By 2018, the cloud computing market will reach $127.5B

The cloud computing market is growing at a compound annual growth rate (CAGR) of 22.8% from 2014 to 2018, and will reach $127.5B by 2018.

Enterprise spending on SaaS applications is approaching 30% of all application spending, and is currently growing at a 17.6% CAGR from 2013 to 2018.

By 2018, 62% of all CRM software will be cloud-based, with Salesforce solidifying its market leadership position.

These and other insights are from Byron Deeters’ State of the Cloud Report 2015 from Bessemer Venture Partners. Please see Alex Konrad’s insightful post, Report: Cloud Market Cap To Pass $500 Billion By 2020 for a detailed analysis of the financial implications of the report. Bessemer Venture Partners (BVP) is a venture capitalist firm specializing in cloud computing and technology investments, and also publishes their own Cloud Computing Index. There are 42 public companies in the index, and they serve as leading indicators for Bessemer Venture Partners’ analysis of the market.

The State of the Cloud Report 2015 shows that cloud adoption is still in its early stages. “We believe this still a multi-decade transformation that we’re being part of, and we can think of this as the early innings for the public knows and understands as the cloud industry “, says Byron Deeter. Many of the findings show how nascent the cloud computing market is.

Key take-aways from the report include the following:

  • The cloud computing market is growing at a 22.8% CAGR and will reach $127.5B in 2018.  In 2014, the cloud computing market was $56.6B, with the largest amount on spent on private cloud ($26B).
  • SaaS is rapidly accelerating as a percentage of total application spend. 30% of all application spending is for SaaS-based applications, projected to grow at a CAGR of 17.6% from 2013 to 2018. On-premise software spending is projected to decline at a 2.8% CAGR in the forecast period.
  • 62% of all CRM software will be delivered via the cloud by 2018. Cloud-based CRM is growing at a 19.6% CAGR from 2013 to 2018.  Sales force is predicted to continue as market leader through the forecast period.
  • The BVP Cloud Index will reach a $500B market cap by 2020. The index has attained a 64% CAGR from 2010 to 2014, and the following graphic provides an overview of various growth scenarios. Bessemer believes the 25% CAGR pace is the most probable given the current pace, scale and growth of the portfolio companies.
  • Bessemer has found six key indicators define a cloud’s business value over time.  “The leading indicators that we look at are proxies for what will become value drivers in the business over time,” Deeter said during the presentation of the study’s results.  These six indicators include Annual Recurring Revenue (ARR), % ARR Growth, Retention/Up sell, Customer Acquisition (CAC) Payback, % Gross Margin, and Burn Rate/Free Cash Flow (FCF). Of these, ARR and ARR Growth are the best leading indicators. Bessemer also found that a strong up sell strategy can counteract the negative effects of customer churn and has quantified that in this study.
  • Vertically-focused cloud businesses have a $25.2B market cap as of 2015. Deep vertical market expertise combined with the ability to deliver new apps quickly on a cloud platform leads to faster new customer wins, increased credibility in the vertical market served and ultimately, higher market valuations.
  • Mobility’s impact on cloud market growth and app development is growing, with enterprise mobile having more monetization potential than consumer mobile. 80% of workers don’t work at a desk, and the majority of Internet usage is now from mobile devices. Global penetration of smartphones is now at 73%. The following two slides from the report provide an overview of Bessemer’s findings in the area of mobility.

This article was written by Louis Columbus from Forbes and was legally licensed through the News Cred publisher network.

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