Parallels SMB Cloud Insights TM for China

Profit from the cloud TM 2012 Parallels SMB Cloud Insights TM for China China d

Table of Contents Executive Summary...1 Definitions...2 Key Findings in the Cloud...3 Hosted Infrastructure...6 Web Presence...9 Hosted Communication and Collaboration... 12 Hosted Premium Email... 12 Hosted PBX... 14 Business Applications... 18 Conclusion...20

Executive Summary The Chinese cloud services market for small and medium businesses (SMBs) continues to grow and as it does, it s changing the way Chinese SMBs consume IT. Through cloud services, Chinese SMBs are gaining enterprise-level computing power, applications, and services at prices they can afford. Last year, our research indicated that the Chinese SMB market was on its way to becoming one of the fastest-growing markets for cloud services. Our 2012 research bears that out, showing that as China s Internet infrastructure improves, Chinese SMBs are rapidly expanding their use of cloud services. Having initially interviewed 400 Chinese SMBs of different sizes and industries in 2011 about their cloud service consumption, plans, and attitudes, Parallels has refreshed this research for 2012, conducting 400 new interviews aimed at determining what changes had taken place in the intervening months. Our research addressed SMBs cloud service use and attitudes both in general and with respect to four specifi c service categories: hosted infrastructure, web presence services, hosted communication and collaboration, and online business applications (a category also known as software-as-a-service, or SaaS). By combining the results of these interviews with our in-depth industry expertise, we have created a comprehensive view of the Chinese SMB market for cloud services in 2012, including an understanding of how the space has grown and evolved over the past year. This paper summarizes our fi ndings, with a focus on providing practical insights and identifying targeted opportunities that will help service providers drive growth in the Chinese SMB cloud market in 2012 and beyond. In the spring of 2012, Parallels calculated the Chinese SMB market across all categories of cloud services to be 10.8B RMB ($1.7B USD). As shown in Figure 1, hosted infrastructure contributes 4.5B RMB ($707M USD) to this market, web presence services contribute 1.2B RMB ($195M USD), hosted communication and collaboration (consisting of hosted premium email and hosted PBX) adds 855M RMB ($134M USD), and business applications account for the remaining 4.2B RMB ($666M USD). Parallels predicts the Chinese SMB market will grow by 31% over the next three years, reaching 24.2B RMB ($3.8B USD) in 2015. This growth will be driven both by new adopters of cloud services and by current users adding more applications and functionality to their existing cloud services. Because of this high growth rate, service providers who become familiar with the various SMB audiences in China, target the appropriate opportunity segments, and educate their customers successfully will have ample opportunity to expand in the Chinese SMB market. 1

Figure 1. SMB cloud services market size in China (2012) 4.2B ($666M) 10.8B ($1.7B) 4.5B ($707M) 1.2B ($195M) 855M ($134M) Hosted Infrastructure Web Presence Services Hosted Communication & Collaboration Business Applications Total Definitions This research is focused on the cloud services that matter most to SMBs: hosted infrastructure, web presence services, hosted communication and collaboration, and a general category we refer to as business applications. We define each of these cloud service categories as follows: Hosted infrastructure (also known as infrastructureas-a-service). This category includes dedicated servers, virtual private servers (VPS), managed hosting, and utility or elastic computing. In 2012, we expanded this category to include add-on applications and services for hosted infrastructure, such as control panels, development platforms, LAMP stack (Linux, Apache, MySQL, PHP), security, server backup, and SQL databases. Web presence. This category includes third-party web hosting, blogging services, domain registration, SSL and ecommerce addons, and site-building tools. In 2012, we expanded this category to include web server backup, content delivery networks (CDN), content management, mobile optimization tools, search engine optimization (SEO), and web server security and health monitoring. Hosted communication and collaboration. This category consists of business-class email services, including email security, email archiving, and mobility; and hosted phone services, including hosted PBX. Business applications. This category includes ten major types of software applications that can be accessed online file sharing, instant collaboration, online accounting, online backup and storage, online CRM, payroll and HR, phone conferencing, enterprise resource planning (ERP), support and help desk, and web conferencing. For each of these cloud service areas, Parallels captured SMBs current use, attitudes, future plans, and market size. As for our definition of SMBs also known as small and medium enterprises, or SMEs we follow other research and academic organizations in defining them as companies with 1 to 250 2

