The 2014 Strategy& Global ICT 50 study

Battle for the cloud

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Contacts

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Florham Park, N.J.

Barry Jaruzelski Senior Partner +1-973-410-7624barry.jaruzelski @strategyand.pwc.com

Frankfurt

Germar Schröder Partner+49-69-97167-426 germar.schroeder @strategyand.pwc.com

Frankfurt/Dubai

Olaf Acker Partner +49-69-97167-453 olaf.acker @strategyand.pwc.com

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David Hovenden Partner +60-3-2095-3188david.hovenden @strategyand.pwc.com

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Hugo TrepantPartner +44-20-7393-3230hugo.trepant @strategyand.pwc.com

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Dan Priest Partner+1-424-294-3800 dan.priest @strategyand.pwc.com

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Florian Gröne Principal +49-30-88705-844florian.groene @strategyand.pwc.com

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Pierre Peladeau Partner +33-1-44-34-3074 pierre.peladeau @strategyand.pwc.com

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Ivan de Souza Senior Partner +55-11-5501-6368 ivan.desouza @strategyand.pwc.com

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Sarah Butler Partner +86-21-2327-9800 sarah.butler @strategyand.pwc.com

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Toshiya Imai Partner +81-3-6757-8600 toshiya.imai @strategyand.pwc.com

This is the third annual edition of the Strategy& Global Information, Communications, and Technology 50 study. For previous years’ studies, published by Strategy& and our magazine, strategy+business, see strategyand.pwc.com/global/home/what-we-think/digitization/suppliers.

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Olaf Acker is a partner with Strategy& based in the firm’s Frankfurt and Dubai offices. He focuses on business technology strategy and operating model transformation programs for global companies in the telecommunications, media, and technology industries.

Germar Schröder is a partner in Strategy&’s Frankfurt office. He focuses on communications clients and ICT service providers, and has led several initiatives for product development, go-to-market, and operating model design, specifically for the cloud.

Florian Gröne is a principal with Strategy& based in New York and Berlin. He works with communications, media, and technology companies on new customer experiences, products, and services, and building operating and technology models for the digital age.

Florian Muhss is a senior associate with Strategy& based in Düsseldorf. He focuses on business technology strategy and transformation topics for ICT service providers and communications clients.

Strategy& associate Markus Weiss also contributed to this report.

About the authors

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Executive summary

In companies around the world, the transition to an almost fully digitized business environment is happening with remarkable speed. Virtually every large corporation is gathering huge amounts of data on key elements of its operations — customers, financial performance, manufacturing, retailing, and supply chains, among others — and crunching that data with advanced analytical software. Digital fabrication is transforming manufacturing processes, and the “Internet of things” is connecting sensors that monitor everything from toothbrushes and thermostats to giant industrial turbines. The companies at the forefront of these technology industry trends have already gained a competitive edge over their slower rivals.

A key factor has been the move to cloud computing. Virtually every large organization is using interconnected, shared infrastructure — comprising servers, software, connections, and information — in a utility-like fashion, connected over the Internet. The power and ubiquity of cloud computing–based services can be found in both public clouds (shared by customers) and private clouds (dedicated to one company). Without the cloud, it would be far more difficult for companies to gather, store, analyze, and use the mountains of data so critical to success today. And as cloud computing becomes ubiquitous, it is also transforming how companies build and manage the information technology they need to run their businesses.

This transition affects just about every aspect of the information and communications technology (ICT) industry, the industry that makes business digitization possible. Current technology industry trends are lowering the prices of IT services and software, generally changing the business model to one of flexible subscriptions rather than outright purchases. In the short run, this may dramatically push down IT revenues for the suppliers of digitization, but it could also lock in customer relationships, enable speedier customization of products and services, and intensify innovation and global expansion. The net effect could be to concentrate business further around the top few technology

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industry players, which will all offer cloud-based platforms at a massive global scale.

These trends are evident in this year’s Strategy& ICT 50. We analyze and rank the influence and demonstrated business success of the 50 largest publicly held companies that supply digitization-related products, services, and infrastructure to enterprises, governments, and other organizations around the world. Our goal is twofold: First, we seek to provide the industry itself with a view of the relative position and potential of its strongest companies. Second, we hope to help the large companies that use ICT products and services gain a better understanding of their technological options, especially in building their own distinctive capabilities.

The ICT 50 rankings are based on a carefully weighted formula that takes four critical criteria into account: financial performance, portfolio strength, go-to-market footprint, and innovation and branding (see Methodology, page 31). Together, these criteria determine the influence that companies have as providers of digitization-related products and services. The results reveal several widespread changes in the industry this year. The market for hardware, software, and services is becoming more difficult; customers are more sophisticated; software is migrating to subscription-based revenue forms; and broader geographic footprints appear to be more important. Finally, as activity migrates to online interconnected computer resources, a battle for the cloud is brewing. Companies need to establish a distinctive position in the converging digital field, with less regard than in the past for which sector they occupy.

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Introduction

The influence of digitization is moving quickly through every company. Digitization is not just the adoption of new technologies, but the resulting transformation of life and work. Today’s new technologies, such as the cloud, big data, and the “Internet of things,” are rapidly being woven into the fabric of business, as other technologies were before them. This is having a more dramatic effect than many people realize — not just on their customers, but on the industry that supplies these tools.

