Japanese Cloud Computing – Massive Growth To ¥8.5T ($103B) By 2015

I’m sure all of our readers will share the heart-felt sympathy we have for the Japanese people following the recent earthquake. We have friends and family in the region and have the best of thoughts for them and the country’s speedy recovery of course. We wrote the following before the disaster of course. To contact ITCandor please email info@itcandor.com

Japanese Cloud Computing Highlights

• Cloud Computing accounted for ¥5.5T in 2010
• Represented 14.3% of the total ¥36.8T market
• NTT was the strongest supplier with an 8.5% share
• Spending will level off at around ¥2T per quarter in 2014 and 2015
• Telecom and IT Service categories predominate
• Cloud Development Service and Cloud Access Devices will be strongest ‘Cloud Elements’
• Consumers will remain the strongest buyers
• Japan is different in being dependent on large companies with skinny ITC resources
• Cloud Computing is set to grow to ¥8.5T by 2015

Japan came out as a strong favourite for us to cover in our country Cloud Computer assessments. As always the data and forecasts developed here are available for other markets – so let us know if you have specific needs.
The updates in this report include the base data, which now includes Q4 2010 vendor results and the forecast period, which now extends to 2011. We’ve quoted market sizes in Yen of course based on quarterly daily weighted averages as published by OANDA.

NTT Leads The Nascent Cloud Computing Market In Japan

ITC spending in Japan totalled ¥36.8 Trillion in 2010: of this 14.3% (or ¥5.5 trillion) can be described as Cloud, rather than Traditional spending. We use a broad definition of Cloud components (see later) which favours Telecom service suppliers and its not surprising to see NTT as the leading Cloud Computing vendor. It held an 8.5% share and was followed by Sony (5.1%) and Hitachi (3.1%). Google, Microsoft and Yahoo are major players thanks to their Web delivery strengths, although Fujitsu and NEC are also in the top 7. We believe that IBM, Fujitsu and HP’s activities in implementing private Cloud for big companies have not yet created significant revenues. Figure 1 shows 2010 market shares for both Cloud and Traditional Computing sub markets.

Cloud Computing Will Outgrow Tradition ITC Sales

Despite the superior spending growth shown in Asia Pacific over the last few quarters we are not predicting strong growth for Japan in latter years of our forecast. The combination of Cloud Computing delivering ¥2 Trillion per quarter and the tailing off of other spending will see Cloud Computing grow from 15% of the total in 2010 to 26% in 2015. A comparison of the growth rates by quarter is shown in Figure 2.

IT And Telecom Services Will Account For Most Cloud Computing Expenditure In Japan

When itemising the numerous spending categories for Cloud Computing the two strongest components are IT Service (of which Internet and Other Services account for the largest part) and Telecom (of which Broadband Service predominates). Other categories – in particular SaaS, IaaS and PaaS – account for only a small proportion of current spending and, despite the focus on these areas, they are important for the role they play in developing private and public Clouds from which end-user services are delivered. We’ve included a view of the forecast by category in Figure 3.

Cloud Development Services Offer Most Growth, Retail Cloud Services Most Revenue In Japan

Of the various Cloud Computing elements Retail Cloud Services dominates current spending due to its inclusion of Broadband and Internet Service: consequentially they contribute strongly to the overall shape of the forecast (see Figure 4). 2010 has shown a strong growth in spending on Cloud Access Devices, which we expect to fall off significantly in the New Year. Cloud Telecom Connection is expected to be stronger than total Cloud Computing spending. The strongest growth of the various elements is expected in Cloud Development Services, especially in 2011 and 2012.

Among Retail Cloud Services Broadband And Internet Service Will Over-Shadow ‘… As A Service’ Offerings

For some Cloud Computing definitions are restricted to Software, Infrastructure and Platform as a Service (SaaS, IaaS and PaaS). While these categories will continue to show strong growth, it will take to a long time after the period of our forecasts before they challenge the size of the two pre-existing services, Broadband and Internet Service. Figure 5 shows the expected development of spending of the smaller areas of RCS – the most talked about elements of Cloud Computing for most American analyst firms.

Consumers And Small Business Will Invest Most In Cloud Computing In The Japan

Consumers are already the majority users of Cloud Computing. The use of free-to-use social networking, Internet email and backup services is naturally being expanded with the introduction of music and television streaming and other paid-for Internet services. Equally small businesses (those with less than 100 employees) have found initial Cloud Computing easier to adopt than those companies which run their own IT infrastructure. We don’t expect the success of systems companies in building private Clouds for larger companies to lead to those companies spending overtaking smaller organisations and consumers within the current forecast. However we note that large companies in Japan account for a higher ratio of spending than they do in countries such as the Netherlands and the UK. A view of ITCandor’s forecast for Cloud Computing spending by company size is shown in Figure 6.

