It proves to be quite a challenge for Microsoft, AWS and Google Cloud Platform to keep up with the incredible demand for cloud capacity. That demand comes primarily from the desire of just about everyone to run AI workloads in the cloud.
The three big cloud players are racing to capture or regain as much market share as possible. To compare each company’s cloud offerings is a bit like comparing apples and oranges. After all, they each put somewhat different products or services under this umbrella. Looking at their own figures, however, it is clear that AWS is still the biggest, with over 27 billion dollars in revenue, followed by Microsoft with more than 24 billion. Google Cloud Platform continues to grow and has turned over 11.4 billion dollars, but it does not yet come close to the other two.
Meanwhile, investors are mostly giving them the benefit of the doubt, but for how long? The ‘big three’ can’t put up their data centers fast enough, and the additional hunger for energy that can’t quite get satisfied is also putting somewhat of a damper on growth. Microsoft is powering on an old nuclear power plant, and the other two are also looking at the possibilities offered by nuclear power. Regardless, Microsoft, Google and Amazon Web Services (AWS) are all pulling out all the stops to meet the growing global demand for cloud capacity.
Microsoft: stock dip despite growth
Microsoft’s cloud strategy hinges on its own Azure platform, a component of great importance to its recent financial results. For the Intelligent Cloud business (which includes Azure), growth was 20 percent, generating revenue of 24.1 billion dollars last quarter. A whopping 12 percentage points of Azure growth can be attributed to AI.
Investors, impatiently waiting for all those insanely high investments in AI (and thus cloud) to start bearing fruit, were unimpressed and punished Microsoft with a six percent share price drop, its biggest plunge in two years. That may not say much for the long term, but it shows investors’ patience is running thin. Unable to delight them with better news, the company predicted that revenue growth for Azure in the coming quarter would be ‘only’ 31 or 32 percent.
Integrating AI into all products
Microsoft is investing heavily in AI and has a significant stake in OpenAI. It is also integrating its offerings fully into its own services. CEO Satya Nadella explained that AI will have a place in the entire Microsoft suite. Think of assistants in Office (mockingly called ‘Clippy 2.0’ by critics like Salesforce’s Mark Benioff) or helpers that summarize emails or transcribe conversations in Teams. In other words, things that we probably won’t think twice about in a few years.
Meanwhile, OpenAI is bleeding money, which means it’s also weighing on investor Microsoft’s balance sheet, presumably about 1.5 billion dollars (about 1.4 billion euros) for the coming quarter. While the Azure unit is thus benefiting handsomely from the demand for AI, the costs are enormous, too. Capital expenditures rose to 14.9 billion dollars or 13.7 billion euros, a whopping 50 percent more than last year’s period.
Keeping a lid on costs
Much of this spending is on constructing or leasing data centers or related real estate and equipment. Supplying the requested AI workloads in Azure would be impossible without these investments. It is incumbent on the company to keep the whooping costs somewhat in check so that in time, hopefully, some revenue can still be earned from the AI revolution.
Microsoft’s quarterly results ended up in the black. Revenue overall rose 16 percent to 65.6 billion dollars (more than 60 billion euros), and earnings per share were 3.30 dollars. The stock price was taking a nosedive due to investors’ high expectations. This typifies the concerns of the market, which wants to know whether Microsoft’s exorbitant AI spending will pay off in the long run or whether rivals will outpace the company.
Alphabet (Google) exceeds expectations
Alphabet (Google’s parent company) had reason to be a bit more cheerful, but it had traditionally been lagging behind, meaning there was still plenty of room for improvement anyway. Google Cloud Platform’s slow uptake was cause for concern a while back, but the company is catching up. The platform exceeded expectations with revenue growth of 35 percent. This division now accounts for 15 percent of the parent company’s revenue.
The company likes to keep the momentum going, courting various AI start-ups, often founded by ex-Google employees. Not to collaborate with them (although that’s never out of the question), but rather as customers for running AI workloads. One of these is World Labs, with former Google Cloud AI head Fei-Fei Li at the helm. The startup said the choice for this platform had ‘nothing to do’ with this history.