In this, our third annual Strategy& Global Information, Communications, and Technology (ICT) 50 study, we examine the top technology and communications suppliers in order to gauge more carefully just how fast these changes are taking place. As in the past, we divided the ICT 50 companies into six sectors and subsectors: hardware (formerly called “hardware and infrastructure”), software (formerly called “software and Internet”), IT services (which we broke down further into the global, offshore, and regional players), and telecom (see “How the sectors are defined,” next page). We then looked at them across four critical criteria: financial performance, portfolio strength, go-to-market footprint, and innovation and branding. This year, IBM again took the top spot in the rankings, followed by Microsoft, SAP, Oracle, and Cisco Systems.

In 2013, we added a new section in which we analyzed the “puretone” ways to play that these companies take in their approach to their markets. There are six generic archetypes that describe how the ICT 50 companies can create value for their customers. This year, we analyzed how the puretones correspond to market success for the ICT 50 (see “The winners’ puretones,” page 28).

We also looked more closely at how the top five companies are incorporating their distinct puretones into their efforts to build and scale up their cloud business. So far, a consolidator strategy — using acquisitions to gain the capabilities and scale needed to dominate a category — appears to be the puretone of choice among all five, although each has its own variation on that strategy, all in hopes of

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How the sectors are defined

Even though many of the companies making up the ICT 50 get revenues from more than one sector — especially large ones like Apple and IBM — we place them in the sector from which they generate the most revenue.

Hardware. This sector includes the companies — Apple, Cisco, HP, and Xerox, among others — that make the PCs, smartphones, tablets, routers, and telecom and networking infrastructure equipment that underpin our digital world. Yet as hardware becomes more commoditized — or simply less important — they are diversifying into software, services, and other businesses.

Software. This sector, including companies like Google, Microsoft, Oracle, and SAP, makes the software on which both companies and consumers depend. Software companies increasingly provide their wares as cloud-based services using an increasingly commoditized connectivity layer. These services are becoming known as “over-the-top” (OTT) services. Some of the software and OTT companies are also moving into other sectors — notably hardware and, in the case of Google Fiber, telecom — in hopes of reinforcing their core software businesses.

IT services. The firms in this sector provide the critical IT services, including network hosting, managing

enterprise-level business applications, and integrating hardware and software. It is a large group, and we divide it further into three subgroups. The global companies, the largest subgroup, continue to lead the sector; they include Accenture, CSC, and IBM. The regional service providers continue to struggle to define their position and gain market share; this year’s list changed almost entirely from last year’s — only France’s Atos remained. Finally, the offshore IT service providers, all of which are based in India, including HCL, Infosys, and Wipro, keep growing strongly, as they try to expand into new developed and developing markets.

Telecom. These companies offer a wide variety of communications services, including fixed and mobile voice and broadband, and even television. Though growth in the sector remains weak, M&A activity has been on the rise. Following SoftBank’s acquisition of Sprint, speculation has surrounded possible suitors for Deutsche Telekom’s U.S. wireless operations. In Europe, Vodafone recently acquired cable providers Kabel Deutschland and Ono in Spain, and Telefónica’s German O2 subsidiary is merging with KPN’s former E-Plus wireless operation. These deals are intended to increase reach, scale, and synergies for operators that have been struggling to move beyond providing commoditized connectivity service.

winning the battle for the cloud (see the profiles of IBM on page 15, Microsoft on page 18, SAP on page 21, Oracle on page 24, and Cisco on page 27).

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Shifting priorities

The major change we see this year is the growing importance of cloud computing, a subject that no longer needs to be introduced with caveats about “the hype.” The cloud is real, and virtually every large organization is using it in some form or another — private, public, or hybrid — to help gather, store, analyze, and use the mountains of data so critical to success today. Indeed, the question most often asked about the cloud has shifted from “How do we build one?” to “What can we do now that we have one?” And as cloud computing becomes ubiquitous, it is transforming how companies build and manage the information technology they need to run their businesses.

The shift to the cloud has had a particularly significant impact on the companies that provide the software, services, and communications technologies all businesses need if they are to take advantage of digitization. In some respects, the ICT supplier space has remained stable; 13 of the top 15 companies from 2013 remained in the top 15 this year. But the rest of the list has changed dramatically, and one group of companies — software providers — is increasingly dominant. That’s largely a result of the growing impact of cloud computing. There are no service or telecommunications providers in the top eight, and this suggests that the battle for the cloud is just beginning.

As the ICT industry consolidates around the cloud, two tiers of competitors are coming to the fore. The top tier includes just a few massive, dominant enterprises; they are staking claims to build, run, and own major parts of the cloud-based ICT ecosystem. Then there is the second tier of companies, which must find sustainable niches within that system. Some are struggling to do so. Their challenges include the commoditization of many IT services, less favorable economics as competition intensifies, and the lower-margin reselling of top-tier clouds (often by telecom and IT service providers, under the rubric of “preferred partners” or “licensed resellers”).

One group of companies — software providers — is increasingly dominant.

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Who’s who in the ICT 50

The list of the top 50 companies in the ICT space, all of which are publicly traded, is determined on the basis of revenues in the most recent fiscal year. We then divide up the companies into the appropriate sectors, and score them depending on how they performed on four criteria:

• Financial performance: Companies that are most likely to maintain the growth and profitability needed to continue to invest in the technologies that will help them win in their increasingly competitive markets.