employees. There are around 3.3M such SMBs in China today. Sub-categories within the SMB segment include: Micro SMBs (companies with 1-9 employees) Small SMBs (companies with 10-49 employees) Medium SMBs (companies with 50-250 employees) Key Findings in the Cloud Our research showed that the Chinese cloud market grew over 4 during the course of 2011. We expect similar growth among all areas of cloud services over the next three years, with large numbers of SMBs moving to cloud services for the first time. As more of China s population gains access to the Internet, we will see Chinese SMBs continuing both to choose the cloud for a major part of their IT and to expand their spending on cloud services. In addition to the ongoing expansion of Internet access, some key drivers of growth for the upcoming years include: Greater willingness to move to the cloud for IT. Our research found that, as was the case last year, Chinese SMBs not yet using the cloud have an impressive willingness to adopt cloud services in the near future. Across most areas of cloud services, 6 or more of those not currently using a hosted service are considering adding it in the next three years. The only exception is in business applications, where the number planning to adopt in the next three years is 42% (still a notable number). We also found that, in general, larger Chinese SMBs are more willing than smaller businesses to adopt cloud services, indicating that medium SMBs will enter the market at a faster rate than their smaller counterparts. Current SMB customers increasing their spending on cloud services. In general, in 2012 we found more current cloud users who are planning to increase their spending over the next three years a trend that holds true across all areas of cloud services. This trend creates an opportunity for service providers to offer add-on applications and upsell their current customer base to higher service levels. Together with new adoption, this increase in spending will grow the market significantly in the near future. Growth in cloud usage will come from expanded Internet access, greater interest in moving to the cloud, increased spending on cloud services, and education about the benefits of cloud services. Educating SMBs about the benefits of cloud services. As new SMBs enter the cloud market, it s important for service providers to educate them about the business benefits of each cloud offering. This is particularly essential in the hosted communication and collaboration services, where SMBs are ranking all key purchase criteria similarly, indicating they are not yet clear on how to buy services within this space. Educating SMBs about how cloud services can benefit them can drive significant growth in their cloud usage. Parallels also found that different sizes and categories of SMBs have different needs and plans for their cloud service use. Therefore, for service providers to grow their cloud business, it is essential both to know their SMB audiences and to offer them the right services. 3

Know Who the IT Decision Makers Are As we explained in our 2011 research, knowing who makes the IT decisions is critical both for selecting the right products and for marketing them successfully to SMBs. As Figure 2 illustrates, we found that the Chinese SMB market consists of three separate decision-making groups: SMBs with no IT staff ( do-it-yourselfers ). For these SMBs, the business owner or a senior member of the company handles all IT purchasing decisions, as well as installation and maintenance of IT solutions. These decision makers need to know how a cloud service will benefi t their business and their bottom line. They also need solutions whose user interface is simple enough to not require detailed IT expertise. To market successfully to this group, focus on the business benefi ts of cloud services, while minimizing technical complexity. Figure 2. IT staff reported by different sizes of Chinese SMBs (2012) 10 27% 8% 17% 75% 9% 63% 5 66% 25% 64% 7% 22% 9% 8% Micro SMBs Small SMBs Medium SMBs No dedicated IT Staff IT Consultants Dedicated IT Staff I don t know Target the right IT decision maker with the right marketing messages: for SMBs with no IT staff, stress business benefits; for SMBs that hire IT consultants or have dedicated IT staff, stress technical benefits. SMBs that hire IT consultants. IT consultants want to know about the technical specifi cations of the cloud service, its confi guration and management, best practices, and other technical advice. Having a white-label reseller offering designed for IT consultants one that gives them the opportunity to resell cloud services to the SMB end customer without having to manage the infrastructure themselves will help reach this target audience, as will sales and marketing strategies that target the broader IT channel, including distributors. SMBs with a dedicated IT staff. For these SMBs, IT personnel are the primary audience. While they need to know the business benefi ts so they can pass them on to senior management, they themselves are much more concerned with the technical aspects of the solution and whether or not it fi ts the needs of their company. Clear, detailed documentation about technical specifi cations, strong support, and cutting-edge technical features will be the key selling points for this audience. 4

Target Each Opportunity with the Right Services To help service providers target their marketing efforts, we have identifi ed three major groups of SMBs that represent cloud service growth opportunities: Cloud leapers. This category represents a signifi cant portion of Chinese SMBs. It consists of SMBs that currently are not using an in-house IT solution (that is, they have no servers, no web server, or no PBX system) and are likely to move straight to the cloud, leaping over the typical intermediate step of purchasing inhouse IT. These companies might have rudimentary IT equipment, such as external hard drives for storage or Excel workbooks for accounting, but they don t have the level of in-house infrastructure or software used by the cloud converters (see below). The cloud leaper category also includes startups that choose cloud services over traditional in-house IT as they start their business. Cloud converters. These SMBs currently have in-house solutions but are either moving or planning to move to hosted services. For example, many SMBs that currently have in-house servers may switch to hosted servers when it comes time to upgrade their infrastructure. Cloud expanders. These SMBs, which are already using some form of cloud services, represent an opportunity for upselling to new and expanded cloud offerings. Growth opportunities exist among cloud leapers (SMBs going straight to the cloud); cloud converters (SMBs moving from in-house solutions to the cloud); and cloud expanders (SMBs expanding their current use of cloud services). SMB size is also an important factor, as it s likely to infl uence both which cloud usage category a business falls into and who its IT decision makers are. For instance, micro SMBs are most likely to be cloud leapers and do-it-yourselfers, with no dedicated IT staff. Size also infl uences what kinds of services SMBs are most likely to buy. Knowing the opportunity for each type of cloud service in each SMB size category will help service providers target their marketing and sales efforts to reach the right audiences. The following sections examine Chinese SMBs use of each of the four categories of cloud services in more detail, describing their current use of these services, how they choose which services to purchase (or not to purchase), and what their future plans for spending are. Throughout these sections, we look at each market sub-segment (micro, small, and medium) as it relates to the above three target SMB audiences (do-it-yourselfers, IT consultants, and dedicated IT staff) and SMB opportunity segments (cloud converters, cloud leapers, and cloud expanders). In each case, we detail the opportunities, how best to target them, and with which services. 5

