Amazon and the cloud wars

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I must admit I’m having trouble figuring out what people are worried about with regards to Amazon’s competition in the cloud business from Microsoft and Google. Let’s look at some figures that were posted on another board. The percent is an estimate of rate of growth of their cloud business next year. The dollars refer to their 2016 cloud revenue.

	       AMZN		MSFT		GOOG
		50%		100%		150%
		$10.0		$2.0		$0.6

Amazon’s cloud grew by 58% in the June quarter and 55% in the Sept quarter. Let’s give them 55% cloud revenue growth next year. Starting from that base of $10.0 billion they would sign $5.5 billion in new cloud business in 2017.

Google, is coming off their tiny base of $0.6 billion, and growing at 150%. That means they will sign all of $0.9 billion in new cloud business in 2017, roughly about 16% as much new cloud business as Amazon. Does that sound like they are catching up to Amazon? Who is signing most of the new cloud business? Amazon is signing six times as much new cloud business as Google! Who is dominating this market?

And Microsoft, coming off a base of 2.0 billion, and growing at 100%, will add $2.0 billion in new cloud business in 2017. That’s about 36% as much new cloud business as Amazon. Does that sound like they are catching up to Amazon? Amazon is signing almost three times as much new cloud business as Microsoft! Who is dominating this market?

And that’s assuming Google will actually grow at 150% (which is, you’ll have to admit, a stretch), and that Microsoft will actually grow at 100%, and that Amazon will actually grow at 55%, which they may not (but if they “only” grow at 50% it won’t change the thesis at all, just the details).

Just my thoughts…

Saul

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I have not stayed close to this, but here’s what I know (this includes some input from a fellow who specializes in cloud architectures and vendors. He is still in the Enterprise Architecture group that I was in at my former employer).

MSFT offers a very robust cloud platform. It exceeds all other offerings in ease of use and integration with MS_Office products which dominate the vast majority of enterprises as well as individual home users.

I will not dwell on the benefits of the cloud, but guaranteed back-up and disaster recovery as well as multi-device access from anywhere an internet connection is available are just a couple of compelling reasons to utilize cloud storage.

T present MS has the largest pool of cloud storage available of any of their competitors (I read that recently, bu have not verified it). Satya Nadella (MS CEO) made his cloud strategy central to his growth plans for MS. So far, it seems to be working.

The main complaint about Amazon and Google is poor integration with the desktop and mobile apps as well as ease of use being far less than one might hope. For a change MS, which has never made ease of use a primary objective of their offerings is playing a different tune with the cloud where they have focused like a laser on it.

So, time will tell, there is no immediate threat to Amazon’s cloud dominance, but keep your eyes open. Microsoft is no joke here.

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One thing that MSFT has going for it is that it’s Office apps are still indispensable. Whether on Apple devices where you get Apple office software for free (and top notch products they are) or even against Google apps. It is MSFT Office products that you must have.

As such, yes, Azure is gaining momentum and I’d bet has higher margin product offerings. I don’t expect MAFT to equal AMZN by marketshare but perhaps by profit at some point.

Google? What does Google offer that AMZN does not? What is their point of differentiation? At this point, not much and it shows in their marketshare.

It should be pointed out that Apple has a huge cloud business itself focused on all of its devices. Simpler, but like most of what Apple does, more profitable to run and mostly secure from competition. Even though I use Dropbox on Apple, I still pay Apple for iCloud as well, but not MSFT for One Drive (or whatever they call it, even though I rely on Office. My business infrastructure though runs on Azure.

So they all have their points, and making use of multiple cloud services is probably common.

The one cloud service I don’t use is Google’s (outside of gmail, and that is only for personal email).

This may help explain why Google is doing so relatively poorly in this market.

Tinker

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One thing that an Amazon investor could possibly be worried about is not that Amazon might lose market share, even though it could be a scenario that’s very bad for the Company. It’s that competition will exert deflationary pressures on price. Since cloud services are not capital intensive, the margins for a first mover like Amazon are tremendously high at the moment. As more and more companies begin to offer competing services, even if Amazon doesn’t lose market share, they could be pressured to begin dropping their prices/margins on AWS in order to compete with the other big vendors.

On the other hand, I’m not sure how much a lower margin would really matter to the stock price since Amazon’s retail segment has been running miniscule margins (comparatively to the industry) for so long and hasn’t been punished for it, but still something to think about

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Hey Saul, I was trying to find where you got your numbers. I think they might be off.

