data centres and legacy applications.
UBS has a particularly negative view of offshore service providers, like the Indian market leaders HCL, Infosys and TCS, who may see the pressure build on their outsourcing revenue. Analysts also expect a negative impact of cloud computing growth on the revenue of companies with large data centre exposures such as IBM, Atos and TietoEVRY. In addition, the insourcing trend is bad for Atos and TietoEVRY, while it is neutral for IBM. However, Atos can benefit from DevOps and remote working.
The impact of these trends on the cybersecurity sector varies greatly from one company to another. According to UBS, Crowdstrike and Palo Alto Networks look positive as a whole, as they benefit greatly from the growth of cloud and remote working. It is also favourable for Zscaler, but DevOps and insourcing are bad for this native cloud player. Fortinet benefits less from the cloud than the other three companies, while it is also hurt less by DevOps.
Berenberg: observability market
As the cloud adds extra complexity to the IT environment, the demand for monitoring and observability solutions for cloud infrastructure is expected to increase. Analysts from Berenberg Bank (hereafter Berenberg) recently examined the observability market.
Berenberg sees a shift in the IT industry from monitoring (inspection based on pre-defined metrics) to observability (active research into unexpected patterns that may emerge). The bank expects the observability market to show strong growth, because the importance of data is only increasing and data is becoming increasingly difficult to manage. As a result, IT problems are becoming the norm rather than the exception.
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Outdated solutions are completely ineffective at solving these challenges, Berenberg writes. New companies with innovative approaches are emerging and are rapidly gaining market share from the legacy players. Berenberg expects these new platforms to gain sufficient critical mass and to continue to gain market share over the next three to five years.
The gain is shared between different businesses, as Berenberg has not met a customer so far who only uses a platform for observability. Most customers use four to five tools, because each tool has its own strengths.