After a decade of dominance in the public cloud market, Amazon’s top spot came under immense strain in 2017. Years of investment in networks & cloud services began to pay off for Microsoft’s Azure and the Google Cloud Platform (GCP). Apple is also making noises in the cloud.
Tides shifting in 2017
At year-end 2016, Amazon’s Amazon Web Services (AWS) was the public cloud’s market leader, as it had been for many years. Per the Cloud Security Alliance, in 2016, AWS had a 42% share of the public cloud application installed base, Azure had 29%, and GCP had 3% (as did IBM’s SoftLayer).
Capex spend has been strong at Amazon’s rivals for many years, though, and it appeared to pay off in 2017.
As shown in the figure below, capex has grown at all three since 2012, but faster at Google and Microsoft. Each of these “webscale network operators” (WNOs) spend capex on items unrelated to the cloud, for instance Amazon’s fulfillment centers, or Microsoft’s retail outlets. But the big driver in the last few years has been cloud capex, concentrated around construction (or expansion, or retrofitting) of data centers, and supporting infrastructure such as data center interconnect.
All this cloud investment has created an intense rivalry, with the new entrants pushing hard on Amazon’s top spot. Large and medium enterprise customers (such as Target, Apple, Dropbox, and Spotify) are now looking at alternatives, including a partial shift from Amazon to other leading cloud service providers. Amazon’s loss of such enterprises from the AWS fold has hurt operating margins, not just topline growth.
Microsoft’s “not so soft” approach appears to be hurting Amazon’s AWS margins
Amazon’s AWS unit has continued to grow fast in 2017, but at declining rates: year-over-year (YoY) revenue growth for AWS was 42% in 3Q17, down substantially from 3Q16. By contrast, Microsoft’s Azure revenues have grown at an average of more than 90% in recent quarters (chart, below).
More important, after margin declines in 2016, Azure saw improvement in the last two quarters. As the chart below shows, Microsoft’s “Intelligent Cloud” (Azure) margins have improved YoY for the last two quarters, while AWS margins did the opposite. The two companies’ margins converged somewhat in both 3Q16 and 3Q17, but Microsoft’s overall level is safely higher.
To support Azure’s growth, Microsoft has invested on multiple fronts, including acquisitions. For instance, the company recently acquired Cycle Computing, a startup software developer that allows businesses to run apps in the cloud, a lucrative business for cloud vendors. As Cycle Computing has been a long-time partner with AWS and Google, Microsoft gets some new customers out of this acquisition: the existing Cycle Computing customers on AWS and Google Cloud will be asked to migrate to Azure, along with the future customers.
Microsoft has also invested heavily in network capex, partnering with such vendor suppliers as ADVA (100G optical for DCI); Cisco (Cisco Cloud Services Router 1000V); Ericsson (IoT accelerator); Huawei (a jointly engineered server product for hybrid cloud apps on the Azure Stack); Mellanox (40G Ethernet switches); Qualcomm (evaluating the new Qualcomm Centriq 2400 processor for cloud applications); and, many others.
Cloud is one of Google’s three big bets
Google Cloud Platform, the tech giant’s cloud division, currently lags far behind AWS but is trying to catch up. The renewed focus on cloud is a result of Google exploring growth outside its core advertising business. This continues to grow nicely, but remains highly vulnerable to economic headwinds.
Google’s CEO Sundar Pichai says “Cloud” is among the top three bets of the firm going forward. Unlike Microsoft, Google does not break out revenues (or report margins) for its cloud business separately. However, we know that GCP is a big part the company’s growing “Google Other” segment, which was 12.3% of total revenues in 3Q17 (3Q16: 10.8%). Google’s CFO Ruth Porat confirms that GCP is a main driver for growth in this segment. One metric of GCP’s growth is the number of big (>$0.5M) cloud deals signed per quarter; the total in 2Q17 was 3x the total for 2Q16.