Hosted Infrastructure The hosted infrastructure market in China has grown by 4 over the past year, and should continue growing by at least 29% through 2015. The hosted infrastructure market in China has grown by a healthy 4 since our 2011 research, reaching a current value of 4.5B RMB ($707M USD). As Figure 3 illustrates, overall hosted server use among Chinese SMBs encompassing both basic hosted infrastructure services (such as dedicated servers and virtual private servers) and add-on services (such as security and server backup) has grown to represent 13% of all Chinese SMB servers, with further growth projected for the near future. Figure 3. Hosted server penetration among Chinese SMBs (2012) 10 Overall, 13% of Chinese SMBs now use hosted servers. 75% 5 25% 8 55% 21% 52% 2 13% 6% 19% 1% 6% 18% 9% Micro SMBs Small SMBs Medium SMBs Hosted Servers Both Hosted and In-house In-house Servers No Servers Over the past year, the majority of growth has come from SMBs with in-house servers either converting from in-house to hosted servers or adding hosted servers to their in-house server use. However, 72% of Chinese SMBs still don t user servers of any type, so this potential cloud leaper group also represents a signifi cant opportunity. In fact, we expect this group to drive much of the growth of the hosted infrastructure market in the near term. Target the Opportunity Moving forward, Parallels predicts continued substantial growth in hosted infrastructure across all size segments of Chinese SMBs especially as more SMBs gain access to the Internet. We estimate that this market will have a compound annual growth rate (CAGR) of at least 29% through 2015, becoming a 9.8 RMB ($1.5M USD) market by the end of that year. Following is a breakdown of the expected growth within each of the three cloud usage categories. Cloud Leapers New adopters of IT infrastructure represent the largest near-term opportunity among Chinese SMBs. These SMBs do not currently use servers, but, as they decide to add them, will go directly to the cloud rather than taking the intermediate step of buying in-house servers. Of these new adopters, micro SMBs represent the best opportunity. Some 79% of micro SMBs currently are not using servers of any kind, and 34% of those report that they either defi nitely plan to add a hosted server in the next three years or are considering doing so. Small SMBs 6

also represent a strong opportunity, as some 54% of them are not using servers and, of those, 67% are considering adding a hosted server in the next three years. Together, these opportunities could add an additional 1.2M new hosted servers to the market. Raising awareness of the benefi ts of hosted infrastructure will play a key role in driving growth in the cloud leaper segment particularly among micro SMBs, which have been slower to adopt hosted infrastructure than their small SMB counterparts. Cloud Converters Chinese SMBs replacing in-house servers with hosted servers could add 580,000 new hosted servers to the market over the next three years. This opportunity is especially strong among SMBs without dedicated IT staff or IT consultants the do-it-yourselfers. For these SMBs, hosted servers have the advantage of not requiring maintenance effort or technical expertise. Micro SMBs, which mostly fall into the do-it-yourself IT category, represent a signifi cant opportunity, as they encompass nearly 7 of Chinese SMBs. Although, as shown in Figure 3, only 13% of micro SMBs have in-house servers, our research indicates that 77% of those either defi nitely plan to switch to hosted servers in the next three years or are considering doing so. Cloud leapers could add 1.2M new hosted servers to the market over the next three years, while cloud converters could add another 580,000. In addition, 48% of current cloud users plan to expand their spending on cloud services. Small SMBs, the second-largest group of do-it-yourselfers, also represent a great opportunity, with 21% currently using in-house servers and 71% of those either defi nitely planning to switch to hosted servers in the next three years or considering doing so. Medium SMBs will also continue to add hosted servers, with 47% reporting that they are considering doing so over the next three years. To succeed in moving micro SMBs to the cloud, service providers should emphasize the business benefi ts of their hosted server offerings, while small and medium SMBs may respond better to messages that focus on the technical benefi ts. Cloud Expanders The market also has room for upselling SMBs that are already using hosted infrastructure. Many of these are looking both to expand their use of hosted servers and to purchase more value-added services, such as security services, control panels, and backup. Overall, 48% of Chinese SMBs currently using hosted infrastructure plan to spend more on it in the next three years. This opportunity is largest among medium SMBs, where 76% of current hosted infrastructure users plan to increase their spending. Offer the Right Services Two keys for successfully marketing hosted infrastructure services to Chinese SMBs are to offer (1) education and support to help them overcome any concerns they may have, and (2) add-on services that will provide additional security for SMBs while also increasing service providers revenues. 7

