ubs/investmentresearch This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 61. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Global Research 29 January 2018 UBS Evidence Lab: Cloud Computing Checking On How The Clouds Are Forming Key Pivotal Questions: Cloud Adoption, Pricing Environment & Competition We partnered with UBS Evidence Lab to survey 500 IT mgmt. executives in the US, UK & Germany and also ran our proprietary UBS Evidence Lab Cloud Pricing Model to help address three pivotal questions: 1) adoption rate/curve for cloud computing, 2) current pricing environment & 3) how competition is evolving among the main cloud players. From this work and industry conversations, we continue to see cloud computing evolving into a market with a high degree of concentration among a handful of players (73% market share for AMZN, MSFT, GOOG & IBM in 2021E) and not winner-take-all. Pricing & Competitive Dynamic Stable Over the Recent Past We recently re-ran our UBS Evidence Lab Cloud Pricing Model to compare prices across AWS, Azure and Google Cloud and track price changes over time. Results broadly indicate price cuts have been less than what headline numbers suggest. Further, while 45% of enterprises still believe they can save >30% after year 2 by migrating to cloud, 80% of cloud users expect prices to either increase or fall by just 0-10% in the next year, suggesting that the cost savings are attractive even without aggressive price cuts. Lastly, with the mix of lower-priced general instance server offerings down as a percent of the total, this could be a tailwind for margins across the key companies (though unclear if leverage will be re-invested to foster growth & develop capabilities). How Will The Landscape Evolve? Given the competitive landscape, we expect heightened levels of investment & possibly a consolidation wave as some players may look to private/public enterprises to address respective development areas (AMZN moving up the stack & into apps; MSFT selling strategic industry solutions vs. straight products; GOOG go to market strategy (enterprise salesforce); IBM focus on analytics to attract customers and slow incursion of hyperscalers). We see cloud TAM ests. skewed more to the upside vs. downside given continued shift of workloads to hybrid/public cloud environments, enterprises gaining comfort in utilizing cloud and CSPs' offerings continuing to expand and improve. This could accelerate if we see further pull-through of PaaS, as deployments shift from commodity services to strategic workloads. We reiterate ratings: AMZN (Buy, $1,440 PT, MSFT (Buy, $105 PT), GOOG (Buy, $1,325 PT) & IBM (Neutral, $170 PT). Equities Americas Internet Services Eric J. Sheridan Analyst eric.sheridanubs +1-212-713 9310 Jennifer Swanson Lowe Analyst jennifer.loweubs +1-415-352 4694 Steven Milunovich, CFA Analyst steven.milunovichubs +1-212-713 3372 John C. Hodulik, CFA Analyst john.hodulikubs +1-212-713 4226 Benjamin Miller Associate Analyst benjamin-h.millerubs +1-212-713 3629 Alexandra Kasper Analyst alexandra.kasperubs +1-212-713 2968 Rakesh Kumar Associate Analyst rakesh.kumaarubs +1-415-352 4698 Fatima Boolani Analyst fatima.boolaniubs +1-212-713 8345 Munjal Shah Analyst munjal.shahubs +1-212-713 2113 Ryan Gravett Associate Analyst ryan.gravettubs +1-212-713 3344 Lisa L. Friedman Analyst lisa.friedmanubs +1-212-713 2589 UBS Evidence Lab: Cloud Computing 29 January 2018 2 X Table of Contents Executive Summary . 