• Portfolio strength: Companies that have a coherent mix of business-to-business products and services — strength of individual products and services as well as differentiation, breadth, and integration — required to meet the demands of digitization.

• Go-to-market footprint: Companies that offer the production, delivery, and sales presence in the markets — both developed and developing — for ICT products and services.

• Innovation and branding: Companies that have both the prowess in innovation and the brand recognition needed to attract new customers and fresh talent to maintain their competitive position.

As in years past, these companies are assessed in the context of their business-to-business offerings: what they do for enterprise customers, not consumers. This explains why well-known consumer-oriented companies, including Apple and Google, rank lower on this list than they would on some others.

The list of companies making the ICT 50 this year is quite different from last year’s (see Exhibit 1, next page). Though the telecom companies among the top 50 have not changed at all, the list of IT service firms is considerably different. Six regional firms dropped off the list this year —

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Exhibit 1The 2014 Global ICT 50

Source: Strategy& analysis

*Entered ICT 50

Accenture (global)

Atos (regional)

Capgemini (global)

Cognizant (offshore)

CSC (global)

HCL (offshore)

IBM (global)

Infosys (offshore)

TCS (offshore)

Wipro (offshore)

*ADP

*Capita

*CGI

*Fidelity National

*Fiserv

Alcatel-Lucent

Apple

Cisco Systems

Ericsson

EMC

Fujitsu

Hitachi

Hewlett-Packard

NEC

Ricoh

Samsung

Toshiba

Xerox

*Intel

*Lenovo

*Qualcomm

Amazon

Google

Microsoft

Oracle

SAP

*Amdocs

*Sage

*Symantec

AT&T

BT

China Mobile

Deutsche Telekom

KDDI

KPN

NTT

Orange / France Télécom

Telefónica

Verizon

Vodafone

IT servicesHardware Software Telecom

primarily because their revenues simply couldn’t keep up with growth in the broader ICT space — while five new ones joined the sector. And three new software companies overtook three companies from last year’s list.

As we said, the top 15 firms among the ICT 50 showed little change this year (see Exhibit 2, next page). Only two firms moved out of the top 15. Atos, a service firm based in Europe, lost ground to companies with broader geographic markets, and Adobe dropped off the list completely, because of a steep (but expected and planned for) one-time decline in revenue following its abrupt shift from a licensing to a subscription software model. Based on the plausible assumption that revenues will rebound, we placed Adobe on this year’s watch list.

Replacing the companies that dropped out of the top 15 were EMC, an American provider of storage technology, cloud-based services, and other services (and the fastest-growing among the top 15), and HCL, an offshore IT service firm, which is also rapidly moving into cloud-based services. Finally, one company from last year’s watch list — Lenovo — made it onto the main ICT 50 list (see “The up-and-comers,” page 12).

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Exhibit 2The top 15 ICT companies, 2013–14

Source: Strategy& analysis

See Rank Rankpage 2014 2013 Company Sector

15 1 1 IBM IT services, global

18 2 3 Microsoft Software

21 3 4 SAP Software

24 4 2 Oracle Software

27 5 5 Cisco Hardware

6 6 Apple Hardware

7 10 Samsung Hardware

8 8 Google Software

9 7 Hewlett-Packard Hardware

10 9 Accenture IT services, global

11 11 TCS IT services, offshore

12 13 Amazon Software

13 21 EMC Hardware

14 12 Infosys IT services, offshore

15 18 HCL IT services, offshore

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The up-and-comers

Five of the nine companies on this year’s watch list are telecom companies, including two new additions from China: China Telecom and China Unicom. Their success suggests that rapid growth in the telecom industry in China will continue.

Two of the other telecom companies on the watch list are from the United States. They are Windstream and CenturyLink, which are reinventing themselves as providers of cloud and hosting services for B2B customers. Finally, SoftBank is a Japanese telecom company that has jumped across the Pacific to acquire Sprint in the United States. This gives it the distinction of being the only wireless

carrier to cover the world’s top two established ICT markets.

Two hardware companies from China are on the watch list: Huawei and ZTE. Finally, there are two American software companies. As we explain on page 10, Adobe is managing a temporary revenue shortfall after a switch to subscription revenue models, and it is expected to return to the main ICT 50 list next year. Salesforce.com, a fast-growing maker of cloud-based enterprise software, made its second appearance on the watch list, while Yahoo dropped off the ICT 50 list without landing on the watch list, because of a decline in revenue in 2013 (see Exhibit A).

Exhibit AWatch list: Nine companies that could soon join the ICT 50

Source: Strategy& analysis

Company Industry

Adobe Software

CenturyLink Telecom

China Telecom Telecom

China Unicom Telecom

Huawei Hardware

Salesforce.com Software

SoftBank Hardware

Windstream Telecom

ZTE Telecom

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Financials: A maturing market

Overall, the 50 companies that make up this year’s ICT 50 posted US$2.22 trillion in revenue, 2 percent more than they did the year before. Meanwhile, the companies’ average profit margin stayed stable, at 15.5 percent. These results suggest that the market for hardware, software, and services is maturing. Most of the ascending products and services, such as cloud computing and other subscription-based services, don’t produce the level of earnings that license-based services have in the past. Nonetheless, the subscription-based software business model is here to stay, along with other factors that could slow down revenue growth, such as more competition from companies in emerging markets, and the natural commoditization of many services over time.