To expand the use of hosted infrastructure among Chinese SMBs, service providers should build good presales support, have an informative website, educate SMBs about their offerings technical benefits and security, and provide add-on applications that offer additional security and functionality. Increase Adoption Through Education and Support Over the past year, Chinese SMBS have learned more about how to select service providers for their hosted infrastructure needs. They currently rank presales support, informative website, price, and technical characteristics as their top purchase criteria. In contrast, in 2011 they ranked all criteria similarly, indicating that they were unsure about how to buy hosted servers. With so many SMBs currently not using servers at all, it s important for service providers to educate them about the benefi ts of hosted servers as they enter the server market.to reach these buyers, service providers should focus on building good presales support and an informative website, while also emphasizing the technical benefi ts of their offerings. Concerns about security have also grown among Chinese SMBs. As Figure 4 shows, 8 of those that have in-house servers say that security or privacy concerns are a top reason to keep servers in-house (as compared with 6 in 2011). Additionally, security is the top add-on for hosted infrastructure, as shown in Figure 5. Based on these facts, we have two recommendations: fi rst, educate SMBs about the security of hosted infrastructure, reassuring them that it is as secure as in-house servers, if not more secure; and second, provide add-on applications that will enable SMBs to keep their data backed up and secure. Figure 4. Chinese SMBs reasons to keep servers in-house (2012) 10 8 8 6 4 47% 42% 37% 2 Security or privacy concerns Price Bandwidth / connectivity issues Specifi c application(s) needs to be in-house / other tech. concerns 1 5% Specifi c application(s) not supported by any provider Not recommended by my IT personnel / consultant Micro SMBs Small SMBs Medium SMBs Overall SMBs Figure 5. Chinese SMBs use of add-on services and applications for hosted infrastructure (2012) 10 8 63% 6 4 2 55% 44% 38% 34% 14% Security (inc. antivirus, and/or antispam) SQL database Control panel Development Platform Server backup LAMP stack Micro SMBs Small SMBs Medium SMBs Overall SMBs 8

Drive Revenue Growth Through Add-Ons Offering add-on applications not only may motivate more SMBs to move to the cloud, but also can increase service providers revenues. Chinese SMBs are already using a range of add-on services and applications for their hosted infrastructure, with security (including antivirus and antispam services), SQL database, and control panel add-ons among the most popular, as shown in Figure 5. Over the next three years, add-on services will continue to be in demand. For example, 24% of SMBs whose hosted infrastructure doesn t currently include security defi nitely plan to add it, and 22% of those that don t have server backup defi nitely plan to add it. In the medium SMB segment, these numbers are even higher, with approximately 5 of those that don t currently have security or server backup planning to add both services. By promoting these add-on services to SMBs when they purchase hosted infrastructure, service providers can increase the value of their transactions while still keeping basic hosted server prices low. Service providers should also push add-on services to their existing customer base especially since, as mentioned above, 48% of SMBs currently using hosted infrastructure plan to spend more on it in the next three years. Web Presence From 2011 to 2012, the Chinese web presence market grew by a substantial 39%, reaching a current market size of 1.2B RMB ($195M USD). This growth was driven primarily by SMBs particularly micros entering the web presence market for the fi rst time, although upselling existing web presence customers with additional web applications has also been an important source of market growth. Some 32% of Chinese SMBs now have a company website, and 51% of these are third-party hosted, as shown in Figure 6. Because of this relatively low penetration rate, there is still plenty of room for service providers to attract new web hosting customers. Focusing on the new entrants to the market the cloud leapers is the best way to grow revenue in this developing market space. Target the Opportunity Looking forward, Parallels expects the growth in web presence services to remain high over the next several years, especially as new entrants the cloud leapers move straight to third-party hosting. Strong opportunities also exist for upselling existing customers, the cloud expanders. Our research indicates that, for the next three years, the Chinese SMB web presence market will grow by 29% year-over-year, reaching 2.7B RMB ($423M USD) in 2015. Following is a breakdown of the expected growth within each of the cloud usage categories. Our research indicates that the overall Chinese SMB web presence market will grow by 29% year-over-year, reaching 2.7B RMB ($423M USD) in 2015. 9

Figure 6. Use of web presence services among Chinese SMBs (2012) 4 Overall, 32% of SMBs have a website, and 51% of these are third-party hosted. 3 2 1 17% 3% 1 9% 24% 23% 18% Micro SMBs Small SMBs Medium SMBs Third-party hosted Self-hosted Don t Know Cloud leapers could add an additional 1 million web hosting plans over the next three years; cloud converters could add another 260,000; and 65% of SMBs with current web hosting plans intend to increase their spending. Cloud Leapers The largest web presence opportunity among Chinese SMBs lies in adding new customers as they enter the market. Some 68% of SMBs still don t have a website, including 7 of micro SMBs and 66% of small SMBs and our research shows that 56% and 71% of these, respectively, either defi nitely plan to add a hosted website in the next three years or are considering doing so. For service providers who are able to target these SMBs successfully, these potential cloud leapers represent a great growth opportunity one that could add over one million new web hosting plans to the market. Cloud Converters Currently, 9% of micro SMBs and 1 of small SMBs in China have self-hosted websites an expensive and technically complex solution compared with the inexpensive standalone web hosting plans that are readily available. In fact, more than 8 of these micro and small SMBs say they either are defi nitely planning to switch to third-party web hosting plans in the next three years or are considering doing so. Interestingly, medium SMBs also have a strong interest in converting from in-house web servers to web hosting: of the 17% that have selfhosted websites, more than 8 are considering moving their websites to the cloud. Taken together, these cloud converters could add more than 260,000 hosted websites to the current market. Cloud Expanders Upselling existing customers presents another good opportunity, as all customers could benefi t from add-on applications to boost their web presence and enhance their website s performance and security. Of the 19% of Chinese SMBs currently using a standalone web hosting plan, some 65% intend to increase their spending over the next three years. By offering value-added tools and services to these current SMB web presence customers, service providers can signifi cantly increase their average revenue per user (ARPU). 10

