The major cloud providers announced earnings last week, and their growth is slowing significantly. What that means, however, isn’t immediately obvious. Earlier this year each of the clouds used the same word to explain the decreased pace: “optimization.” Customers are cutting spending in some areas so they can increase it elsewhere. What is the “elsewhere” claiming CIOs’ budgets?
As first noted by Microsoft (and surprisingly not by Google), the biggest shift in spending is toward artificial intelligence. Back in May, I noted that we’re currently in an “optimization calm before the cloud spending storm” that will hit once companies feel more confident in the AI experiments they’re running. As Amazon CEO Andy Jassy said at the time, “Few folks appreciate how much new cloud business will happen over the next several years from the pending deluge of machine learning that’s coming.”
This is likely true, but why is Microsoft alone in reporting this tailwind in its earnings? And why aren’t any of the cloud providers talking about how developers impact AI spending?
But first, the data
Despite cloud spending still claiming a small fraction of overall IT spend, and despite what feels like a steady shift from on-premises infrastructure to public cloud, AWS, Microsoft Azure, and Google Cloud continue to report slowing growth, as Jordan Novet captures. In order of market share:
- AWS grew revenue 12% (up from 11% in the previous quarter)
- Microsoft increased 29% (up from 26%)
- Google was up 22% (down from 28%)
Of course, the components of these cloud numbers from the three providers vary greatly: AWS’ number includes mostly infrastructure-as-a-service revenue, while Google and Microsoft (with much lower IaaS numbers) throw in software-as-a-service applications like Google Workplace (Docs, etc.) and Office 365. Amazon is reportedly paying $1 billion to Microsoft to run Office on someone else’s cloud. Fair enough.
The numbers are big, even with decelerating growth relative to last year. But why aren’t they bigger? After all, by IDC and Gartner analyses, we’re nowhere near cloud saturation. By some accounts, less than 10% of total IT spending goes to the cloud today. Is the “optimization” just a speed bump on the way to trillions in cloud spend? If so, where will all that growth come from? Novet, commenting on Amazon’s earnings, had similar thoughts: “Looking at the future, you do wonder how much more AWS on its own can grow, and where the growth will come from.” The same is true of Microsoft and Google.
Minting AI money
One answer is AI. Is it enough? Microsoft seems to think so. Of the 29% in cloud revenue growth, Microsoft CEO Satya Nadella claimed 3 percentage points came from customers spending big on AI. That AI spend, he continued, isn’t just about whatever AI service the company might be selling. It’s about the storage, compute, etc., that gets pulled into such workloads.
Jassy was correct to note back in May, “Folks don’t realize the amount of nonconsumption right now that’s going to [turn into consumption] and be spent in the cloud with the advent of large language models and generative AI.” What’s puzzling is why AWS and Google aren’t seeing the same tailwind as Microsoft—or at least, they’re not reporting it.
Google was arguably earliest to the AI party and had the strongest portfolio. Google CEO Sundar Pichai noted on the earnings call, “We are definitely seeing a lot of interest in AI,” and claimed, “There are many, many projects underway now, just on Vertex alone, with the number of projects growing over seven times.” That’s awesome, but it isn’t showing up in Google’s numbers.
Ditto AWS. The company has been criticized for being slow to AI, but even if you buy into that narrative, AWS has a rich suite of services related to AI and data science and the largest customer count of any of the clouds. Jassy said on Amazon’s earnings call that generative AI is “top of mind for most companies,” yet AWS didn’t report any impact on its revenue from such customers. Jassy went on to argue that, “Customers want to bring the [generative AI] models to their data, not the other way around, and much of that data resides in AWS.” Again, this sounds reasonable but it’s missing the punchline (i.e. “and so our revenue growth accelerated”).
Perhaps it’s buried in the more than $900 million of revenue touted “as customers are continuing to shift their focus toward driving innovation.” To be fair, Jassy also said the $919 million in growth demonstrates the “most absolute growth of any of the players out there,” a dig at how Microsoft and Google report their numbers. So maybe AWS does have more AI-related growth than anyone else, but if so, why not talk about it?
After all, Jassy stressed that the “gigantic new generative AI opportunity” should drive “tens of billions of dollars of revenue for AWS over the next several years” because “we have a unique and broad approach that’s really resonating with customers.” So highlight it.
One possible factor is Microsoft’s historic strength with the CIO. A decade ago, CIOs declared Microsoft their “most important vendor.” Although the rise of AWS has seriously challenged Microsoft’s once-dominant position, it’s still true that Microsoft has a significant account of influence with the C-suite. It’s therefore worth pulling a post I wrote back in 2016 that remains relevant today.
Developers don’t necessarily control budgets, but they’re hugely influential on IT spending. The big three cloud providers can talk all they want about the effect AI will have on their revenue, but within those accounts, developers have a lot of impact. The long-term cloud winner will be the one that helps developers the most. AI is the latest battleground for developers and should be getting more air time on the respective companies’ earnings calls. Microsoft and Google mentioned developers five times on their earnings call while AWS mentioned them six times. Meanwhile, AI was talked about exponentially more. To win, they need to combine the two.