Global Equities

Cloud computing is an unheralded tech success

Favourable economics and greater security foster the sharing of remote IT resources. The practice is largely controversy free.

February 2019

In mid-2017, computer scientists at Google’s security-research unit Project Zero helped discover two 20-year-old flaws in computer chips that were so widely used it meant just about every computer and network in the world was vulnerable to hacking.

Among those vulnerable to the microprocessor flaws named ‘Meltdown’ and ‘Spectre’ were the providers of cloud computing, those that offer IT resources from data centres over the internet. Meltdown, for instance, could theoretically allow a hacker who had penetrated a system to access information in a computer’s memory, which is typically shared by many users on the public cloud. By the time the flaws were made public in January 2018, however, the major cloud-service providers such as Amazon, Google and Microsoft had secured their systems and enhanced their reputations for competence and security.[1]

The ability of cloud service providers to remind people of their worth when such a vulnerability emerged is among reasons why the practice of cloud computing has become a US$176 billion industry over the past 15 years or so.

The practice of renting computing infrastructure over the internet, which is a key segment of cloud computing, is thriving because it is propelled by several favourable forces. One is that rather than having to build an expensive data centre that will be costly to maintain, businesses can access the most advanced computing services immediately and only pay for what they use. Another is that cloud-service providers benefit from such huge economies of scale that they can offer the most-up-to-date services at reasonable prices – by mid-2017, Amazon had cut the price of its ever-improving cloud services at least 62 times in 11 years. And as Project Zero scientists showed, cloud-service providers are better able to secure a system than can most businesses or governments.

The sharing of remote IT resources is expected to grow in coming years. Morgan Stanley estimates that by 2021 businesses will send 44% of application workloads to the public cloud, more than double today’s figure of 21%.[2] US consultancy Gartner predicts the global cloud services market will reach US$278 billion by 2021.[3] All up, cloud computing is proving a rare part of technology; it is surpassing predictions of its usefulness and doing so in a relatively trouble-free manner in an era when much technology is shrouded in controversy.

To be sure, any large, fast-growing industry is bound to stir up some issues. Data centres can have technical problems that put them temporarily out of service. Their large energy demands could attract criticism, although cloud computing is a more efficient use of resources at a society level and cloud providers are adept at maximising energy efficiency. Issues about ‘data sovereignty’ have prompted some governments to force cloud service providers to contain data within country borders. No part of the internet, including cloud data centres, will ever be fully secure. The European banking regulator worries that the outsourcing of core banking systems to the cloud is a systemic risk.[4] Increasing market dominance by the likes of Amazon and Microsoft could attract the attention of anti-trust regulators.  

It must be said too that for all the benefits the cloud offers not everything will shift to data centres. Cost-wise, for instance, cloud computing may be better suited to variable volumes of data processing. Certain core operational workloads might stay on the premises, as might critical IT and customised processing. The same goes for data that must stay on site for compliance reasons. Another brake on cloud growth is that applications such as autonomous driving still benefit from having computing resources closer to the data source.

But these caveats pale next to the bigger trends. Favourable economics, technological advancements and security concerns will prompt businesses to outsource more IT to the large data centres that comprise the cloud. In the foreseeable future, cloud computing is likely to fulfil upbeat expectations of its benefits without stirring up too much trouble for itself.

Nothing new

In 1996, the term ‘cloud computing’ was coined to describe the concept for people to access software, files and computer grunt over the web. The term seems to have been inspired by drawings where the network was shown as a cloud. (Who said it first is disputed.)[5]

 The practice of sharing resources, however, is far from new. It began when people used terminals with no processing power to access mainframes by ‘time sharing’ – a concept devised in 1955 to overcome the limitation that only one person could use a computer at a time. Sharing of access effectively by timetable for a wildly expensive room-sized computer with ample storage made computing more economical.[6]

By 1963, computers could be used by two or more people at the same time.[7] Another landmark came in 1969 when the development of the precursor to the internet meant data could be shared across computers in different places.[8] The 1970s ushered in virtualisation software, which creates a virtual computer that can execute functions in isolation from the hosting hardware, one of the key elements of modern cloud computing. In the 1990s, virtualised private networks appeared, which allows users their own private interconnections across public networks.

While other companies had been offering software in the cloud, such as the sales-automation software provider Salesforce in 1999, years before Amazon Web Services was launched in 2006, Amazon commercialised a new and much broader cloud-computing model on a massive scale.