Offer the Right Services Following are some of the approaches that our research shows will be most successful in growing web presence services in China. Focus on Key Purchase Criteria By directly addressing Chinese SMBs top purchase criteria, service providers will be able to sell web presence services more effectively. Over the past year, price has grown to become the most important purchase criterion for Chinese SMBs, indicating that it s important for web hosting plans to stay competitively priced. Other important purchase criteria are technical characteristics, pre-sales support, and an informative website. Service providers will position themselves for success by addressing each of these areas in their marketing efforts. Offer Applications and Services That SMBs Want Service providers should focus on the following areas when choosing web presence add-ons: Web applications. New in the 2012 research, Parallels asked Chinese SMBs about a wide range of web applications that can be used to secure and enhance their web presence (see Figure 7). Our fi ndings indicate that the top current applications are backup, used by 48%; ecommerce capabilities, used by 47%; and search engine optimization, used by 43%. Figure 7. Web application use among Chinese SMBs (2012) 8 6 4 2 48% 47% 43% 31% 26% 24% 23% 19% Backup Ecommerce capabilities Search engine optimization Content management Mobile optimization SSL certifi cates Content delivery network - CDN Security and health monitoring Micro SMBs Small SMBs Medium SMBs Overall SMBs Asked which web presence applications they re planning to add over the next three years, SMBs listed search engine optimization (31%), security and health monitoring (29%), and ecommerce capabilities (24%) as their top choices. Among medium SMBs, backup also shows strong growth potential, with 51% defi nitely planning to add it in the next three years. In each case, the percentage planning to add the application is highest among small and medium SMBs, pointing to a strong opportunity among these groups in the near term. For maximum profitability, service providers should focus on web applications that secure and enhance SMBs web presence and tie in with their increasing use of social media. 11

Social media. Chinese SMBs are making increasing use of social media to boost their web presence, with blog pages still the leading form of online presence (see Figure 8). Facebook page adoption has grown by 114% since 2011, with 1 of SMBs now having a Facebook page; and with 6% of SMBs now on YouTube, its usage has grown by 93%. Service providers can capitalize on these trends by enhancing their standalone web hosting offerings with tools that let SMBs create Facebook pages and other forms of social media and cross-link them to their own websites. The integration of Parallels Web Presence Builder with Facebook will allow SMBs to do just that. Figure 8. Use of social media among Chinese SMBs (2012) 4 3 3 2 15% 1 Blog Local directories 1 1 LinkedIn company profi le Facebook page 7% Rating sites 6% Youtube page 3% Twitter Micro SMBs Small SMBs Medium SMBs Overall SMBs Although China s hosted communication and collaboration market is still small, it s projected to grow rapidly at a 54% year-overyear growth rate over the next few years. Hosted Communication and Collaboration As in 2011, we focused our hosted communication and collaboration research on two areas: hosted premium email and hosted PBX. The overall market for these services in China is smaller than the hosted infrastructure and web presence markets, but is growing fast, having reached 855M RMB ($134M USD) in 2012. Currently, just 3% of SMBs pay for hosted premium email and only 6% purchase hosted PBX, but over the next few years, we expect these two cloud services to be among the highest growth areas for Chinese SMBs, growing 54% year-over-year. Hosted Premium Email Hosted premium email includes added features such as team collaboration, shared calendars, email archiving, mobility, and security. Compared with the overall email market which includes free accounts through ISPs or providers like Google, in-house email servers, and free hosted email this market is small, but growing rapidly. Overall email use grew by 35% over the past year, with 44% of Chinese SMBs now using an email account (free or paid). Within the hosted premium email market, penetration rates among small and medium Chinese SMBs grew by 127% and 76%, respectively. The majority of this growth came from SMBs that were either upgrading from free hosted email to hosted premium email or moving directly to hosted premium email, whether from a free email account or from having no email at all. 12

