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Higher spending on public cloud service providers bad news for Cisco

Enterprise spending on public cloud service providers will increase almost 22% annually through 2020, depressing sales of data center switches from Cisco and other suppliers.

Over the next several years, the rate of enterprise spending on public cloud services will far exceed that of on-premises IT infrastructure, including networking gear, according to IDC. As a result, established vendors like Cisco are likely to continue to struggle with falling sales of switches and routers.

Spending on public cloud service providers will increase 21.5% annually through 2020, when IDC expects it to reach $203.4 billion globally. The rate of expenditure is nearly seven times higher than that for overall IT buying.

Increased spending on public cloud service providers translates into less spending on data center IT infrastructure. That's because as companies move workloads to the cloud, fewer servers, switches and routers are needed to power what remains.

"To the degree that new and existing application workloads migrate to the public cloud, the need for data center infrastructure will migrate with them," said Brad Casemore, an analyst at IDC.

Impact on Cisco

The trend is already having an effect on established networking vendors with a sizeable portion of revenue tied to enterprise data center sales. In its latest quarterly results, Cisco reported a 3% drop in revenue from the same period a year ago -- the fifth consecutive quarterly decrease. Similar to the previous quarters, the drop-off was due to continued weakness in switching and router sales.

On the flip side, networking companies successful in selling gear to cloud service providers have fared much better. In its latest results, Arista Networks reported an almost 34% increase in revenue, and Juniper Networks said net sales rose 5%.

"Vendors that are successful in targeting the public cloud will benefit from its growth," Casemore said.

Public cloud service providers benefiting from spending increase

IDC defines public cloud services as software, infrastructure or platform as a service. Through 2020, infrastructure and platform as a service will grow at a much faster clip than software as a service (SaaS). By 2020, IaaS and PaaS will reach 40% of overall public cloud spending from a third in 2015.

Industries with the highest rates of spending on public cloud service providers over the five-year forecast include professional services, retail, media and telecommunications. Companies with more than 1,000 employees will account for nearly half of all spending.

Enterprises embracing the public cloud are doing so to trade capital expenditures for a monthly service fee. Experts, however, warn companies to consider more than just lower hardware expenses when calculating the total cost of a cloud deployment.

Research firm Gartner pointed to three factors that could significantly raise the cost of using a public cloud. The first reason is SaaS providers may not lower fees if companies end up with fewer users than the originally licensed number.

Secondly, subscription fees may be higher than year three or four of a perpetual software license. "Therefore, the savings need to be significant and ongoing to make cost lower after more than five to seven years," Gartner said.

Finally, companies should factor in the high cost of moving data out of the cloud and back into the data center, if that becomes necessary.

Despite the negatives, migration to public clouds shows no signs of slowing, and neither does the market disruption.

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