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U.S. Tech Firms Dominate Cloud Services in Western Europe

Posted by hkarner - 6. August 2016

Date: 05-08-2016
Source: The Wall Street Journal

Four American firms have 40% market share; local data centers to counter security concerns

U.S. technology firms are building more data centers in Europe in response to concerns about privacy and security.

When energy giant Enel SpA started looking last year for an outside company to manage its computer systems and files, the Italian firm had a red line: All its data had to stay in the European Union.

The company that got the contract? U.S. tech giant Amazon.com Inc., which won by promising that Enel’s data would be housed in a German facility that met Enel’s other requirements: “reliable, flexible, agile and cheap.”

Political and legal pressure has for years been mounting on European companies to store their sensitive information in Europe—in part to keep it away from what many suspect are prying American eyes. But the push toward so-called data localization has done little to slow the growth of U.S.-based cloud-computing businesses operating in Europe.

Behind the growth: Big European companies are moving more of their computing work to outside providers. American firms have the scale to offer low prices, and are quick to roll out new services and upgrades, analysts say.

Americans also have built at least a dozen new data centers in Europe in recent years, reducing European competitors’ home-field advantage and helping convince European firms that U.S. providers can keep their data safe.

The allegations in 2013 by former National Security Agency contractor Edward Snowden of widespread U.S. government surveillance and the potential involvement of technology firms triggered a backlash in Europe and led to calls by privacy advocates to protect European data.

U.S. firms disputed the scale of their cooperation and said they often challenged surveillance requests.

But, since then, the top four providers of cloud infrastructure in Western Europe are all U.S. firms, and they have expanded their market share by a third in the region, hitting 40% in 2015, according to market researcher IDC.

Rising CloudThe four companies—Amazon, Microsoft Corp., Alphabet Inc.’s Google and International Business Machines Corp.—nearly tripled their combined cloud-infrastructure revenue in the region to $2 billion by the end of the three-year period, IDC says. Together, Western European firms saw their revenue increase 86% during that period.

“On paper, European companies should be poised to take advantage of this growth. But they are less nimble,” said Jonathan Atkin, a senior analyst for RBC Capital Markets. American firms “have bigger checkbooks to make decisions on this scale.”

The expanding share of American firms in Europe’s cloud-infrastructure business comes as something of a surprise.

After the Snowden leaks, industry-supported think tank Information Technology & Innovation Foundation estimated that the fallout would cost American cloud firms between $21.5 billion and $35 billion globally over three years.

Initially, European firms looked poised to take advantage, and used fear of U.S. government surveillance as a marketing tool. Deutsche Telekom AG sold “Email made in Germany.” Two French consortia, including one run by Orange SA, promoted their own “sovereign cloud” offerings with promises of €150 million ($167 million) in government backing to get these ventures off the ground.

Pressure on U.S. companies mounted last year when the EU’s top court struck down a trans-Atlantic privacy accord that allowed companies in Europe to easily store data on U.S. servers. It wasn’t until July that the EU and the U.S. completed a replacement agreement, which would give European companies more confidence to store data with U.S. firms—through privacy advocates promise to challenge the deal in court.

American tech firms responded to the threats to their European growth with more investment.

Since 2013, IBM says it has doubled the number of its data centers in Europe to 12, with one more going online in the fall. Amazon, in late 2014, opened a new set of data centers in the Frankfurt area, on top of another set in Dublin. Microsoft opened three new data hubs, and last year announced a deal to allow customers in Germany to designate Deutsche Telecom as the trustee in control of their data.

“In a post-Snowden world, people want to know what governments can get access to their information and when,” said John Frank, Microsoft’s vice president of EU government affairs.

Google has taken a different tack and doesn’t promise to keep Europeans’ data only in the EU, noting that such localization can be inefficient. The company, nevertheless, has expanded its data centers in Belgium, Finland and Ireland, and is opening a new one in the Netherlands.

U.S. firms face tough local competition in a fragmented market. European telecom giants have networks that enable them to offer competitive cloud infrastructure. Germany business-software giant SAP SE competes in the related market for business services that run on top of basic cloud infrastructure, where analysts say much of the cloud business’s growth is set to come.

Still, many European companies use U.S. cloud firms, including France’s Schneider Electric, BMW AG and Spotify AB.

Enel, for instance, began its process of shifting to the cloud last year, even though using European infrastructure comes at an added cost. The standard cost of hosting data in Frankfurt is 8% more expensive than Amazon’s least expensive U.S. facilities, such as those in Virginia, the company said. Still, Enel says it has saved roughly 11% in computation costs and 48% in storage costs over the past year.

“It comes down to scale, economics, automation of these big players,” said Jack Sepple, senior managing director of cloud for consulting firm Accenture, which advised Enel on the shift to Amazon. “Local companies have trouble keeping up.”

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