The consolidation across categories is also a factor. When Hewlett-Packard confirmed in October 2014 that it would split into two companies one selling hardware and the other services, this was a clear example of a general trend. Many technology companies are quietly struggling to find a sweet spot in the new environment, with the right mix of hardware, software, and services.

In general, software companies continue to perform strongly, with revenue up 11 percent, to $284 billion. They still boast the strongest margin, at 22.5 percent of revenue, but that’s down from the 25 percent margin they posted last year (see Exhibit 3, next page).

The hardware sector experienced respectable growth in revenue this year to $858 billion, up 3 percent from the prior year, although margins overall have not improved at all. Two hardware makers — RIM (BlackBerry) and Dell — fell off the list entirely, the former due to significant loss of revenue and the latter because it is no longer a public company. And though the boom in smartphones and tablets and in building out fixed and mobile networks helped revenues, competition is intense for many of these companies. Very few were able to generate significant profitable growth in what is increasingly becoming a commodity business. Apple alone captured two-thirds of the profit in smartphones and tablets, while most of its direct competitors made no money at all in this business.

The subscription-based software business model is here to stay.

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Exhibit 3ICT 50 revenue and earnings growth by sector, 2009–13

Note: Financial performance not adjusted for M&A. Historical data is for companies in the 2014 ICT 50.

Source: Bloomberg; Strategy& analysis

0

5

10

15

20

25

% 30

2009 2010 2011 2012 2013

90

100

110

120

130

140

150

160

170

180

US$ 190

2009 2010 2011 2012 2013

Watch list

IT services, offshore

Software

Hardware

IT services, regional

IT services, global

Telecom

18%

16%

16%

10%

10%

2%

1%

Normalized US$ revenue(2009=100)

5-year CAGR EBIT margin

22

18

16

14

12

10

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IBM: Everything as a service

Dating back to its On Demand technology solution offerings of the early 2000s, IBM, the top-ranked company in the ICT 50, has been a pioneer in enterprise-level cloud computing. Its combined consolidator/solutions provider strategy and its long-standing prominent position have kept it high in the rankings. In the criteria, IBM is number one in product portfolio diversity and in sales and delivery footprint, and fourth in innovation. It has filed more than 1,500 cloud-related patents since 2000, and has made at least 15 cloud-related acquisitions valued at more than $7 billion. In 2013, it took in $4.4 billion in cloud-based revenue, up fully 69 percent from the prior year. It has set a target of $7 billion in 2015 revenue.

IBM introduced its first full-blown cloud strategy in 2007, a combination of its software, hardware, and service offerings called Blue Cloud, and then SmartCloud. These were criticized for lacking simplicity and flexibility. Then in 2013, IBM acquired SoftLayer for $2 billion. This company, founded in 2005, provides cloud computing infrastructure with an accessible, easy-to-use approach

to do-it-yourself implementation. IBM has since developed a public infrastructure-as-a-service (IaaS) offering, and is moving SmartCloud customers there.

IBM also offers cloud-based application development infrastructure under its Bluemix brand, known generically as platform-as-a-service (PaaS) offerings. It is seeking to spur growth in this arena by adopting open architecture standards and embracing a broader community of software developers. In addition, it has established more than 100 business applications delivered as cloud-based services in a software-as-a-service (SaaS) approach.

So far, IBM is the only company with a combined IaaS/PaaS/SaaS cloud offering. This is one of the company’s three main strategic imperatives. The others are big data and analytics, and enterprise mobility. The cloud is particularly critical to the company’s entire strategy, because it provides the underpinning fabric that is essential in making the other two imperatives possible.

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Of all the sectors, IT services appears to be the most affected by this change. Though the group as a whole displayed relatively strong revenue growth (see Exhibit 4, next page), much of it appears to have been driven by mergers and acquisitions. In particular, regional players are consolidating to gain scale. For example, Atos bought SBS and CGI bought Logica. Unfortunately, in most cases when two regional service providers combine, they still won’t have the scale to gain the capabilities they need to fully differentiate themselves or to compete with global giants like IBM and Accenture. One sign of the churn in this subsector is the fact that six of the regional players on the 2013 list have dropped off, to be replaced by six new ones. Most of these new entrants are focused on specialized, high-growth services to particular enterprise functions, such as HR, or to vertical sectors, such as financial services. Meanwhile, revenues among the global firms have declined slightly but their positions seem more stable than they did a year before.

The offshore IT service players keep growing strongly, but their margins have declined slightly. This is a function of their growing presence in mature markets, the legacy technologies and high cost structures that go with being there, and their aggressive investment in market share. They have sometimes accepted less favorable outsourcing terms in exchange for a beachhead on new markets or a prominent showcase client.

It is still not fully clear how well the services offered by these three subsectors can keep up with the changes demanded by the market, particularly the move to the cloud. As companies standardize their IT on the cloud, it could be very disruptive to more traditional outsourcing providers.

By contrast, the telecom companies seem relatively unaffected — at least at first glance. To be sure, they saw their revenues decline by 2 percent this year, but their profit margin as a group rose by 3 percentage points, to 18 percent in 2014. In their case, these results are probably due to several successful restructuring efforts designed to cut costs, and to the industry’s ongoing consolidation. If you are a telecom company leader, this is not a time for complacency.

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Exhibit 4Revenue growth and profitability among IT service providers, 2014

Note: In general not adjusted for M&A. CGI includes acquisition of Logica; for 2011–12, combined revenues.

