All growth must end eventually. But it is a brave person who will predict the end of growth for the public cloud hyperscalers. The hyperscaler cloud revenues have been growing at between 25-60% the past few years (off very different bases – and often including and counting different revenue streams). Even the current softening of economic spend we are seeing across many economies is only causing a slight slowdown.
Looking forward, we expect growth in public cloud infrastructure and platform spend to continue to decline in 2024, but to accelerate in 2025 and 2026 as businesses take advantage of new cloud services and capabilities. However, the sheer size of the market means that we will see slower growth going forward – but we forecast 2026 to see the highest revenue growth of any year since public cloud services were founded.
The factors driving this growth include:
- Acceleration of digital intensity. As countries come out of their economic slowdowns and economic activity increases, so too will digital activity. And greater volumes of digital activity will require an increase in the capacity of cloud environments on which the applications and processes are hosted.
- Increased use of AI services. Businesses and AI service providers will need access to GPUs – and eventually, specialised AI chipsets – which will see cloud bills increase significantly. The extra data storage to drive the algorithms – and the increase in CPU required to deliver customised or personalised experiences that these algorithms will direct will also drive increased cloud usage.
- Further movement of applications from on-premises to cloud. Many organisations – particularly those in the Asia Pacific region – still have the majority of their applications and tech systems sitting in data centre environments. Over the next few years, more of these applications will move to hyperscalers.
- Edge applications moving to the cloud. As the public cloud giants improve their edge computing capabilities – in partnership with hardware providers, telcos, and a broader expansion of their own networks – there will be greater opportunity to move edge applications to public cloud environments.
- Increasing number of ISVs hosting on these platforms. The move from on-premise to cloud will drive some growth in hyperscaler revenues and activities – but the ISVs born in the cloud will also drive significant growth. SaaS and PaaS are typically seeing growth above the rates of IaaS – but are also drivers of the growth of cloud infrastructure services.
- Improving cloud marketplaces. Continuing on the topic of ISV partners, as the cloud hyperscalers make it easier and faster to find, buy, and integrate new services from their cloud marketplace, the adoption of cloud infrastructure services will continue to grow.
- New cloud services. No one has a crystal ball, and few people know what is being developed by Microsoft, AWS, Google, and the other cloud providers. New services will exist in the next few years that aren’t even being considered today. Perhaps Quantum Computing will start to see real business adoption? But these new services will help to drive growth – even if “legacy” cloud service adoption slows down or services are retired.
Hybrid Cloud Will Play an Important Role for Many Businesses
Growth in hyperscalers doesn’t mean that the hybrid cloud will disappear. Many organisations will hit a natural “ceiling” for their public cloud services. Regulations, proximity, cost, volumes of data, and “gravity” will see some applications remain in data centres. However, businesses will want to manage, secure, transform, and modernise these applications at the same rate and use the same tools as their public cloud environments. Therefore, hybrid and private cloud will remain important elements of the overall cloud market. Their success will be the ability to integrate with and support public cloud environments.
The future of cloud is big – but like all infrastructure and platforms, they are not a goal in themselves. It is what cloud is and will further enable businesses and customers which is exciting. As the rates of digitisation and digital intensity increase, the opportunities for the cloud infrastructure and platform providers will blossom. Sometimes they will be the driver of the growth, and other times they will just be supporting actors. But either way, in 2026 – 20 years after the birth of AWS – the growth in cloud services will be bigger than ever.
Last week, NVIDIA announced that it had agreed to acquire UK-based chip company Arm from Japanese conglomerate SoftBank in a deal estimated to be worth USD 40 billion. In 2016, SoftBank had acquired Arm for USD 32 billion. The deal is set to unite two major chip companies; power data centres and mobile devices for the age of AI and high-performance computing; and accelerate innovation in the enterprise and consumer market.
Rationale for the Deal
NVIDIA has long been the industry leader in graphics chips (GPUs), and a smaller but significantly profitable player in the chip stakes. With graphic processing being a key component in AI applications like facial recognition, NVIDIA was quick to capitalise. This allowed it to move into data centres – an area long dominated by Intel who still holds the lion’s share of this market. NVIDIA’s data centre business has grown tremendously – from near zero less than ten years ago to nearly USD 3 billion in the first two quarters of this fiscal year. It contributes 42% of the company’s total sales.
