Will Hyperscalers Lose Steam as Homegrown Sovereign Clouds Emerge?

In 2025, the Reserve Bank of India (RBI) will launch a pilot program that will enable financial services firms to access affordable local cloud data storage, which will prioritize smaller companies that would otherwise be unable to access such services due to the associated financial barriers. Spearheaded by the RBI’s Financial Technology & Allied Services wing with advisory from EY, the former will fund the project with US$2.72 billion from its asset development fund. The institution will scale the project in the coming years, inviting financial firms to invest in equity stakes further into the future. The country’s central bank is building its cloud platform upon tech from local solutions providers, which will have to build data center facilities in Mumbai and Hyderabad.

The country’s cloud services market is dominated by international players such as Amazon Web Services (AWS), Google Cloud, and Microsoft Azure—which has recently announced that it would invest US$3 billion in India for cloud and Artificial Intelligence (AI) initiatives. With its new initiative, RBI is directly challenging these hyperscalers, building upon a market that is aware and has been fully educated on the uses of the technology.

This project was likely initiated due to the need for control over data in the country, wherein U.S. hyperscalers Google Cloud, Microsoft Azure, and Amazon Web Services (AWS) dominate. Consuming more data than the United States and China, and having experienced over 1.6 billion cyberattacks in 2023, safekeeping information in sensitive verticals such as financial services is imperative. The economic impact of this also cannot be understated: creating a successful robust, cheap, and vertical-specific cloud platform not only employs local engineers, but also means that RBI can replicate this to scale, and develop the capacity to specialize in and support other sectors.

Generally, producing a platform such as this allows countries to have stringent control over how the data are regulated and accessed. For example, enterprises would require knowing how U.S.-based hyperscalers may retrieve data on their overseas clouds if American intelligence firms request it. Additionally, homegrown sovereign clouds may also be tailored to be specific to the needs of the region, as well as the market within the country in a way a global hyperscaler would not be able to do. Locally constructing such a service offers protection from future geopolitical uncertainties in terms of availability of services and privacy.

As it stands, American hyperscalers dominate the global cloud computing space by a landslide, given their wide ecosystem of partners and deals accrued from these vendors, host of industry-standard applications, and flexibility in scaling services. However, the question remains: will building independent sovereign cloud services in lieu of suitable, vertical-specific solutions from hyperscalers also become the trend?

Clearly, leading markets like the United States and China collaborate with their local incumbents such as AWS, Google Cloud, and Microsoft Azure in the former country, and Huawei Cloud, Alibaba, and Tencent in the latter to build sovereign cloud systems that cater to different public verticals—especially mission-critical ones such as defense.

However, in other regions such as Europe, more hesitance remains. With adherence to strict data laws such as the General Data Protection Regulation (GDPR) and the Data Protection Act, European countries cooperated to launch Gaia-X—a federated cloud project aimed at reducing reliance on non-European cloud services companies. Smaller firms are also emerging to tackle the vertical-specific sovereign cloud in the region—Germany-based STACKIT, for example, specializes in retail, health, and public sector solutions. It recently collaborated with U.S.-based MicroStrategy to release a sovereign cloud service infused with AI for business intelligence.

This hasn’t stopped hyperscalers from innovating. Microsoft recently announced its plans to invest US$3 billion in AI and cloud expansion, as well as upskilling 500,000 people in India over the next 2 years. It is funneling resources into five organizations, across education, manufacturing, financial services, healthcare, and railways. Oracle has also implemented its Cloud Infrastructure Dedicated Region in Bangladesh last year—complete with its own data centers—to help the country with its sovereign government cloud. Additionally, Google Cloud and Indonesian telco Indosat Ooredoo Hutchinson have partnered to offer AI applications on the former’s Distributed sovereign cloud, looking to target healthcare, defense, financial services, energy, and manufacturing. Lastly, AWS has released several different use cases and open-source tools in conjunction with its sovereign cloud, further fortifying the platform.

The reason smaller, local firms are finding success, and gradually emerging across global markets is that they closely collaborate on business domain-, use case-, and region-specific solutions, meaning that solutions are completely relevant to clients. Additionally, firms that adopt a sovereign cloud tend to do so to protect sensitive data, keeping them in a vacuum to minimize the risk of data leakages and misuse.

However, these firms, as well as individual governments, lack the scale, ecosystem, and resources that hyperscalers possess, meaning that in the short- and medium-term, hyperscalers will safely remain international market incumbents.

Regardless of the maintain competitiveness and relevance in the long term, hyperscalers could take several steps:

• Hyperscalers must invest in countries and local institutions to build trust and a local knowledge base from which solution guidance may be extracted. Through this, firms can build a presence in the target country, gain a thorough understanding of verticals within the specific context of the country, promote the national economy, and gain access to hundreds of thousands of potential employees through its training program. Fostering trust and dependability within the region is integral to attracting government support and local enterprise attention. To make their efforts even more effective, Microsoft should double down on the verticals of the firms it has committed to investing in and upskill local talent within these industries to capture these markets.
• Similarly, creating exclusive partnerships with local tech bodies and firms, and building data centers in the country will further cement trust and compliance with local needs and regulations. Oracle, for example, can leverage its newly formed infrastructure and government connections to form relationships with other state-owned firms, and dive deeper into enterprise applications. For further potency and security, hyperscalers may also choose to create a separate entity in the markets they are targeting to limit worries around foreign data accessing in the future. Indeed, hyperscalers often partner with local firms to operate their sovereign clouds; however, fallout could be further placated with a fully disconnected offshoot.
• With their accrued local intelligence, hyperscalers should also focus on creating niche, innovative solutions. Leveraging technologies that these firms are already leading in, such as AI, as well as partnering with local hardware firms, hyperscalers can benefit from creating managed services that suit the specific needs of the clients and verticals within their target region. Google Cloud’s market entry into Indonesia could further be leveraged through the provision of specific bundling of AI use cases within the verticals it has expressed interest in catering to.
• Greater investment should be made in cybersecurity measures. As the primary reasons for sovereign cloud investment are privacy and security, hyperscalers should place greater emphasis on active threat detection, encryption, and various other methods of data safekeeping. AWS, even though it has already emphasized its security applications, should further work with its cloud security partners to develop cutting-edge defensive and threat-detecting applications for its own platform. As these firms specialize in security and possess thorough, and up-to-date perspectives on cyberthreats, it may be more fruitful for AWS to collaborate with these companies, instead of building solutions internally.

Regardless, although many countries have revealed plans to create sovereign clouds for local firms and cybersecurity, it is unlikely that they will take customers from hyperscalers in the near future—much of this activity is occurring within government and sensitive data verticals. However, for other sectors and enterprises, this is unlikely to happen given the number of advantages offered by hyperscalers in terms of applications, services, and ecosystem of partnerships, providing them with benefits that local cloud providers are unlikely to offer in the short term.