Source: Bloomberg; Strategy& analysis

15%

2011–13 revenue CAGR

30%

35%

25%

20%

10%

5%

0%

-5%

2013 EBIT

25%20%15%10%5%0%

Wipro

TCS

Infosys

IBM

HCL

FiservFidelityNational

CSC

Cognizant

CGI

Capita

Capgemini

ADP

Atos

Accenture

Offshore

Regional

Global

Regional IT service providers

Offshore ITservice providers

Global ITservice providers

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Microsoft: Productivity in the cloud

Microsoft is rapidly migrating its formula for success to the next generation, by moving its enterprise and application software to the cloud. Despite the challenges Microsoft has encountered on the consumer-facing side of its business — including its efforts to gain a foothold in the mobile hardware market, create a third mobile ecosystem to rival those of Apple and Google/Android, and boost its stagnating legacy Windows licensing business — its enterprise-facing profile is strong.

The enterprise division, which comprises the servers, cloud computing, and programming tools businesses, brought in $42 billion in the 2013–14 fiscal year. This represented almost half of Microsoft’s total revenue, and almost two-thirds of its $60 billion in gross earnings. Those results put the company among the top 10 in financial strength among the ICT 50.

The enterprise side of the business is likely to grow even more important as the firm continues to reinvent its prominent client-server products, such as Exchange (messaging) and SharePoint (intranet and content management), in the cloud. The goal: to expand its cloud-based SaaS business, which has consistently had double-digit annual growth or better, and which currently has more than $1 billion in annual revenue.

The cloud-based Office 365 product has also generated more than double the revenue it did last year, making it a natural successor to Microsoft’s personal computer–based productivity applications. The company has positioned its Dynamics customer relationship management (CRM)

product to compete directly with CRM leader Salesforce.com. These offerings are complemented by Azure, a cloud-based enterprise infrastructure and platform service business, which is competing strongly with Amazon’s Web Services product. The company has made targeted acquisitions to enhance this cloud platform, including StorSimple, a cloud storage appliance, and MetricsHub, which monitors activities in the cloud.

Microsoft’s moves in the cloud have given it a reasonably well-rounded product lineup. Though it does not provide solutions for core systems such as ERP, supply chain, and manufacturing, it is ranked ninth in portfolio strength this year. Its other strengths include an extremely large installed base of enterprise users, and a well-established capability for providing IT professionals with services and training — including migration tool kits to help them move operations to the cloud. Microsoft’s global footprint of sales, distribution, and production resources also contributed to its high ranking, and despite its challenges on the consumer side, its brand is still ranked fifth worldwide. Last but not least, it currently has more than $80 billion in cash to help it fight the battle for the cloud.

Microsoft remains the leader in the competition to provide productivity software to enterprises in the cloud. It continues to stand by its original formula for success: providing the common denominator for user-oriented business software. It is now shifting that formula to the cloud, in hopes of perpetuating the strengths that made it dominant in the on-premises markets of the past.

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Portfolios: Coherence matters

As in the past, we analyzed the portfolio strength of the companies in the ICT 50 to determine which sectors are leading the race to provide what their customers need. The relative performance of sectors in this category depends on several factors: expertise, strategic ambition, differentiation, and ability to execute — all evaluated according to the judgment of independent industry analysts.

In our view, there is no one formula for a successful portfolio strategy. Breadth can be a positive, since firms with broad portfolios can provide virtually everything their clients need and benefit from strong long-term relationships with them, while generating greater revenues. A narrow focus can also work, particularly when accompanied by differentiation and excellence in products and services. Leading-edge technological prowess can also help, especially given the increasing demand for offerings, such as cloud computing, that can further digitization efforts. Probably the most important factor is a coherent, well-integrated portfolio — one that, whether broad or narrow, draws on the same advanced and differentiated capabilities. This can provide a real advantage in the struggle for customers.

The global IT service providers have a considerable lead in the portfolio rankings, ahead of the offshore service providers and the telecom companies, while the hardware companies and the software players are in a close race for fourth place. These rankings reflect the fact that hardware players have, in many areas, become more like commodity businesses (see Exhibit 5, next page). The increasing importance of the cloud favors the global IT service players, while only a few companies in each of the other categories have embraced it enough to affect their portfolio ratings.

Despite the sheer size of many of the telecom operators, they have not developed strong portfolios beyond their traditional core businesses. Many of them are working to build out various IT service and cloud offerings. The regional IT service players remain the weakest in this area, even though all but one of them — Atos — were replaced by new ones this year. As a group, they still don’t have the portfolio breadth and depth to compete effectively with their global and offshore cousins. Those that focus on traditional outsourcing services are lagging even more.

Telecom operators have not developed strong portfolios beyond their traditional core businesses.

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Exhibit 5ICT 50 portfolio strength, by sector

Source: Strategy& analysis

43210

1.7

2.0

2.0

1.2

2.7

1.8

Software companies

Telecom operators

Offshore IT service providers

Regional IT service providers

Global IT service providers

Hardware companies

Scored 0–4

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SAP: Rapid cloud migration

Like several other large software firms, SAP has only recently begun the transition to the cloud. But its migration is moving forward quickly. Thanks in part to the breadth of cloud-based platforms and services it now offers, it is ranked third in the portfolio breadth category among the ICT 50.

