South Korean investors are flocking to cloud managed services providers (MSPs) amid increasing demand for data processing, with the domestic cloud market expected to reach 3.4 trillion won ($2.8 billion) next year.

In one of several recent collaborations, Samsung SDS signed a memorandum of understanding with internet firm NHN Corp. for a strategic cooperation in cloud businesses, with the two companies agreeing to jointly expand their services and develop  cloud-based products and solutions.

Conglomerates like SK Group and LG Group have established joint ventures or invested in cloud MSPs, and financial investors, including Stonebridge Capital and NAU IB Capital, are also betting on the growth potential of the business. Venture capital firms and private equity firms are showing similar levels of interest in the industry.

“The value of cloud MSPs is expected to rise sharply as domestic companies are gearing up for a digital transformation,” said an industry source.

Demand for multi-cloud, which combines on-premise operations with services and applications running on multiple cloud providers, has been on the rise. As few homegrown companies are capable of meeting the growing demand, investors are backing domestic cloud MSPs which have partnered with global providers like Amazon Web Services and Microsoft Azure.

Demand for advanced data management since the outbreak of the Covid-19 pandemic also has strengthened interest in cloud MSPs. Market players that had been watching from the sidelines have now actually made investments.

“It was initially expected to take at least three to five years for the domestic cloud industry to enter a mature phase, but it is likely to happen earlier than expected, with companies increasingly moving toward an untact situation (non-face-to-face contact),” said an industry source.

However, some market insiders point out that the attractiveness of domestic MSPs may weaken if foreign cloud service providers enter the domestic market directly or terminate their partnerships with local firms.

It is also difficult to predict when cloud MSPs that are now recording losses will return to profitability. Many face a challenge in setting pricing high enough to maintain an adequate profit margin as they resell other cloud providers’ infrastructure, which is already expensive. Analysts expect profitability to improve when they generate economies of scale and their business enters a stable phase.

“Currently, companies are investing a large amount of money in hiring or educating IT professionals,” said an industry source. “However, they are likely to make a turnaround in two to three years, considering synergies to be created between their existing business and services that will be further enhanced.” (Reporting by Ar-rum Rho)