The gaming PC market has been the fastest-growing segment in the PC market. The rare shining light in an otherwise stagnant-to-slightly declining market. NVIDIA has benefited greatly from this with a huge jump in their graphics revenues. Its GeForce brand is one of the most desired in the industry. However, with their success in AI, NVIDIA’s ambition has now grown well beyond the graphics market. Last year NVIDIA acquired Mellanox – who makes specialised networking products especially in the area of high-performance computing, data centres, cloud computing – for almost USD 7 billion. There is clearly a desire to expand the company’s footprint and position itself as a broad-based player in the data centre and cloud space focused on AI computing needs.
The acquisition of Arm though adds a whole new dimension. Arm is the leading technology provider in the mobile chip market. A staggering 90% of smartphones are estimated to use Arm technology. Arm is the colossus of the small chip industry – having crossed 20 billion in unit shipments in 2019.
Acquiring Arm is likely to result in NVIDIA now having a play in the effervescent smartphone market. But the company is possibly eyeing a different prize. Jensen Huang, Founder and CEO of NVIDIA said “AI is the most powerful technology force of our time and has launched a new wave of computing. In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI.”
With thoughts of self-driving cars, connected homes, smartphones, IoT, edge computing – all seamlessly working with each other, the acquisition of Arm provides NVIDIA a unique position in this market. As the number of connected devices explodes, as many billions of sensors become an ubiquitous part of 21st century living, there is going to be a huge demand for low power processing everywhere. Having that market may turn out to be a larger prize than the smartphone market. The possibilities are endless.
While this deal is supposed to be worth around USD 40 billion, somewhere between USD 23-28 billion is going to be paid in the form of NVIDIA stock. This brings us to an extremely interesting dynamic. At the beginning of 2016 NVIDIA’s market cap was less than USD 20 billion. Mighty Intel was at USD 150 billion. AMD the other player in the market for chips who also sell graphics was at a mere USD 2 billion. In July this year, NVIDIA’s value passed Intel’s and today it is sitting at around USD 300 billion! Intel with a recent dip is now close to USD 200 billion. AMD too with all the tech-fueled growth in recent years has grown to just shy of USD 100 billion market cap.
What this tells us is that the stock portion of the deal is cheaper for NVIDIA today by around 55% compared to if this deal was consummated on 1st January 2020. If there was a right time for NVIDIA to buy – it is now. This also shows the way the company has grown revenue at a massive clip powered by Gaming PCs and AI. The deal to buy Arm appears to be a very good idea, which would establish NVIDIA as a leader in the chip industry moving forward.
Ecosystm Comments
While there appears to be some good reasons for this deal and there are some very exciting possibilities for both NVIDIA and Arm, there are some challenges.
The tech industry is littered with examples of large mergers and splits that did not pan out. Given that this is a large deal between two businesses without a large overlap, this partnership needs to be handled with a great deal of care and thought. The right people need to be retained. Customer trust needs to be retained.
Arm so far has been successful as a neutral provider of IP and design. It does not make chips, far less any downstream products. It therefore does not compete with any of the vendors licensing its technology. NVIDIA competes with Arm’s customers. The deal might create significant misgivings in the minds of many customers about sharing of information like roadmaps and pricing. Both companies have been making repeated statements that they will ensure separation of the businesses to avoid conflicts.
However, it might prove to be difficult for NVIDIA and Arm to do the delicate dance of staying at arm’s length (pun intended) while at the same time obtaining synergies. Collaborating on technology development might prove to be difficult as well, if customer roadmaps cannot be discussed.
Business today also cannot escape the gravitational force of geo-politics. Given the current US-China spat, the Chinese media and various other agencies are already opposing this deal. Chinese companies are going to be very wary of using Arm technology if there is a chance the tap can be suddenly shut down by the US government. China accounts for about 25% of Arm’s market in units. One of the unintended consequences which could emerge from this is the empowerment of a new competitor in this space.
NVIDIA and Arm will need to take a very strategic long-term view, get communication out well ahead of the market and reassure their customers, ensuring they retain their trust. If they manage this well then they can reap huge benefits from their merger.