SAP’s strategy is straightforward: to use the cloud to offer traditional IT services, from basic enterprise computing infrastructure to key vertical software platforms. SAP customers can choose to stay with its traditional suite of business applications, including its HANA data analytics platform, or switch to the cloud, which includes HANA as well as additional offerings, such as infrastructure services, all supported by SAP’s PaaS. In theory, the cloud model offers customers a relatively low total cost of ownership, since the cloud platform scales easily, and customers can either buy computing power under the aegis of their current licenses or buy subscriptions to SAP’s cloud services, which it offers in both public and private configurations.

In carrying out its cloud strategy, SAP has so far followed a consolidator model, buying up companies in order to expand its portfolio. It began the transition around 2012, in part with the acquisition of the human capital software company SuccessFactors. That acquisition was widely seen as driven more by a desire to learn about the cloud business than to build out SAP’s HR software offering. Two recent acquisitions — human resources software provider Fieldglass,

and Hybris, which makes omnichannel retailing software — have expanded the company’s range in cloud services. SAP is expected to continue following this strategy, making more acquisitions to further expand its cloud offerings.

At the same time, the company is striving to improve its innovation efforts. It ranked average in innovation in the 2014 study, primarily because it has traditionally been slow to develop new core products, and has more recently turned to acquisitions rather than in-house R&D. But its current offerings, and future plans, suggest that it could improve significantly in this area. SAP recently announced the creation of a new business unit, in collaboration with Accenture, devoted to cloud-based products for vertical industries, including services for machine-to-machine and Internet of things communications, e-health, and others. This could be a critical move in extending the firm’s cloud service portfolio.

SAP’s move into the cloud is projected to total almost 36 percent of its revenue over the next four years, up from a current 20 percent, even as the company plans to maintain its higher-margin non-cloud business. As such, SAP hopes to continue to improve its EBIT margin to 37 percent in the next four years, and increase revenue 6 percent annually over the period. It is currently ranked third in its subsector in financial health, and its continued health may depend on how well its combined cloud and non-cloud strategy works out.

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Footprints: Global or local

How and where ICT 50 companies produce their products and services and then bring them to market is instrumental in their ability to boost growth and profitability. Though virtually all of the large global service players, hardware companies, and software firms are well established in the top five developed markets, they’re less entrenched in the BRIC countries — Brazil, Russia, India, and China. There, the market footprints of these companies have not improved since last year, perhaps because overall growth there has slowed considerably, especially in Brazil and Russia. Still, the top three companies in each sector are significantly outperforming their smaller rivals throughout the world (see Exhibit 6, next page).

This suggests that size matters when trying to operate globally. Perhaps that’s why leading companies in each of the sectors and subsectors are trying to broaden their footprint. The global IT service providers remain dominant in many regions, thanks in part to their ability to scale up around the world, applying the same capabilities to everything they do. The top hardware companies also maintain strong positions by having a global production footprint. The offshore IT service players are moving onshore, broadening their footprint by aggressively building their presence and buying up market share in local markets. In some cases, they are accepting unattractive outsourcing terms — even losses — to do so. Still, their footprints remain small, well behind those of the global giants. The regional players are still the weakest, simply because they are regional, and they continue to struggle to broaden their footprints. Finally, the telecom operators remain bound to their home markets to some extent. Though many operate businesses outside their home countries (for example, Telefónica in Latin America, SoftBank in the U.S.), the operators are also tied to their physical networks, in which they have invested heavily and which are constrained to a large extent by national and local boundaries.

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Exhibit 6Larger global footprints correlate with top three companies in each sector

Source: Strategy& analysis

Hardware IT services, globalIT services, regionalIT services, offshoreSoftwareTelecom

43210

Scored 0–4(Figures in parentheses show the rating of the top three companies in each sector)

3.3 (4.0)

1.3 (2.3)

1.4 (2.7)

4.0 (4.0)

2.6 (3.1)

0.5 (0.9)

1.2 (1.9)

3.2 (3/3)

1.3 (1.4)

1.5 (1.6)

3.3 (4.0)

1.2 (2.5)

1.3 (2.0)

1.5 (3.0)

0.4 (0.8)

Go-to-markettop five

(U.S., U.K., Japan,Germany, France)

Go-to-marketBRIC

(Brazil, Russia,India, China)

Globalproduction

2.8 (3.0)

2.8 (3.3)

0.8 (1.9)

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Oracle: A reluctant enterprise app store

Unlike some of its rivals, Oracle moved relatively early to offer some of its enterprise software in the cloud. Though its success has largely depended on providing database and CRM software through an on-premises model, the company first introduced its CRM On Demand offering in 2006. Since then, it has moved more of its services to the cloud. The 2014 ICT 50 study ranked Oracle number one in portfolio strength, and its cloud service offerings are increasingly responsible for this.

However, Oracle continues to take a relatively cautious approach to the cloud. Its on-premises products still bring in the vast majority of its revenues and earnings — thanks in part to its number two ranking among software firms in sales and delivery footprint, behind only SAP. There may be concern within the company that subscription-based cloud services will not equal the same revenues and margins of its ongoing on-premises offerings. Indeed, Oracle is pursuing a “path to the cloud” strategy — turning virtually all of its portfolio of enterprise software into what is, in effect, an app store, and thus putting together among the most comprehensive cloud products available. That lets customers decide whether to go the cloud route or maintain the system behind its corporate firewalls.

