Mass: The Cloud is a variable-mass system

On top-down market sizing and the economic mass of the system. On TAM, market penetration, and intra-market share capture vs inter-market share capture.

[The Rose by NASA/JPL-Caltech/SSI](https://s3-us-west-2.amazonaws.com/secure.notion-static.com/b2c88c22-d7e8-40fa-9510-8e5742a1839f/saturns_rose.jfif)

The Rose by NASA/JPL-Caltech/SSI

<aside> ✴️ From the Online Etymology Dictionary:

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<aside> ✴️ From Haystack VC: **@Semil Fireside Chat w/ @Chamath** (2015):

Semil: One follow up on that, do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform.

Chamath: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after.. like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened around literally a few months after Facebook platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

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Whereas classic three-body system in physics is concerned with a closed system with only three bodies, the system which we are considering is a variable-mass system in which three hyperscalers constitute the system’s center of mass but are not the system’s sole source of mass. Infrastructure and platforms, by definition, can not be infrastructure and platforms unless they serve as the foundation for bigger things to be built on top of them. In much the same way that the point of roads and bridges are not the roads and bridges themselves, the point of the tens of thousands of tons of metal and glass that compose the hyperscalers’ “clouds” is not itself. In both cases, the value of the infrastructural layers is contingent upon what can be enabled by and through them — roads and bridges enable the physical movement of automobiles and the people within them; IaaS and PaaS enable the computation, communication, and storage of electronic information through code.

From a strictly materialist perspective, the literal center of physical mass within the Cloud industry is the material infrastructure layer constituted by the thousands of tons of hyperscaler-operated servers in the Cloud, with all of the -illions of electrons and atoms that comprise the code and data in the software layer weighing, well, much less than that. However from an economic perspective, the “mass” of the dematerialized economic flows (i.e., periodic recurring revenue, annual free cash flow, etc.) and stocks of capital (i.e., market capitalization, enterprise value, etc.) of the software layer exceeds the economic “mass” of the infrastructure and platform layers which forms its foundation.

From a [revenue] flow-based, global public SaaS run rates at around 2-3x that of IaaS+PaaS.

This stacked bar chart isn’t up to date (2016 to 2018) but it clearly illustrates the relative market sizes of the layers of the public Cloud industry — IaaS+PaaS serve as the foundation for a larger, dematerialized economic structure.

More recent IDC figures for CY2020 indicates that global public revenues of SaaS are ~2x that of IaaS+PaaS revenues:

[SaaS - System Infrastruture Software] + [SaaS - Applications] = 16.0% + 49.7% = 65.7% of market share; SaaS/[IaaS+PaaS] ⇒ 65.7%/34.3% = 1.91x

[SaaS - System Infrastruture Software] + [SaaS - Applications] = 16.0% + 49.7% = 65.7% of market share; SaaS/[IaaS+PaaS] ⇒ 65.7%/34.3% = 1.91x

From a stock-based [”stock” as opposed to “flow”-based, that is; not referring to equity value] perspective, napkin math indicates that the global market value of public and private cloud companies exceeds the value of the hyperscaler cloud business segments by roughly a factor of 2 to 3.

<aside> ✴️ From BVP: State of the Cloud 2021:

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<aside> ✴️ Napkin Math:

Bessemer Venture Partners estimates a ~$2.2T market cap for public cloud companies (Feb ‘21) and a total cumulative value of ~$1.9T (Jan ‘21) for 527 private cloud unicorns, providing a rough proxy for total global cloud market capitalization (ex-IaaS/PaaS) at around ~$4.1T

I estimate hyperscaler segment enterprise values ...

Italics indicate use of off-screen estimates/assumptions. Blue text indicates hardcoded assumptions.

Italics indicate use of off-screen estimates/assumptions. Blue text indicates hardcoded assumptions.

... for the public cloud triopoly to be around $1.5tn.

Toggle for more detail on my methodology around these enterprise value estimations

The nature of software companies, and especially cloud-based software co’s that have de minimis infrastructure requirements, is that they can operate with relatively little debt. Aswath Damodaran’s estimations for Software industry debt ratios are 2.00%, 7.13%, and 5.37% for “Software (Entertainment)”, “Software (Internet)”, and “Software (System & Application)”, respectively. For simplicity’s sake, therefore, we’ll asssume that the cloud software companies in Bessemer’s market analysis have 0 net debt, implying that:

aggregate enterprise value = aggregate market cap = ~$4.1tn.

We can now make a useful but obviously imperfect comparison between capitalized values of cloud infra vs cloud software:

(aggregate enterprise value of cloud software companies) / (enterprise value of hyperscale triopoly) =

(~$4.1tn) / (~$1.5tn) = ~2.7x ⇒ “roughly a factor of 2 to 3”

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The existence of a higher software value layer on top of the Cloud’s infrastructure and platform layers is what makes these layers Infrastructure-as-a-Service and Platform-as-a-Service. The market cap of the top 20 public US utilities companies is somewhere within the magnitude of ~$700B [a figure that’s less than half the market cap of Amazon, the smallest of the Big Three cloud’s parent companies] versus the aggregate market cap of the 30 US-based constituents of the S&P Global Luxury Index is ~1.7T, but the flourishing of the latter industry is dependent on the functioning of the former — whereas Thanos-snapping away the 30 US luxury companies off the face of the Earth would immediately destroy 1.7T of market value, doing the same to 20 US utilities companies would destroy 700B of market value as well as the market value of every company in the Luxury Index because bullets are more valuable than Birkins when the world is ending. Similarly, while the economic mass of SaaS companies eclipses that of the hyperscale cloud businesses, their value is predicated on the existence of the thousands of tons of servers that compose the Cloud’s infrastructure — this is why, for the sake of my contrived three-body analogy, the hyperscalers are the center of gravity of the system despite being less valuable than SaaS companies in the aggregate.