3 Cloud Computing Pivotal Questions . 4 Thesis in Pictures . 5 Pivotal Question 1: What is the runway for IT spending to transition to public cloud over the next 3-5 years? . 9 Pivotal Question 2: What is the current cloud pricing dynamic and its impact on cloud service provider competition (i.e., AWS, Azure, Google)?. 25 Pivotal Question 3: What does the public cloud competitive landscape look like? . 35 Eric J. Sheridan Analyst eric.sheridanubs +1-212-713 9310 Jennifer Swanson Lowe Analyst jennifer.loweubs +1-415-352 4694 Steven Milunovich, CFA Analyst steven.milunovichubs +1-212-713 3372 John C. Hodulik, CFA Analyst john.hodulikubs +1-212-713 4226 Benjamin Miller Associate Analyst benjamin-h.millerubs +1-212-713 3629 Alexandra Kasper Analyst alexandra.kasperubs +1-212-713 2968 Rakesh Kumar Associate Analyst rakesh.kumaarubs +1-415-352 4698 Fatima Boolani Analyst fatima.boolaniubs +1-212-713 8345 Munjal Shah Analyst munjal.shahubs +1-212-713 2113 Ryan Gravett Associate Analyst ryan.gravettubs +1-212-713 3344 Lisa L. Friedman Analyst lisa.friedmanubs +1-212-713 2589 UBS Evidence Lab:Cloud Computing 29January20183 Ex ecu tive Su mmary UBS Evidence Lab:Cloud Computing 29January20184 Cloud C omput ing Pivot al Qu es tion sGiv e n the c ontin ued foc u s on the la rge s t pla y e rs in the publi c / hybr id c l ou d c omputi ng s pace , we par tne r e d with UBS E v id e nc eLa b to s urv e y 5 0 0 IT M a nage m e nt e x e c utiv e s in the US, UK & Ger m a ny a nd a lso ra n o ur proprie ta r y UB S E v ide nc e La b Clou dP ricing M odel to hel p a ddre s s thre e piv ota l questionsPivota l Q ue s t i on 1 : W ha t is the runway fo r IT spen d i ng totr an si ti on to pu bli c cl ou d over the next 3 - 5 ye ars?P i v o ta l Que s t i o n 2 : W h a t is th e cu r ren t c l o u d p r i c i n g d y n a m i cand i ts i mpac t on c l ou d se rv i ce prov i de r comp et i t i on (i . e . , A WS ,A zure, G oo gle) ?Pivota l Q ue s t i on 3 : W ha t does the pu bl i c c l ou d compet i t i vel an dscape l oo k l i ke ?Co ncl us i on : We r ecen t l y re - r an ou r U BS Evid ence Lab C l ou d P r i cin gModel to co m pa r e p r i ce s ac r os s A W S , A zu r e and G oo g l e C l ou d andt r ack p r i ce chang e s ove r t i m e . Re sul t s i nd i cat e p r i ce r edu c t i on s bro adl yhave b een l es s t h an w h a t head l i ne nu m be r s sugg es t . Fur t he r , w hi l e45 % of en t e r p r i ses s t i l l bel i eve t h ey can sa ve > 30 % a f t er ye ar 2 bym i gra t i ng to clo ud , 80 % of clo ud u se r s e xpec t price s to ei t h e ri ncr ease or f al l by j us t 0 - 10 % in t he n ex t yea r , s ug gest i ng t ha t t hecos t sa vin gs a r e a t t r a c t i ve ev en w i t ho u t agg r es siv e p r i ce cu t s . La st l y ,w i t h t h e m i x of l o w e r p r i ced gen e r al i nst an ce t y pe se r ver o f f er i ng sdecl i n i ng as a pe r cen t of t he t o t al , t hi s coul d be a t ai l w i nd f o rm ar gi ns .Co ncl us i on : We b el i eve t her e can be m ul t i pl e w i nn er s , w i t h t he 4l ar ges t clo ud s er vice p r o vid er s ( C SP s ) e ar ni ng t h e va s t m aj ority ofdo l l ar s sp ent (i . e . , A WS , A zur e , G oo gl e C l ou d & I BM ) . Speci f i call y, ou rw o r k l ead s us to bel i eve A W S r e m ai ns # 1 in t he cor e clo ud m a r ke tw i t h A zu r e a f o r m i dab l e co m pe t i t or and GCP pl ayin g ca t ch up,r e sul t i ng in t he bi g 4 ga r ne r i ng 73 % m ar