Meanwhile, Oracle is transforming the technology it got though its 2010 purchase of Sun Microsystems into

a range of hardware and software offerings designed to be the building blocks of large corporations’ private and hybrid clouds. And it will soon launch its own cloud-based database platform to compete with similar offerings from Amazon and others. Neither strategy, however, has produced stellar results yet. Indeed, both its on-premises and cloud-based software offerings are growing relatively slowly; the company lags behind competitor Salesforce.com in CRM offerings in the cloud, behind SAP in other SaaS applications, and behind Microsoft in delivering office productivity solutions. Just 3 percent of Oracle’s annual revenue is derived from software licenses and subscriptions from its cloud offerings in 2013.

Following a long list of high-profile acquisitions — not just Sun but also PeopleSoft, J.D. Edwards, and others — Oracle continues to follow a consolidator strategy, even if it hasn’t always fully integrated its purchases into its enterprise solutions. Last year it bought Responsys, a provider of cloud-based B2C marketing software, and in June 2014, it purchased Micros Systems, a provider of software to the retail and hospitality industries. Whether it decides to more tightly integrate all of its acquisitions into a full-service cloud offering for enterprises remains to be seen. But the portfolio is strong, and the company has a war chest of almost $40 billion to fund the effort. Oracle should be in a strong position to keep fighting the battle for the cloud.

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Innovation and brand value

The final component in our ranking of the ICT 50 companies involves the relative strength of their innovation efforts and the value of their global brands. Here, the results have not changed a great deal from last year. The six companies that scored highest in this regard last year again appeared among the top 10 most innovative companies in the 2013 Strategy& Global Innovation 1000 study. And this year, six of the top 10 in the ICT 50 also ranked among the top 10 on Interbrand’s 2014 list of the most valuable global brands, and 13 made it onto the list of the top 100 brands (see Exhibit 7, next page).

Innovation is critical to all the ICT 50 companies, even if the results of their R&D efforts are uneven. And as the world becomes ever more digital, there appears to be a growing correlation between the ability to innovate and brand strength. The fact that the list of the top 10 global brands is dominated by highly innovative technology companies speaks volumes about the impact of innovation on a company’s value proposition. Indeed, it is telling that Coca-Cola, for decades the most valuable brand in the world, dropped to third place in Interbrand’s ranking. Meanwhile, less innovative companies like the telecom operators continue to lag in terms of brand value — none made either the innovation or the branding list — and only one IT service provider made the branding list — Accenture, at number 41.

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Exhibit 7Correlation with innovation and brand value

Source: Interbrand’s Best Global Brands 2014; Strategy&’s 2014 Global Innovation 1000 study

Global ICT 50 rank Company Industry rank

1 Apple Computing and electronics 6

2 Google Software and Internet 8

3 Amazon Software and Internet 12

4 Samsung Computing and electronics 7

5 Tesla Motors Auto —

6 3M Industrials —

7 GE Industrials —

8 Microsoft Software and Internet 2

9 IBM Computing and electronics 1

10 P&G Consumer products —

Global ICT 50 rank Company rank

1 Apple 6

2 Google 8

3 Coca-Cola —

4 IBM 1

5 Microsoft 2

7 Samsung 7

12 Intel 21

14 Cisco 5

15 Amazon 12

16 Oracle 4

17 HP 9

25 SAP 3

44 Accenture 10

62 Xerox 35

Global Innovation 1000: Most innovative companies, 2014

Interbrand: Best global brands, 2014

Part of the Global ICT 50 company set

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Cisco: Infrastructure and platforms

Given Cisco’s long and very successful history of supplying networking hardware and solutions to enterprises, it will come as no surprise that its approach to cloud computing is somewhat different from that of its four big competitors. Rather than focusing on offering cloud services directly to enterprise end-users, the company is leveraging its networking expertise to offer the infrastructure and platforms needed to build computing clouds themselves. Cisco isn’t the first entrant into this market, but according to some industry analysts, the company already sells more of the hardware on which the cloud is based than any other player, thus capitalizing on its strong position as the company that supplies the Internet’s “smart plumbing”: the technologies that enable its infrastructure to work.

For example, Cisco’s Unified Data Center and UCS IaaS products unite computing, networking, storage, management, and virtualization into a single cloud-based platform designed to increase and simplify operating efficiencies and provide business agility. Many major corporations are embracing the two as the infrastructure layer they use to build their private clouds. Even commercial cloud providers like Terremark, owned by Verizon, and NTT Data use Cisco technology as the “bricks” with which their own offerings are built.

But Cisco is also thinking about the cloud much more broadly. The company is still one of the most innovative forces in shaping an interconnected world operating on a “network of networks” — connecting the growing number of

public, private, and hybrid clouds so they can operate together and enable the emerging Internet of things. As such, Cisco ranked seventh this year in portfolio breadth, and third among all hardware providers.

Given Cisco’s determination to sell the cloud’s essential underlying components, it is only natural that it is pursuing an open, standards-based approach. The goal is to give cloud providers and enterprises a full ecosystem of platform technologies that keeps them from being locked into a single vendor or platform — as long as they rely on Cisco, of course, for a good share of the technology. Cisco is also pushing hard to provide the computing capacity and data processing speed needed for the Internet of things. That’s happening not only in the global Web’s central data center hubs, but increasingly on the Web’s edges, bringing processing power closer to the sensors and computing devices that are intended to make sense of the world we live in.

