The cloud computing industry is still in its early stages of adoption. In 2016, the Infrastructure as a Service (IaaS) segment recorded just $22 billion in annual revenues. Considering the hundreds of billions dollars the IT industry spends every year, it is very clear that IaaS still has a long way to go.

The Software as a Service segment is a bit older, but the model has now become the preferred method for software delivery. Microsoft has done an excellent job of ditching its old annual licensing model for SaaS, and the success of Office 365, their lead SaaS product, is ample validation of that. Oracle is targeting $10 billion in annual revenues from SaaS over the next few years.

With these and thousands of other companies in the fray, the SaaS segment is expected to continue its double-digit growth over the next several years.

The cloud software market reached $48.8 billion in revenue in 2014, representing a 24.4% year-over-year growth rate. IDC expects cloud software will grow to surpass $112.8 billion by 2019 at a compound annual growth rate (CAGR) of 18.3%. SaaS delivery will significantly outpace traditional software product delivery, growing nearly five times faster than the traditional software market and becoming a significant growth driver to all functional software markets. By 2019, the cloud software model will account for $1 of every $4.59 spent on software.IDC

As businesses around the world slowly started warming up to the idea of third party-managed infrastructure services (IaaS) and software products delivered over the cloud (SaaS), the segment has piqued the interests of all the major tech players. Early entrants Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) have already crossed $13 billion in trailing 12-month revenues while IBM has, so far, kept pace. Google is still working toward getting its bona fides in the cloud game by building datacenters and increasing features and services while Oracle is slowly working on its IaaS portfolio as well.

But Amazon and Microsoft, the lead players in the cloud story, have now made it clear that they are already on their way to embracing the next level of cloud. Microsofts CEO Satya Nadella made a huge announcement during the recent Microsoft Build 2017 developer conference that the companys cloud strategy is moving toward edge computing:

It has been barely four years since Microsoft CEO Satya Nadella announced the companys Mobile First, Cloud First strategy. Instead of basking in the glory of newfound success in Cloud, Microsoft CEO Satya Nadella has now announced that the time has to come to move on from a Mobile First, Cloud First strategy toward a more cloud-focused Intelligent Cloud, Intelligent Edge strategy.1reddrop

Amazon made its edge computing/IoT-focused software, Amazon Greengrass, publicly available Thursday, making it loud and clear that they, too, are in the race to move computing closer to the edge.

But most investors in the stock market have barely begun to discover cloud computing so heres a little primer on the new wave of cloud computing.

What is edge computing?

In cloud computing, the processing power is always centralized. Data has to travel from a device to servers, where it gets processed; the output is then pushed back to the device. Edge computing moves these heavy processing tasks or as many of them as possible closer to the point of origin, hence the word "edge."

This reduces the time data needs to travel, thereby reducing latency and cutting reliance on internet connections. It results in improved reliability and faster, more reliable decision making at the edge.

Among its application areas are artificial intelligence, or AI, where it It completely transforms the way AI can be applied to various scenarios.

Thats probably an oversimplified description of edge computing, but its enough at this point to understand that the "edge" part of the equation takes the "computing" part of cloud computing away from massive data centers and brings it closer to the connected devices themselves.

There are several obvious advantages to adopting an edge computing model over a traditional cloud computing one, but the segment itself is in very early stages of its development. Edge computing also needs a robust IoT and AI device ecosystem to make its impact felt in full force. By moving in early on this new paradigm in cloud computing, Amazon and Microsoft, the top two cloud companies, have once again moved the cloud goal posts and significantly raised the bar.

Their competitors now have to take the risk to invest sufficient resources, time and money if they want to keep Amazon and Microsoft in check. Considering the fact that Google and Oracle are only now starting on the cloud computing segment itself, it is going to be an extremely difficult task to execute to keep expanding their cloud offerings while also working on edge computing and IoT technologies.

By putting a clear moat around their businesses, Amazon and Microsoft are further differentiating themselves from the now-crowded cloud computing space. Microsoft is even going so far as to redefine its very vision for the future of cloud computing and the direction that the companys cloud push is going to take.

Why do investors need to know this? Because these are the moves that will take Microsoft and Amazon from their annual cloud revenues of $13 billion to twice, thrice that and beyond. Its not something of which a serious tech investor can afford to be unaware.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

Sangara Narayanan

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Edge Computing Is New Cloud Computing Tech Investors Should Track - GuruFocus.com