Target the Opportunity We expect many of the past year s trends in the email market to continue. We see medium SMBs, in particular, driving huge growth in this space, although use by micro and small SMBs will increase, as well. Cloud Leapers Encouraging small and medium SMBs that currently don t use email to move directly to hosted premium email could result in signifi cant growth. Both groups can benefi t from the service s team collaboration aspects and pay-per-seat pricing model. As shown in Figure 9, 57% of small and 53% of medium SMB currently do not use email. However, our research shows that as these SMBs enter the email market, they are willing to add hosted premium email: 62% of small SMBs and 68% of medium SMBs without email say they either defi nitely plan to add hosted premium email in the next three years or are considering doing so. Taken together, these SMBs could add an additional 12M hosted premium mailboxes to the market in the near term. Cloud Converters Some 5% of micro, 8% of small, and 1 of medium SMBs in China currently use in-house email servers an expensive and complicated solution for small companies, particularly those without dedicated IT staff. Our research found that over 8 of these SMBs in all size segments either defi nitely plan to switch from in-house servers to hosted premium email in the next three years or are thinking of doing so. This opportunity could add up to 2.4M hosted premium mailboxes to the market. Cloud Expanders Cloud expanders represent another signifi cant growth opportunity for hosted premium email. (We consider SMBs that upgrade from free hosted email to hosted premium email to be cloud expanders, even though their current use of the cloud service is free.) Parallels believes the best cloud expander opportunity lies in upselling small and medium SMBs currently using free hosted email to hosted premium email. This group represents approximately 12% of the small and medium SMBs currently using hosted email. Such an upsell should be easy, since, as mentioned earlier, these SMBs can benefi t both from the service s team collaboration aspects and from its pay-per-seat pricing model. With 86% of small SMBs and 91% of medium SMBs in the cloud expander segment saying they either defi nitely plan to add hosted premium email in the next three years or are considering doing so, this segment could add 3.6M hosted premium mailboxes to the market. Cloud leapers could add 12M hosted premium mailboxes over the next three years; cloud converters could add another 2.4M; and cloud expanders could add 3.6M more. 13

Figure 9. Distribution of different types of email accounts among Chinese SMBs (2012) 10 Overall, 3% of SMBs are paying for hosted premium email. 75% 5 25% 56% 57% 53% 5% 8% 1 35% 14% 13% 21% 24% 4% Micro SMBs Small SMBs Medium SMBs Hosted service provider ISP or Free email provider In-house server No Email In marketing hosted premium email, it s important to offer both a value-oriented and a big-brand name option, as well as creating a strong reputation through industry and customer reviews. Offer the Right Services Following are the two marketing approaches that our research shows will be most successful in encouraging Chinese SMBs to adopt hosted premium email. Offer Value-Oriented as well as Brand-Name Email Services When SMBs are asked whether price or a trusted email brand name is more important, 69% overall ranked price over brand. Breaking these results down by size segment, we fi nd that, among micro SMBs, 91% say price wins out over brand, while among small and medium SMBs, 8 rate brand as more important. In light of these mixed ratings, service providers will want to have a value-oriented premium email option, such as Open Xchange, along with a big-brand-name premium email offering, such as Microsoft Exchange, to capture the substantial growth that will occur across all size segments. Create a Superior Reputation Through Education As the hosted premium email market in China grows, service providers need to continue to raise awareness about this service through education and build a strong, positive reputation. When asked to rank the key purchase criteria for hosted premium email, SMBs ranked all criteria fairly similarly, indicating they are unsure on how to choose a hosted premium email provider. Still, they did give the highest rating to having a well-known brand. Accordingly, it s important for service providers to create a strong, positive reputation through both industry and customer reviews of their hosted email services. With 6% of Chinese SMBs now using hosted PBX, this service has experienced a 5 growth rate over the past year. Hosted PBX The hosted PBX market remains small in China, with only 6% of Chinese SMBs currently using this service. Still, this number is 5 greater than it was last year. Interestingly, it s also higher than the penetration rate in several more developed countries, such as Japan and Australia, where only 2% and 3%, respectively, use hosted PBX. We still see lack of awareness, particularly among the smaller SMBs, as one of the main barriers to this service s adoption an issue that might continue to be a problem over the next few years. Despite this initial barrier, however, Parallels believes that hosted PBX can continue to achieve great success in the Chinese SMB market. 14