ke t sha r e in 2021 E . G i vent hi s co m pe t i t i ve dyn am i c , we e xpec t hei gh t ened l evels of i nves t m en t& po ss i bl y a con sol i datio n w av e as som e pl aye r s po t en t i al l y l oo k to acol l ect i on of p r i va t e/ pu b l i c en t e r p r i se co m pan i es to add r e s s t hei rr espect i ve cur r ent short f al l s .Co ncl us i on : We s ee e s t i m at e s f o r clo ud com pu t i ng TA M ske w edm o r e heavi l y to t he up sid e vs . do w nsi de gi ven t he con t i nu ed shi f t ofw o r kl oad s to h ybr i d/ pu bl i c clo ud envi r on m en t s , ente r p r i ses h avin gi ncr eased co m f or t in u t i l i zin g clo ud and clo ud se r vice p r ovi de rof f e r i ng s con t i nu i ng to ex pan d and i m p r ov e . Thi s h as t he po t ential toacc el er a t e if we see f u r t h er pu l l - t h r ou gh of PaaS as dep l oym en t s shi f tf r om com m od i t y t ype ser vices to st r at e gi c w orklo ads . UBS Evidence Lab:Cloud Computing 29January20185 Su mmar y IT Sp en ding Continu es Sh ift to Pu blic CloudS o u r c e : C o mpa n y r e p o r t s, G a r t n e r , U B S e st im a t e sL eg ac y D at a C en t er44%Pr iv at e C lou d1 7 %Pu b li c C lou d (IaaS, PaaS, SaaS)39%2 0 2 1 E Cloud share of total I T spen d i s exp ected to i ncrease fr om 33% i n 2016 to 56% by 2021 E, representi ng ne arl y a 2x increasewi th U BS Evi de nce Lab survey po inti ng to hy bri d be i ng ci ted more fr eq ue ntl y as a cl ou d st rat eg y i n 2017 rel ati ve to 2016 S o u r c e : U B S E v ide n c e L a b- 4 %- 3 %- 2 %- 1 %0%1%2%3%4%Pr iv a t e C lo u d Pu b li c C lou d H y b r id C lo u d U n d ec idedN o n - U s er s C u r r en t U s er sas en ter pri ses are ad op ti ng cl ou d to redu ce costs A N D dri ve bu si ne ss growth0% 1 0 % 2 0 % 3 0 % 4 0 %Sh if t c ap it al ex p e n s e t o var iable/ o p e r at ion a lEx p an d g eo g r ap h ic r ea c hIm p r o v e s p ee d an d ag il it yF r ee u p r e s o u r c e s t o f o c u s o n h ig h val u e ad d A c c es s t o t ec h n o lo g y in n o v at io nIm p r o v e p er f o r m an c e, r eli ab il it y / av ail ab il it yIm p r o v e p r o d u c t iv i t yIm p r o v e s ec u r it yIm p r o v e s c alabili t yR e d u c e o v er all cos t sN o n - U s er U s erwhi le securi ty & da ta pri vacy rem ai n t op inh ibit ors.0% 2 0 % 4 0 % 6 0 % 8 0 % 1 0 0 %V en d o r lo c k- in ( i. e. h igh cos t f o r s wit c h ing L ac k o f cl ar it y o n t h e c o s t o f cl o u d s er v ic esL ac k o f cl o u d exper t is eSelec t ing t h e r i g h t s o lu t ion s an d /o r p r o v id er sD is r u p t io n t o t h e IT o r g a n iz at io n an d s t af fU p f r o n t cos t r eq u ir edL o s s o f con t r o lPer f o r m an c e an d /o r lat e n c yC o m p li a n c e/R eg u lat o r y r eq u ir em en tInt eg r at io n wit h /M igr at io n f r o m le g ac y s y s t em sD at a p r iv ac yIT s ec u r it yN o n - U s er U s erS o u r c e : U B S E v ide n c e L a b S o u r c e : U B S E v ide n c e L a b UBS Evidence Lab:Cloud Computing 29January20186 Su mmar y Cloud Pricing St ab le an d Having Incr ea singly Less Impact on Re sults0%2 0 %4 0 %6 0 %8 0 %1 0 0 %N o m ea n ing f u ls av ing sU p t o 2 0 %2 0 t o 2 9 %3 0 t o 3 9 %4 0 %+D o n 't kn o wWhil e 45% of en ter pri ses st i l l be l i eve they can save >3 0% aft er year 2 by mi grati ng to cl ou d,U BS Evi de nce Lab da ta i nd i cates pri ce redu ct i on s broa dly ha ve be en less than what he