Cisco has a long history of supercharging its innovation puretone way to play through strategic acquisitions. It made its first such deal in 1993, and since then it has acquired more than 170 companies. Over the next two years, Cisco plans to invest more than $1 billion to build its expanded cloud business. Thanks to its strong cash position — Cisco is third in financial health among the 16 hardware providers we tracked in 2014 — the company can afford to keep buying — and likely taking the same approach in building a portfolio of technologies and services underpinning the Internet of things as well.

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The winners’ puretones

Last year, we analyzed the companies included in the ICT 50 in terms of their “ways to play” — the distinctive value propositions that, when closely aligned with their most important capabilities, the products and services they offer, and the markets in which they operate, can give them a clear advantage in their competition with rivals.

These ways to play can be classified in broad groups that we call “puretones” — generic archetypes that describe how companies create value for their customers. Companies in the ICT 50 tend to fall into at least one — and often two or three — of these value propositions:

• Network and infrastructure platform player: These companies make their revenues from developing, maintaining, and managing a stable shared resource, through which other parties can connect their wares to customer needs.

• Consolidator: These companies try to dominate one or several categories in their industry through acquisitions, with the goal of providing either value to consumers or access to a platform with products and services they would not otherwise be able to provide.

• Innovator: These companies rely on their expertise in pursuing innovation and developing their global brands to generate highly targeted portfolios of products and services, rather than trying to be all things to all customers.

• Next-generation digitization player: This group moves quickly to provide customers with the most up-to-date products and services, embracing unmet needs around digital experiences, mobility, or big-data analytics.

• Solutions provider: These companies have the implementation capabilities necessary to provide business services to their customers, carefully integrating and adapting their offerings depending on the needs of their clients, in any industry.

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• Global sourcing value player: These companies, primarily offshore IT service firms, leverage their low-cost workforces, sourced around the world, to sell business services in the largest global markets.

This year, we looked more closely at the five companies at the top of the ICT 50 — IBM, Microsoft, SAP, Oracle, and Cisco — in terms of their efforts to gain traction in the cloud computing space, a critical market for many technology companies as clients look to make their IT functions more effective and save money.

As we demonstrated last year, the six puretone ways to play perform differently in the market over the course of time. Interestingly, all five of the top-ranked companies have three puretones in common: They are all innovators, consolidators, and next-generation digitization players. In other words, they are all investing heavily in both R&D and M&A to build comprehensive cloud-based businesses. Their rankings suggest that this comprehensive forward-looking approach will be the most effective way to reach prominence in the ICT sectors of the next decade.

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Consolidation and competition

This year’s ICT 50 study, and our closer look at the top five providers of cloud services, shows just how competitive the world of technology and communications services has become. The competition for a share of the cloud service market is particularly fierce, but the same can be said for providers of big data and analytics, social media, and, increasingly, the Internet of things. Size matters, too, especially when selling to large corporations — as IBM’s top spot in the rankings this year demonstrates. And the fact that all five of the cloud providers we analyzed this year are following, in whole or in part, a consolidator strategy suggests the importance of building complete portfolios quickly.

But few if any companies can be all things to all enterprises, and there are certainly plenty of profitable niches to be found in the market. Success will come to those who put together the combination of capabilities and product portfolios that best enable them to pursue their chosen strategy.

The greatest opportunity in this story is for the technology users: the companies that need to distinguish themselves in industries like consumer packaged goods, energy, transportation, and financial services. For the first time since the dawn of the ICT industry, small companies have the same access to high-tech services as their larger competitors. Enterprises can use cloud-based services in new ways, building on modular designs to create unique capabilities that fulfill their own strategies, without having to replicate the functions, or the best practices, of their competitors. Technology can now more easily be a vehicle for strategic choice: a guide in determining what a company does best. The ICT industry providers that realize this, and make it more feasible through their offerings, will be the leaders of the ICT 50 for many years to come.

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Methodology

For this study, we analyzed the 50 largest publicly traded companies in the ICT supplier industries on four measures: financial performance, portfolio strength, go-to-market footprint, and innovation and branding. Our analysis was based on a combination of publicly available financial data and a qualitative assessment of the capabilities of each player, conducted by a panel of Strategy& ICT sector experts.

In making this assessment, we used clearly defined criteria to investigate the relative strength and strategic positioning of each company in each of the four dimensions. Exhibit B, below, shows the weighting used in the formula. Consolidated scores for each company were determined on a scale from 0 to 4. Events that became public knowledge after April 2014 occurred after we collected the data for the 2014 Global ICT 50 study and are thus not reflected in the results.

Exhibit BComponents of the ICT 50 score

Source: Strategy& analysis

The ICT 50 rankings were based on four equally weighted primary qualities, each made up of several key measures drawn from publicly available information.

Strong innovation spending 12.5%

Growth in BRIC markets 7.5%

Presence in new market segments 5%

Classic products and services 10%

Next-generation productsand services 5%

Horizontal digitization capabilities 5%

Vertical digitization capabilities 5%

Go-to-market footprint

Capabilities in topmature markets 12.5%

Offshore capacity 7.5%

Follow-the-sun capability 5%

Portfolio strength

Innovation and branding

Financial performance

Profitability 12.5%

Growth (CAGR) 7.5%

Investment capability 5%

© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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