Cloud solutions have steadily gained traction with their services like storage, network, email and office productivity to the extent that almost 70% of the organizations are exploring or using the cloud service solutions. The cloud business which is expected to touch $118 billion this year is dominated by three main kinds of services: Software-as-a-service (Saas), Platform-as-a-service (Paas) and Infrastructure-as-a-service (Iaas).

According to Scott Swartz, VP, CTO Enterprise and Cloud Billing at Ericsson and founder of MetraTech, the cloud is evolving to make space for smaller players who can build, run and integrate their products and services to meet industry specific requirements.

Big firms like the Amazon Web Services (AWS), Microsoft Azure, and Google have been the major players of the cloud market that has largely been horizontal in nature. A need for industry specific or vertical services especially in niche sectors like healthcare, manufacturing, insurance, finance, etc. is leading to smaller players making waves in the cloud market.

What advantages can vertical services bring to the market?

1. More value: Big names like Amazon have captured a huge market share by providing generic services to cater to all the industries across sectors. However, there is a growing need for value-added Iaas that can cater to a specific domain of expertise. Horizontal solutions with their “one-size-fits-all” theory lack the depth that vertical solutions can bring in to the customer since their area of focus is drastically brought down and they are able to pack in more value that is also industry specific. For example, Opower works with utilities to collect customer energy usage data that can help individual customers modify energy consumption.
2. Lower costs: With a specific targeted audience, your potential targets are reduced significantly and you are able to reach your customers faster and in a more efficient manner bringing down your Customer Acquisition Costs (CAS).
3. Larger market share: As Gordon Ritter, co-founder and general partner at Emergence Capital, with Santi Subotovsky, principal at Emergence Capital, says, “With horizontal services, there is so much ground to cover that even market leaders invariably end up getting only 5-10% of the market share.” But with a vertical level, the penetration is far greater and depending upon the player and the industry, one can achieve up to 40% of the market share within five years.
4. Layers of value: Along with capturing market share, the success of any organization depends on the constant innovation that they bring to the market and the solutions offered to the customers. A vertical line can add many layers of value to its solutions. Gordon Ritter calls this the layer cake approach. For example, Guidewire, a popular name in the insurance sector offers varied solutions to its customers within the industry like underwriting, billing and claims, policy management and much more, all on a common platform. Guidewire adds further value to its package by layering it with functional solutions of business intelligence, data management, and mobile solutions.  If we dig further, we can see that this approach (not a recent discovery) was successfully put to use by e-bay that captured the market by bringing innovation in their business through “buy-it-now” and topped it with a smooth check-out process and seamless integration PayPal on their website.
5. Additional revenue:The industry cloud market is a circle where companies know each other and are well-acquainted with each other’s business models. There is a huge potential to earn additional revenue through newer models like referrals-as-a-service (Raas) by identifying potential targets, referring products or services to them and earning a commission when the potential gets converted to sales.

Successful vertical players

The success of companies like Veeva Systems, Guidewire, Opower, Athenahealth have underlined the potential growth of the vertical cloud market through their innovative approach and customer-specific products and services.

What are the risks associated with vertical growth?

As always, with any new trend, there are flip sides along with the advantages.

Higher price: Companies like AWS are able to push down the costs since they cater to a wider berth by offering generic solutions. In comparison, niche players do not have the advantage of volume and hence their services tend to be priced higher.

Being swallowed by the bigger fish: Promising start-ups often run the risk of setting into the oblivion when they lose focus and allow their services to stagnate over a period of time. Also, the bigger players often tend to acquire the innovative start-ups eventually leading to a decline in innovation.

Security issues and risks of lock-in: There could be scenarios where data sovereignty or regulatory issues may prevent a company from moving to a cloud structure. Also, there is a possibility of running into vendor lock-in period that could prove detrimental to the business especially if the company has picked up the wrong cloud in the first place. This, therefore, calls for stringent Service Level Agreements (SLAs).

Point to be noted in this regard: Industries like government, healthcare and finance are ridden with sensitive data and therefore the offerings by niche providers in these industries have been tailored by the respective industry professionals.

What’s the verdict?

No innovation is risk-free or without significant hurdles and therefore the challenges posed by vertical cloud solution comes as no surprise. It’s a noteworthy turn in the journey of the cloud market as businesses are beginning to discover the benefits of customized services as opposed to the generic, all-encompassing ones.