ad line nu mbers sug ge st 0%2 5 %5 0 %7 5 %1 0 0 %- 4 0 % t o -2 0 %- 2 0 % t o -1 0 %- 1 0 % t o -5%- 5 % t o -0%NoC h a n g e0 % t o5%1 0 % t o2 0 %5 % t o1 0 %2 0 % t o4 0 %8 0 % t o1 0 0 %AWS A z u r e Go o g l eS o u r c e : U B S E v ide n c e L a bS o u r c e : U B S E v ide n c e L a b ; N o t e : R e p r e se n t s d ist r ibu t ion o f ma g n itu d e o f YoY li k e - for - li k e se r v e r p r ic e r e d u c t ion s 8 0% of cl ou d users exp ect pri ces to ei ther increase or fal l by 0 - 10% i n the ne xt year ( sug ge s ti ng cost savi ng s att ract i ve even w/ o ag gressi ve pri ce cuts)0%2 0 %4 0 %6 0 %8 0 %1 0 0 %C o s t w il lincr eas eC o s t w il ls t ay t h es am eC o s t w il ld r o p b y u pt o 1 0 %C o s t w il ld r o p b y 1 0t o 1 9 %C o s t w il ld r o p b y 2 0t o 2 9 %S o u r c e : U B S E v ide n c e L a bN o t e : L a r g e , M e d ium, S ma ll d e n o t e s c o mpa n y siz ean d wi th mi x of lower pri ced ge ne ral instance type server offer i ng s de cl i ning as a % of total , thi s cou l d be a tai l wi nd for mar gins.2 0 %2 5 %3 0 %3 5 %4 0 %4 5 %D ec - 1 5 M ar - 1 6 J u n - 1 6 Sep - 1 6 D ec - 1 6 M ar - 1 7 J u n - 1 7 Sep - 1 7 D ec - 1 7AWS A z u r e Go o g l e C lou dS o u r c e : U B S E v ide n c e L a b UBS Evidence Lab:Cloud Computing 29January20187 Su mmar y Multiple Companie s Expe cted to Be ne fit0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %AWS M ic r o s o f t A z u r e Go o g l e C lou d IBM C lo u d ( So f t lay er )2 0 1 7 Su r v ey 2 0 1 6 Su r v ey res ult i n g in o ur ex pe c tat i on f or A WS, A z ure, G CP andI B M to c o nti n ue to grow cl o u d reven ue s ( $ bn ) an dcombi ne d mar ket share of core cl ou d ( I aaS + PaaS) .S o u r c e : C o mpa n y r e p o r t s, G a r t n e r , U B S e st im a t e s30%43%48%58%63%66%69%71%73%0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %$0$ 2 0$ 4 0$ 6 0$ 8 0$ 1 0 0$ 1 2 0$ 1 4 02 0 1 3 E 2 0 1 4 E 2 0 1 5 E 2 0 1 6 E 2 0 1 7 E 2 0 1 8 E 2 0 1 9 E 2 0 2 0 E 2 0 2 1 EOt h e r Am a z o nM icr o s o f t Go o g leIB M C o m b in e d B ig 4 Ma r k e t Sh a r e44%43%44% 44%50%37%55% 55%56%55%48%63%0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %To t al US U K /Ger m an y L ar g e M ed i u m Sm allIncr eas e St ay t h e s am e D ec r e as eS o u r c e : U B S E v ide n c e L a ban d 40 - 45% of en ter pri ses plann i n g to i ncrease the # of CS Ps they use ov er the ne xt yearwi th 4 0 - 50% ( ne t) of en ter pri ses plann i n g to i ncrease spen d on plat form s they are al ready usi ng S o u r c e : U B S E v ide n c e L a bWe saw % of respon d en ts ci ti ng usag e of the big 4 CS Ps i ncrease by 200 - 800b ps vs. last year- 1 0 %- 5 %0%5%1 0 %1 5 %2 0 %US U K /Ger m an y L ar g e M ed i u m Sm allTo t al B y C o u n t r y B y C o m p an y Siz eM SF T AWS IBM GOOGS o u r c e : U B S E v ide n c e L a b UBS Evidence Lab:Cloud Computing 29January20188 Su mmar y Compet itive Po sition ingS o u r c e : U B SAmaz o n (AWS) Mi c r o s o f t (Az u r e) Al p h ab et (Goo g l e C l o u d )St r en g t h s M a rk e t sha r e l e a der in c l o ud I a a S for t he l a st decade a nd hasa l a rge sophi sti c a te d sa l e s te a m a nd c e rti fi e d e ngi nee r bas e .A WS has be c o m e the " sa f e c hoi c e " for e nte rpri se s shi fti n gwo rk l oads to publ i c c l oud M e e ti ng e nte rpri se s w her e the y a re a nd fi nd i ng sol uti o ns tom o v e wo rk l oads to p ubl i c c l o ud (i .