Cloud computing spending is at a record high. But the global chip shortage could create some problems ahead

Worldwide spending on cloud services is reaching new heights, despite the looming threat from the shortage of semiconductors, says tech analyst Canalys.

Cloud computing. Colleagues discussing in office server room

Canalys pointed to the imminent impact on cloud adoption of the global shortage of computer chips, which has been ongoing for several months.   

Image: Getty Images / iStockphoto

Businesses' adoption of cloud computing services shows no sign of slowing down: according to tech analyst Canalys, the third quarter of 2021 saw worldwide spending on cloud infrastructure services reach almost $50 billion as digital transformation initiatives continue to unfold. 

Cloud infrastructure services include the provision of infrastructure-as-a-service and platform-as-a-service, either on a dedicated hosted private infrastructure or shared infrastructure. These services continue to be in high demand this quarter, said Canalys: expenditure has grown $2.4 billion compared to the previous quarter, and almost $13 billion since the same period last year. 

This is largely due to the continuing impact of the COVID-19 pandemic, which forced organizations to adopt new digital processes in order to ensure business continuity while employees and customers were locked down in their homes. 

SEE: Gartner releases its 2021 emerging tech hype cycle: Here's what's in and headed out

Recent research carried out by IBM found that the health crisis accelerated digital transformation at 59% of organizations, with cloud computing remaining by far the biggest investment underway to enable the adoption of new processes, ranging from digitizing products and services to improving customer experience. 

Cloud computing revenues, said IBM, reached $219 billion in 2020, and analysts expect the industry to further grow to $791 billion by 2028.  

Despite these encouraging numbers, Canalys pointed to the imminent impact on cloud adoption of the global shortage of computer chips, which has been ongoing for several months. An imbalance in supply and demand, combined with the difficulty to maintain sustainable supply chains in the context of the pandemic, has led to a worldwide shortage of semiconductors that some analysts predict will last well into 2022

The shortage is having a lasting impact in industries such as electronics or automotive, but it is also affecting the supply of components that are critical to the running of data centers, such as power distribution units, automatic transfer switch units and generators. 

Wiwynn, for example, a company that provides computing and storage products for cloud infrastructure, stated in its latest quarterly report that the second half of 2021 would come with a "severe" risk of component shortages that could cause supply constraints. 

"Overall compute demand is outgrowing chip manufacturing capabilities, and infrastructure expansion may become limited for the cloud service providers," said Canalys research analyst, Blake Murray.   

And on top of managing the availability of key components, continued Murray, cloud providers also have to ensure that their services are aligned with the needs of an ever-expanding, more diverse customer base. 

"Besides managing supply chains to the best of their abilities, the providers building an advantage are focused on developing their go-to-market channels along with their product portfolios to catch up with an increasingly wide variety of customer use cases that has fueled demand since the start of the pandemic," added Murray. 

This is why major cloud providers are now building industry-specific portfolios, and bringing services to the market that are better tailored to a variety of users' needs. 

Amazon's cloud subsidiary AWS recently released AWS for Health, which provides specialized cloud services for healthcare, biopharma and genomics customers, for example to ensure cybersecurity and compliance standards. The company has secured deals in the public sector, notably to assist the UK's National Health Services (NHS) cope with heightened demand during the pandemic. 

Microsoft's Azure, for its part, has released tools to assist companies with data governance. Azure Purview launched earlier this year, for organizations to keep their data discoverable while also complying with data protection regulations in different jurisdictions around the world. Google Cloud similarly announced Google Distributed Cloud, which gives customers the option to extend their cloud infrastructure to the edge and customer data centers – an attempt to cater for users' concerns with data sovereignty. 

SEE: Cloud security in 2021: A business guide to essential tools and best practices

The cloud infrastructure services market is consolidating around the dominance of those three hyperscalers, with AWS taking the top spot. Amazon's subsidiary grew 39% this quarter and now accounts for 32% of the total cloud infrastructure services spent in Q3 2021. It is followed by Microsoft Azure, which boasts a 21% market share after having grown 50% for a fifth consecutive quarter, while Google Cloud grew even faster (54%) to now hold 8% of the market.  

The huge scale of the top three cloud providers comes with benefits: their size enabled the vendors to sell infrastructure that is more resilient, and specifically built to protect workloads from failure. 

But the limited number of competitors in the market also comes with risk for businesses, which might find that they are locked into the services of a single provider. The vast majority of organizations (69%), according to IBM's latest report, see vendor lock-in as a significant obstacle to improving business performance in most parts of their cloud estate.  

Although the appeal and benefits of cloud computing for business are indisputable, therefore, executives need to think their digital transformation strategy through carefully. In many cases, the solution is likely to lie in a multi-cloud or hybrid cloud approach.