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2/23/2011
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SMB Cloud Market Worth $8.6 Billion

Hosted infrastructure and services for U.S. smaller companies have an additional $13 billion of room to grow, according to a Parallels report.

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The total market for cloud-based IT at small and midsize businesses (SMBs) in the U.S. was worth $8.6 billion at the end of 2010, according to new data from Parallels.

The company's study found an additional $13 billion in potential growth for the SMB cloud, putting the future market value at more than $21 billion. Parallels, a back-end vendor to other Web-based service providers, defined "cloud" as any IT function hosted off-site, with a focus on three segments: Hosted infrastructure, Web hosting, and hosted messaging and collaboration services such as email and PBX. The survey included 500 U.S. firms with between 1 and 1,000 employees. Parallels released the full results of its report on Wednesday at its Summit conference.

Hosted infrastructure accounts for more than half -- or $4.9 billion -- of the current SMB market value, while Web hosting is a $2.3 billion segment. Messaging and collaboration for smaller companies is worth $1.4 billion, according to the study.

Interestingly, Parallels did not use the term "cloud" in its survey questions in order to avoid confusion among respondents about what the word means, according to Jack Zubarev, president of marketing and alliances at Parallels.

"We have not used the word 'cloud' because we believe this word has meaning in the industry, but not much meaning among SMBs," Zubarev said in an interview. "We did not want to confuse them with terminology." Instead, the survey stuck to more familiar names of services or functions, such as servers, Web hosting, and email.

Though small businesses -- defined by Parallels as companies with up to 100 employees -- represent the lion's share of SMB cloud spending at 80% of the total market, the study found higher penetration rates among midsize businesses with between 100 and 1,000 workers. 36% of midsize companies, for example, have adopted hosted infrastructure, compared with just 17% of smaller firms. As a result, Zubarev said, small businesses are poised to power more of the future growth in the overall segment.

That bolsters another of the study's findings: Nearly 40% of firms with between 20 and 99 people have no dedicated IT staff -- either the owner handles IT themselves, or they farm out the function to a consultant. Another 25% of those businesses have just one dedicated IT employee. Almost 85% of midsize companies, on the other hand, have two or more full-time IT staff.

The study's growth projections would seem to bode well for cloud vendors that target smaller companies, but there's good news for customers, too. While the Parallels report forecasts a future cloud market of roughly $21 billion overall, Zubarev said that the real number will ultimately be less than that. The reason: Fierce competition among vendors will eventually lead to lower costs for SMBs.

"We believe that there will be significant price pressure, and the prices of hosted and cloud services will continue to decrease," Zubarev said, noting that there is wide pricing disparity in the market today. "Hence, what would be the market in five years likely will be somewhat smaller than what we estimate in our report."

Much of the potential SMB market, Zubarev said, lies in services that have low adoption rates today. Zubarev predicted that hosted PBX will be one of the next major growth segments in the cloud. The study found that while half of SMBs today have a PBX system, just 7% are on a hosted platform. As a result, Parallels projects $3.9 billion in future growth for the hosted PBX industry. Zubarev attributed slower PBX adoption to product complexity and immature pricing, but said those roadblocks are diminishing.

"We believe that [hosted PBX] will start moving because there is absolutely no reason why SMBs should have the hassle of managing their phone system at their offices," Zubarev said, noting the proliferation of bandwidth and VoIP as related catalysts.

Hosted infrastructure will continue to be the most valuable portion of the SMB cloud market, with more than $7 billion in additional growth. The study estimated that today's infrastructure cloud includes around 2.3 million hosted SMB servers; that number is projected to increase to 4.8 million. The report found that 80% of small businesses with servers currently keep at least some of them on-premises, citing price and security concerns as their top reasons why.

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