The Majority Of Cloud Computing Spending In Japan Will Be For Off Premise Offerings

The majority of Cloud Computing spending in Japan will be for services delivered off premise. Cloud Access Devices and Cloud Delivery Platforms are the main on premise elements, while we also include half of the spending on Cloud Telecom Connections in this area. A picture of the development of on and off premise spending is shown in Figure 7.

Cloud Computing Defined For Market Sizing

As with our UK and Dutch sizing activities we started by looking at the total ITC spending by quarter and offering in Japan. Once done we then set about estimating what to count as ‘Cloud Computing’. For this we’ve adopted the following definition:

“For market-sizing purposes Cloud Computing encompasses all ITC offerings (products or services) which are used for the consumption or delivery of remote, browser-accessed applications – the delivery of which comes from data centre resources unknown to the ultimate end-user. Typically Cloud Computing applications are purchased on a pay-as-you-go basis and can be accessed by industry standard client devices such as PCs and Smart Phones. Specifically excluded are applications requiring local processing and storage, client server computing and interactive processing. Single-customer applications are not excluded as long as the delivery mechanisms have been adjusted.”

This is quite a generous definition and we even allowed offerings such as printers, gaming consoles, converged devices to be counted for the time they spend associated with these applications.
For our latest sizing we have grouped the offerings into new subdivisions in order to make our forecasts more vital. In particular:

• Cloud Access Devices (CADs) – we grouped the devices to which Cloud Computing is delivered, taking PCs, smart phones, smart tablets gaming consoles, peripherals and set top boxes; as before we’ve estimated only the expenditure on those devices accessing the relevant applications and excluding the proportion of the time these machines are involved with traditional computing; iPhones downloading music from iTunes are excluded, those using Google maps are included for instance
• Cloud Delivery Platforms (CDP) – here we included those components used to deliver Cloud Computing either to a company’s own employees or consumers; elements including include servers, storage systems, networking equipment, operating systems, infrastructure software and applications as well as hardware and software maintenance; again we’ve excluded those machines used for traditional computing from our estimates
• Cloud Telecom Connections (CTC) – here we’ve estimate the costs of Telecoms service (fixed line and wireless) used to access and deliver Cloud Computing applications to users; a small, but growing, part of the overall Telecoms service market
• Cloud Development Services (CDS) – in this category we’ve tried to capture the amount being spent on developing Cloud Computing by users and aggregators; the components include implementation service, as well custom and development and test software
• Retail Cloud Services (RCS) – this is where we capture the majority of Cloud Computing spending; the newer SaaS, IaaS and PaaS services join the two existing 100% classes – Broadband and Internet Service
• Cloud Location – in addition to the groupings of products and services we’ve also decided to plot where the applications and systems are run by identifying on and off premise locations; this is designed to help identify the balance in the business between selling services or building private Clouds for customers

We’ve been engaged in some interesting discussions about definitions over time and have found some strong disagreements on which classes can be included and whether they can be measured. ITCandor believes that more clarity will develop over time for the classes which appear obscure today. Our subdivisions should allow business planners to pick and chose their inclusive classes, ignoring those they exclude.
Of course we have also kept count of the non-Cloud Computing spending in order to judge the relative growth rates and opportunities.

Some Conclusions – Cloud Computing – Japan Is Different

The Japanese ITC market is different from many others – in the mobile handset market, for instance, where NTT Docomo helped the country become a very early advanced adopter. When it comes to Cloud Computing there are a number of reasons to consider Japan as one of the key markets. In particular:

• As a large single country large business (those with more than 1k employees) accounts for a bigger part of the economy
• There are fewer IT professionals employed in Japanese companies, leading to a dependence on managed services and outsourcing
• Unlike in Europe there are still strong local vendors in Japan – Hitachi, Fujitsu, Sony, NTT and others tend to have the largest shares
• Corporations are required to do some good for society, rather than just ‘maximising shareholder value’ as in the West
• It is difficult to compare the attitudes of citizens to other countries, although we suspect that the Japanese are more trusting of authority than those in the UK or Germany for instance. Certainly some of the Cloud Computing activities we have heard of – such as having monitors in all cars to help control traffic lights – have been fiercely resisted elsewhere.

But this is not to say that Japan hasn’t got a long way to go to embrace Cloud Computing, not least because the country – like elsewhere in Asia Pacific – is more dependent than the USA on hardware purchases. Traditionally it’s a country where physical products have been more popular than virtual services. We predict a strong battle between the managed services suppliers and a new breed of local Cloud Computing suppliers, although it is less likely that the big US suppliers will threaten the dominant Japanese vendors. As elsewhere Cloud can be cheaper for businesses if customers are prepared to share multi-tenanted sites: if the Japanese are more sociable than others they may make bigger savings.
We believe there will be strong growth for those vendors who embrace Cloud Computing in their strategies – especially if they can use it as a new way to deliver managed services to businesses and better computing experiences for consumers.
Are you interested in sizing Cloud Computing? Which countries are most important? Please let me know by commenting on this article.