Amazon’s entry into the industry came about because after the online retailer launched its web-based retail services in 2002, it realised that it only used 10% of the system’s capacity, a common ratio at the time. So the company asked itself what opportunity the other 90% might provide. In 2018, Amazon’s public cloud-computing business generated nearly US$26 billion in revenue.

As businesses ponder their cloud needs,[9] several forces are helping strengthen the dominance that Amazon, Microsoft and Google hold over the industry outside of China. Among them are the breadth of their global data centres, their technological leadership, and the trust of clients and industry relationships (with software vendors, consultants, etc.) they have built over the years.

To appreciate the size of the networks the cloud providers have built, consider the global cloud infrastructure Amazon has. The company over time has built 60 operational zones that help ensure latency and reliability across 20 regions. Each ‘availability zone’ as they are known contains data centres – the most in a zone is 14 while the minimum is two. A data centre, which is typically 7,450 square metres (80,000 square feet) in area and can contain as many as 300,000 servers, is an assortment of servers, storage, networking hardware and proprietary software. To improve reliability and operations, Amazon operates a network that directly connects users to its data centres. This network has about 150 ‘points of presence’ to link with other networks globally, and 89 direct connect locations.

The networks of Amazon and the other providers are likely to grow in coming years as cloud computing keeps proving itself more economical and secure than do-it-yourself, especially in an era of rapid data growth and heightened cyber-security risks and, perhaps, more discoveries of flaws in everyday microchips.


By Michael Collins, Investment Specialist

 

[1] See The New York Times. ‘Researchers discover two major flaws in the world’s computers.’ 3 January 2018. nytimes.com/2018/01/03/business/computer-flaws.html

[2] Morgan Stanley. Research. ‘The rising debate on security in the cloud.’ 17 May 2018. morganstanley.com/ideas/cloud-cybersecurity

[3] Gartner. ‘Gartner forecasts worldwide public cloud revenue to grow 17.3% in 2019. 12 September 2018. gartner.com/en/newsroom/press-releases/2018-09-12-gartner-forecasts-worldwide-public-cloud-revenue-to-grow-17-percent-in-2019

[4] European Banking Authority. ‘EBA report on the prudential risks and opportunities arising for institutions from fintech.’ 3 July 2018. eba.europa.eu/documents/10180/2270909/Report+on+prudential+risks+and+opportunities+arising+for+institutions+from+FinTech.pdf

[5] MIT Technology Review. ‘Who coined ‘cloud computing?’ 31 October 2011. technologyreview.com/s/425970/who-coined-cloud-computing/

[6] See Dataversity. ‘A brief history of cloud computing.’ dataversity.net/brief-history-cloud-computing/ and IBM. ‘A brief history of cloud computing.’ ibm.com/blogs/cloud-computing/2014/03/18/a-brief-history-of-cloud-computing-3/

[7] Dataversity. Op cit.

[8] ECPI University from the US. “Cloud computing. A brief history.’ ecpi.edu/blog/a-brief-history-of-cloud-computing

[9] Businesses can choose between three types of cloud offerings. ‘Infrastructure as a service’ sells access to computer, networking and storage resources along with systems software, while ‘platform as a service’ provides infrastructure software such as tools that help companies build applications. There is an array of different services within these two categories. ‘Software as a service’ refers to web-based applications such as some accounting software (Xero’s) or Gmail. An added choice for cloud users is to decide whether or not to fully or partially outsource to the cloud or instead to opt for a ‘private’ cloud, which gives users dedicated on-premises resources. See Amazon. Cloud computing models. docs.aws.amazon.com/aws-technical-content/latest/aws-overview/types-of-cloud-computing.html

 

Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited ABN 31 120 593 946, AFS Licence No. 304 301 (‘Magellan’). This material is issued by Magellan and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any fund, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Further information regarding any benchmark referred to herein can be found at www.magellangroup.com.au. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

How to invest

  • Magellan offers two market-leading strategies, global equities and global listed infrastructure. Find out how easy it is to invest in the world’s best companies, as chosen by Magellan’s experts.

  • Global equity products

    You buy from the world’s best companies, so why not invest in them? Magellan offers a range of highly-rated global equity funds, containing some the world’s best companies that we believe are positioned to benefit from long-term investment tailwinds.

    Find out why investing in a diversified global fund makes sense.

    Invest in global equities
  • Global listed Infrastructure products

    Infrastructure: Supporting you every minute of every day. Our range of top-rated global listed infrastructure funds are positioned to generate inflation-protected, stable yet solid returns.

    Discover why including listed infrastructure in a diversified portfolio can enhance returns and reduce portfolio risk.

    Invest in global infrastructure