Figure 10 shows the current distribution of different kinds of offi ce phone systems among Chinese SMBs. Most of the growth in hosted PBX over the past year appears to have come from small SMBs, with our research showing an additional 5% entering the hosted PBX market as they converted from their in-house PBX systems or regular phone lines to a hosted service. Target the Opportunity Although hosted PBX is still emerging as a key cloud service in China, opportunities in this space could be substantial for service providers that integrate hosted PBX into their offerings and educate Chinese SMBs about the offering s business benefi ts. Because the current base of hosted PBX users is still small, the primary opportunities will be among cloud converters and cloud leapers, rather than cloud expanders. Cloud Leapers Micro and small SMBs that currently do not have PBX systems have been one of the largest areas of hosted PBX growth in other countries, and they represent a good opportunity in China, as well. Of the 81% of micro SMBs that do not currently have a PBX system of any kind, 41% either defi nitely plan to add hosted PBX in the next three years or are considering doing so. In the small SMB segment, 54% don t currently have PBX, and 57% of those might add hosted PBX in the next three years. Taken together, micro and small cloud leapers could add over 5M hosted PBX lines to the market. Cloud Converters One of the easiest targets for service providers looking to step into the hosted PBX market is SMBs that currently use in-house PBX systems. With 16% of micro, 37% of small, and 47% of medium SMBs currently using in-house PBX systems, opportunities exist in all size segments. Furthermore, of those currently using in-house PBX, 73% of micro, 51% of small, and 76% of medium SMBs are already considering adopting hosted PBX over the next three years, potentially adding 11M hosted PBX lines to the market. Together, cloud leapers and converters could add nearly 16M hosted PBX lines to the market over the next three years. Figure 10. Office phone use by Chinese SMBs in 2012 (excludes mobile lines) 10 6% 3% 1% 75% 5 25% 37% 51% 75% 47% 37% 16% 3% 9% 15% Micro SMBs Small SMBs Medium SMBs Overall, 6% of Chinese SMBs are using hosted PBX. Hosted/virtual PBX In-house PBX Regular phone lines No phone lines 15

Offer the Right Services Because the hosted PBX market remains a new area for many service providers, Parallels has identifi ed three major marketing points that will help ensure their success. Educate SMBs About Hosted PBX As shown in Figure 11, 25% of SMBs still haven t heard of hosted PBX. Furthermore, when asked to rank the key purchase criteria for hosted PBX, Chinese SMBs ranked all criteria similarly, indicating they are unclear on how to choose a hosted PBX provider. Looking at SMBs other reasons for keeping PBX systems in-house, we see that 53% overall have technical concerns a number that has increased over last year; and approximately 33% of small and 63% of medium SMBs have security and privacy concerns. Yet, since hosted PBX is no different from in-house PBX in any of these areas, these numbers indicate that many Chinese SMBs have misconceptions about the service. Consequently, we see education through targeted marketing campaigns as being key to spurring continued SMB adoption of hosted PBX. Figure 11. Chinese SMBs reasons not to switch to hosted PBX (2012) 8 6 53% 4 34% 25% 2 22% Technical concerns Price Do not know about hosted/ virtual PBX Security and privacy concerns 7% We are planning to switch 4% Not recomemended by my IT personnel / consultant 4% Already paid for an in-house PBX Micro SMBs Small SMBs Medium SMBs Overall SMBs In marketing hosted PBX to Chinese SMBs, it s important to educate them about the benefits, keep price low, and understand their purchase triggers. Keep Price Low Although price concerns have dropped since 2011, price is still a leading concern among SMBs with in-house PBX systems, with 34% naming it as their reason for not switching to hosted PBX (Figure 11). Still, an impressive 6 say that a great value/price point would motivate them to switch (Figure 12). Consequently, offering small bundles and keeping prices low will be important in driving adoption of this service. 16

Figure 12. Chinese SMBs purchase trigger points for hosted PBX (2012) 8 6 6 55% 4 2 25% 16% 14% 14% Great value/price point Business has explosive growth Major change to business Add new locations Old equipment is broken/fl aky Offi ce location is changing 4% Equipment lease is expiring Micro SMBs Small SMBs Medium SMBs Overall SMBs Understand SMB Purchase Triggers Despite relatively low awareness of hosted PBX among Chinese SMBs, a full 55% are considering adding this service over the next three years. The rate is even higher among the small and medium size segments, with 65% of small and 75% of medium SMBs indicating an interest in hosted PBX. This growing interest makes it critical to understand at which point SMBs will decide to make the purchase. Parallels asked SMBs without hosted PBX what events would cause them to move forward with the purchase. As shown in Figure 12 (above), the leading answers were a great value/price point (6), explosive growth in the business (55%), and a major change in the business (25%). In the case of medium SMBs, another top reason is the addition of new business locations (49%). Understanding these triggers can help service providers determine the highest-value SMB targets to pursue in boosting new customer growth. 17

Business Applications Business applications represent one of the best areas of opportunity in the Chinese SMB cloud services market. At 4.2B RMB ($666M USD), they also represent one of the largest categories of current SMB cloud spending. Multiple analyst groups predict rapid adoption of online business applications over the next several years, and our research corroborates these forecasts. Some 38% of Chinese SMBs now use some form of free or paid online applications, with the top applications, as shown in Figure 13, being fi le sharing (currently used by 23% of SMBs), phone conferencing (used by 17%), and online CRM (used by 16%). However, the usage of business applications among Chinese SMBs is still smaller than among their counterparts in more developed countries, such as Australia and Japan, where over 5 of SMBs use some type of online business application. Nevertheless, as with other cloud services, we expect substantial growth in the use of online business applications as more Chinese SMBs gain access to the Internet. To take full advantage of this expected growth, service providers need to both target the right opportunity and offer the right services. The market for online business applications among Chinese SMBs is expected to grow to 8.5B RMB ($1.3B USD) by 2015, with a 26% year-over-year growth rate. Target the Opportunity Parallels calculates that the 2015 market size for business applications among Chinese SMBs will be 8.5B RMB ($1.3BUSD), with a 26% year-over-year growth rate. As with other cloud services, growth will take place among all types of cloud users: cloud leapers that have never used the particular application in-house and are trying it for the fi rst time as a SaaS application; cloud converters switching from their in-house software to the cloud; and cloud expanders increasing their use of SaaS applications, whether by upgrading their current application plans, adding more seats, or expanding their SaaS use into additional application categories. Of those SMBs who are currently not using any form of online business applications, 42% report they either defi nitely plan to add one or more in the next three years or are considering doing so. Additionally, for each application, over 2 of SMBs that are already using it also plan to increase spending on it over the next three years. Figure 13. Use of paid and free online business applications by Chinese SMBs (2012) 3 2 1 14% 4% 9% File sharing 9% 13% 7% 6% Phone conferencing Online CRM Support / Help desk 8% 5% 6% Online accounting Web conferencing 3% 5% 6% 2% Instant collaboration Payroll and HR 4% 3% 1% 3% 3% 3% Paid ERP / resource planning Online backup and storage Free 18

