The investment climate and financial operations of the infrastructure as a service (IaaS) industry in Europe have been subdued in comparison to firms in the United States.
Nevertheless, as enterprises gain confidence in these solutions and mega trends such as smart cities, big data and the Internet of Things (IoT) gather pace, the IaaS industry will evolve into a worthwhile investment domain.
New analysis from Frost & Sullivan reveals that pure-play financial companies account for a major portion of investments. Strategic investments by corporate arms in early stage firms are negligible.
"The promise of stable recurring revenues lures investments into the IaaS industry in Europe," said Frost & Sullivan Industry Analyst Renganathan Krishnamurthy.
"High switching costs ensure that clients do not change their vendors frequently, resulting in predictable cash flows. This enables existing participants to strengthen profits."
While growth in big data, social media and the IoT is increasing the strategic importance of data centres, macro-economic conditions are still too weak to drive large-scale revenues in this industry.
Additionally, the data centre industry and some segments in the value chain involve relatively bigger investments, unlike new age industries such as social media and mobile applications startups.
Given the opportunity for smaller investments in other industries (and thus lower risk), the capital available for data centres is limited.
Further, the steep capital required makes it unviable for a single venture capitalist (VC) to support a start-up. To overcome this challenge, VCs in Europe are tying up with each other to boost funds.
"Start-ups must design innovative positioning strategies to counter the advantage existing participants will gain from economies of scale," urged Krishnamurthy.
"Apart from technology, firms looking to improve their returns must also acquire certifications and prove compliant in order to attract customers from regulation-intensive industries such as finance and healthcare in Europe."