Application revenues decline as the shift to the cloud accelerates

Posted by Mike Vizard on Jan 5, 2016 9:59:49 AM

Cloud applicationsAs more and more IT organizations make the shift to the cloud, the amount of revenue being generated by applications is starting to rapidly decline. Overall, application revenue grew a paltry 3.9 percent year over year in the third quarter of 2015 across the 23 vendors tracked by the market research firm Technology Business Research (TBR). More telling yet, new license sales fell 25 percent.

Cloud adoption, on the other hand, generated subscription revenue growth of 40 percent on a year-to-year basis in the same quarter. As a result, total product revenue grew 7.6 percent year over year in the third quarter, but much of that growth now stems from applications being deployed in the cloud.

A cloud-first mentality

Besides the shift in pricing models and the agility provided by cloud applications, TBR notes that the shift to the cloud will also be accelerated by the rise of modern user interfaces that make accessing features such as advanced analytics embedded in a cloud application much simpler. In contrast, the average IT organization would take months to update a similar application running on premise.

As a result, IT service providers should expect the rate at which organizations will embrace cloud applications in 2016 to accelerate rapidly. That doesn’t mean organizations will necessarily abandon existing legacy applications overnight, but it does mean that most organizations have at least adopted a “cloud-first” mentality when it comes to deploying new applications.

Integration challenges

The challenge and opportunity facing IT service providers is to help organizations deploy those cloud applications while also integrating them with existing legacy applications that, for the time being at least, are often the most mission-critical an organization has running.

For example, it’s a relatively simple endeavor for an organization to embrace a human resources application running in the cloud. Replacing an entire ERP environment is a multi-year endeavor, though. It’s even conceivable that because of compliance requirements that ERP application may never be deployed on an external cloud service. As a result, once an HR application is deployed in the cloud the next priority is usually integrating it with the ERP systems that run on premise. In fact, arguably the biggest opportunity for IT service providers may not be the act of physically integrating those systems as much as it is consulting on the new workflow processes those applications enable.

More vendor support

Going into 2016, application providers such as Oracle, Microsoft, and a small legion of other application vendors have made it clear that moving applications into the cloud is now their most strategic initiative. As such, IT service providers should be able to count on more application vendor support than ever when deploying applications in the cloud. While it’s still unclear exactly how many applications will ultimately wind up running in the cloud, that number will almost certainly increase by several orders of magnitude in 2016 and beyond. For most IT services providers, that will simply be too big of an opportunity to ignore.

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Photo Credit: Zach Dischner via Flickr.com. Used under CC 2.0 License.

Topics: IT Services Trends

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