Chinese SMBs currently using cloud services are both shifting more software use to the cloud and upgrading free applications to premium paid accounts. As Figure 14 shows, the fastest growing application over the next three years will be instant collaboration, with 46% planning to add it. All other business applications will also see significant growth, as 14% to 21% of SMBs plan to add applications in each category. Figure 14. Planned adoption of business applications by Chinese SMBs 5 4 3 2 46% 1 21% 2 19% 18% 18% 16% 15% 14% 14% Instant collaboration Online accounting Online CRM Web conferencing Online backup and storage ERP / resource planning Phone conferencing Payroll and HR Support / Help desk File sharing Offer the Right Services Offering the right services is especially important for the business applications category, as integrating endless numbers of SaaS applications into a service provider s current offerings can be an expensive and complex process. To help minimize this complexity and to increase the profitability of delivering business applications, Parallels has two specific recommendations. Offer the Right Applications to each SMB Size Segment Since the top applications depend on the size of the SMB, service providers should target their business application offerings to specific SMB size segments. Our research shows the top applications for each size segment over the next three years will be: Micro SMBs: Online accounting (22%), online CRM (19%), and web conferencing (17%) Small SMBs: Online backup and storage (44%), payroll and HR (31%), and file sharing (29%) Medium SMBs: Online backup and storage (45%), file sharing (42%) and payroll and HR (41%) 19

To market business applications successfully to Chinese SMBs, service providers should offer the right applications to each size segment and consider bundling business applications with other cloud services. Consider Bundling Business Applications and Other Cloud Services In our 2012 research, we asked Chinese SMBs whether they would like to buy cloud services as part of a discounted bundle of several cloud services. An impressive 74% of Chinese SMBs said they were interested. By selling bundled cloud services that target each size segment, focusing on the top opportunities for that segment, service providers will be able to increase ARPU while also giving SMBs the cloud services they want. Overall, the growth of the business applications category makes it a favorable space to pursue especially since becoming a full-service provider continues to be the trend in the cloud service market. Conclusion The Chinese SMB cloud services market grew over 4 during the past year, reaching 10.8B RMB ($1.7B USD) at present. Our research indicates that it will continue to grow rapidly, reaching 24.2B RMB ($3.8B USD) by 2015. Accordingly, we see strong opportunities for service providers that are able to reach SMBs with the right services at the right price. The keys to growing cloud service adoption among Chinese SMBs are to: Know the SMB audience, reaching out to each category of SMBs with the messages that resonate most with its IT decision makers. For the non-technical do-it-yourselfers (primarily micro SMBs), service providers should focus on business benefits; for SMBs with IT consultants or dedicated IT staff (primarily small and medium SMBs), they should focus on the technical advantages of the cloud service. Target each opportunity with the right services. For SMBs without in-house IT services, which is currently the majority of Chinese SMBs, service providers should encourage them to leap directly to the cloud; for SMBs currently using in-house IT services, service providers should focus on converting them to cloud versions of those services; and for SMBs already using cloud services, service providers should upsell them to expanded versions of those services. Service providers can also drive growth and revenue by increasing their offerings, adding new value-added tools to their core cloud services, and expanding their core service base with emerging services, such as hosted premium email, hosted PBX, and business applications. As Internet access increases in China, more SMBs will enter the cloud services market, and all types of cloud services will become more established. Accordingly, service providers who know their SMB customers, target the best opportunities, market their services successfully, and take the time to educate potential customers about their services will grow and prosper. 20

2012 Parallels Holdings Ltd. All rights reserved. The Parallels logo and Parallels are registered trademarks of Parallels Holdings Ltd. No part of this publication may be reproduced, photocopied, stored on a retrieval system, or transmitted without the express written consent of Parallels. About Parallels Parallels enables service providers to rapidly launch and efficiently deliver the most profitable cloud services by automating the delivery of the broadest set of solutions demanded by small businesses. Founded in 1999, Parallels is a fast-growing company with 850 employees in North America, Europe, and Asia. For more information, please visit www.parallels.com/spp. 21

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