To support this growth, cloud-specific investments have increased significantly in 2017; overall capex was $3.5B in 3Q17, up 39% YoY, benefiting server manufacturing partners Inventec & Quanta Computer. Cloud opex is rising as well, due to new cloud technical & sales staff hires.
Google’s push into the cloud market is only a few quarters old
The moderate gains made so far by Google in the cloud market are impressive, considering they just started in 4Q15, with the appointment of VMware co-founder Diane Greene to head its cloud business.
Prior to Greene’s appointment, Google was mostly perceived as the Internet search and advertising giant, which struggled to market cloud solutions to enterprises. The perception has since changed a bit, with GCP’s aggressive pricing strategy and incremental market gains. The GCP got a big boost in September 2017 with a win at Salesforce. Earlier this month, Google made another important hire: Diane Bryant, Intel’s former datacenter unit head, is becoming the COO of Google Cloud.
With this impressive team, Google is now looking to outperform AWS by 2022. Five years is ambitious, but not impossible. To succeed, Google is looking to position itself as a cloud solutions provider for AI- and Big Data-based applications, as these two technologies are considered as next big key adopters to cloud. Google is starting to reap some results from this new positioning. For instance, it recently struck a deal with Zebra Medical Vision to host its AI algorithms on Google’s cloud.
However, Google has to do much more than enticing big-ticket enterprise customers to switch. For rapid growth, and to support an AWS-like breadth of offerings, Google would need a sizable acquisition. Google’s biggest acquisition so far has been Motorola for US$12.5 billion. It would be looking to make a similar-sized acquisition in the medium term to help catch up to Amazon. Per the rumor mill, Salesforce and Workday are options, among many others.
In the long run, Apple’s project “Pie” could eat into Amazon’s “share of pie”
While Amazon is focused on Microsoft and Google in the short to medium run, Apple may be secretly beefing up its own cloud capabilities to battle Amazon in the long run.
Currently, Apple’s role in the cloud has been mostly in the SaaS space through its iCloud service. However, a number of indicators point to Apple pursuing its own cloud computing strategy beyond SaaS; for example:
- Secret restructuring of its cloud computing operations under a project code named “Pie”: This includes moving the infrastructure for Siri, iTunes, Apple Music and Apple News onto a single proprietary cloud platform called “Pie”.
- Reduced reliance on other cloud operators to run its iCloud and other services: Apple is having issues relying on other cloud providers, as slow networks and outages disrupt Apple’s services. In late 2015, Apple started exploring how to build its own cloud infrastructure and end dependence on other cloud players completely, through “Project McQueen”.
- Increased investments around data centers: in 2017, the company announced two massive data centers in Iowa and Nevada, with construction costs of US$1.3B and US$1.0B respectively.
All the above specifics clearly suggest Apple aims to make a foray into the cloud market. But by no means guarantee it. Apple does not enjoy being predictable.
Amazon fights back
Amazon is not sitting back in face of these threats. The company is adopting a three-pronged strategy of “Innovate-Invest-Collaborate” in the cloud.
As the cloud pioneer, AWS continues to “Innovate”: expanding cloud platform functionalities from 280 new features in 2013 to 1,000 new features in 2016; launching a joint innovation center in Qingdao, China in 2017; rolling out a the AWS Snowmobile, which is a physical data transfer service using a 45-foot long container on a truck. That’s for transport to and/or between AWS data centers. Amazon also continues to “Invest” in (or acquire) cloud-related companies, including cyber security company Harvest.ai in January 2017, Thinkbox Software in March 2017, and GameSparks in July 2017.
The “collaborate” aspect of Amazon’s strategy involves collaboration with rivals where Amazon is weak. For instance, Amazon announced a surprise partnership with Microsoft in October 2017, to launch a free software tool for developers, Gluon, which allows them to build AI and cognitive systems. The alliance is seen as countering Google’s TensorFlow tool, which is already popular among developers. In 1Q17, Amazon teamed up with rival VMware to develop software to help companies move on-premises applications to the public cloud. These moves are significant for Amazon, as it looks to counter its peers in specific product segments in order to maintain its #1 position and lift margins.