‘More adoption and bigger deals’
Sundar Pichai, CEO of Alphabet, stressed that the company’s AI-driven cloud solutions are making existing customers more willing to embrace its products (and thus pay more for all the AI bells and whistles). Also, offering more exciting products would lead to bigger deals with new customers. That has positive implications for net profit, Pichai noted. The cloud business generated 11.4 billion dollars in revenue, meaning Google Cloud remains the smallest player –for now. Although the company manages to increase its cloud revenue every quarter, it is still a tall order to catch up with the competition.
Total revenue for Alphabet rose 16 percent to 74.6 billion dollars (68.5 billion euros), with a net profit of 2.12 per share. Unlike Microsoft, where investors did not hide their disappointment, Alphabet’s performance exceeded expectations. This resulted in its stock also immediately rising nearly seven percent. Capital expenditures totaled 13 billion dollars (11.9 billion euros); as with Microsoft, much of this concerns the cost of the infrastructure that keeps AI workloads going.
Bringing back AI pioneers
The company is also reaping the benefits of all its AI efforts internally, Pichai reported that more than a quarter of all new computer code written within Alphabet is now generated using AI. It seems only natural that the company whose staff conducted the research that has made the current AI boom possible should reap the full benefits. But that Alphabet’s initial momentum was in danger of getting derailed shows how fast and volatile this market is. It’s not such a crazy move by the company to have bought back some of its former AI leaders.
Still, it’s not all rosy at Alphabet. The company can ‘rejoice’ in the special attention of antitrust authorities. Because the company is so dominant in search and ads, there are calls to force Alphabet to sell its Chrome browser and the division behind the Android OS. The EU has also set its sights on the company, although it recently managed to escape judgment. Not because there was no case, but because of a formal error. In any case, Pichai warned that the U.S. government’s scrutiny could have ‘unintended consequences’ for the country’s technological climate.
Old-school AWS strikes back
Then there is AWS, Amazon’s cloud arm. A trusted player with a mature business and ditto infrastructure. It has undergone a period of low growth, and there are several reasons for that. Consider a diminishing growth in demand after the initial skyrocketing growth in the COVID era. Also, competition is stirring considerably, especially the two players mentioned above. They are nibbling away at market share and have responded faster to changing customer demand to offer more than just infrastructure. AWS has stepped up its game and now also delivers software solutions, but had some catching up to do.
That has resulted in Amazon’s cloud division’s revenue rising to 27.5 billion dollars (25.3 billion euros), a nineteen percent increase. That aligns with estimates, so investors rewarded this expected growth with over seven percent share rise. That’s also because the rest of Amazon’s business is doing well: total revenue rose eleven percent last quarter to 158.9 billion dollars.
Huge expenditures
CEO Andy Jassy called AI a ‘unique opportunity,” justifying massive investment in the technology. Amazon spent 22.6 billion dollars (20.7 billion euros) on real estate and equipment last quarter alone. That’s an 81 percent growth in such investment costs compared to a year ago.
Indeed, the company has laid out a comprehensive investment plan to secure its piece of the AI pie. By the end of this year, Amazon will have spent some 75 billion dollars (68.9 billion euros) in capex, a significant portion of which will go toward extending its technical infrastructure. By 2025, that will be even more.
Huge investments and growing competition characterize the race for market share in the cloud sector, while demand for AI capacity remains unprecedentedly high. Microsoft, Google Cloud Platform, and AWS are making every effort to meet the demand but face high costs and critical investors.
Whether these mega-investments will translate into sustainable growth and competitive advantage remains uncertain. The most successful player must find the optimal balance between investing in capacity and controlling costs to ensure profitability.
This article was expanded on 6 November to clarify the revenue difference between each company’s cloud divisions.
Also read: New cloud lobby with Google at the helm immediately stirs resentment at Microsoft