The Business Insider article, posted on Stock Advisor’s Amazon board, which I thought you might be referring to stated:

It’s still lagging behind Amazon. Microsoft doesn’t break out its Azure numbers, but the company’s overall cloud revenue, including Azure and the Office 365 cloud-productivity suite, is slated to hit $8.2 billion this year.

From http://www.businessinsider.com/why-amazon-is-so-hard-to-topp…

But, please note, that article is now a year old.

In Bert Hochfeld’s latest piece on Microsoft, he reviews their cloud revenue:

Microsoft, along with many other companies, reports its cloud revenues in many different buckets. Azure, because of its nature, and its gaudy growth rate, gets the most press. But from a financial perspective, the growth rate in overall commercial cloud, which includes Azure, and includes the cloud component of MS Dynamics, is probably the most significant. The run rate for commercial cloud exceeded $13 billion last quarter, its margin contribution improved by 800 basis points and it grew by 59%. Commercial cloud is still just 15% or so of run rate revenues for MSFT as a whole, but more than all of the growth that one might reasonably expect from MSFT in terms of both revenues and particularly, gross margin dollars is going to come from the growth of the commercial cloud and the improvement in its gross margins.

From http://seekingalpha.com/article/4013909-microsoft-oh-azure-s…

As Bert states, Microsoft reports their cloud numbers in many different buckets so its hard to get a firm grasp of them. That on top of Microsoft’s very confusing GAAP vs. non-GAAP reconciliations has prevented from really diving into Microsoft’s numbers.

Now Microsoft’s operating income from just their “intelligent cloud” segment (which includes Azure) was about $2 billion for the last quarter. Their revenue for that same segment was $6.4B last quarter.

Anyway, it appears some numbers were crossed and confused somewhere along the line.

Matt
Long AMZN, GOOGL, MSFT
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Hi Matt, I got my numbers from this article on the MF SA Amazon board:

http://discussion.fool.com/1081/duuudes-as-additional-followup-w…

The numbers certainly may be off and I can’t vouch for them as I don’t follow Microsoft or Google…

For those who don’t have access it got its figures from a current article in IBD
http://www.investors.com/news/technology/amazon-confronts-mi…
which states this:

Launched 10 years ago and now with annual revenue above $10 billion, Amazon Web Services has a dominant market share of 54% in the cloud computing segment referred to as infrastructure-as-a-service, says Pacific Crest analyst Brent Bracelin in a research note ahead of the AWS user conference.

Amazon is followed by IBM (IBM), with a 16% share, Microsoft at 12% with its Azure platform, Alibaba (BABA) at 4% with the Alibaba cloud platform and Google Cloud at 3%, Bracelin estimates.

Saul

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I’m having trouble figuring out what people are worried about with regards to Amazon’s competition in the cloud business from Microsoft and Google.

Don’t overlook the emergence of Alibaba into this fray. Though not an immediate threat, BABA is worth considering.

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Cloud Battle Gets More Intelligent (MSFT, AMZN)
By Richard Saintvilus | November 21, 2016 — 5:35 AM EST

Amazon.com, Inc.'s (AMZN) dominant cloud service Amazon Web Services (AWS) is now becoming more intelligent. But how advanced will AWS prove to be when compared with Microsoft Corporation’s (MSFT) competing platform Azure?

http://www.investopedia.com/news/cloud-battle-gets-more-inte…

Denny Schlesinger

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T present MS has the largest pool of cloud storage available of any of their competitors (I read that recently, bu have not verified it). Satya Nadella (MS CEO) made his cloud strategy central to his growth plans for MS. So far, it seems to be working.

Amazon has got more data centers than Microsoft. There’s no numbers on how much “storage” that translates to, but the general consensus is that AWS has got way more cloud capacity than Azure.

The main complaint about Amazon and Google is poor integration with the desktop and mobile apps

That is weird as Google is getting its growth mainly from mobile users - it boasts the best cloud integration for mobile app providers.

True, Microsoft is leveraging its products very well to build a cloud customer base but what needs to be said is that AWS offers many more features and the aforementioned higher capacity.

As you say, time will tell, but what you need to look for is not how much growth YoY the competitors post compared to each other. What you need to look for is how they divide the pie of each year’s new customers.

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Sorry, that was wrong thread.

What you need to look for is how they divide the pie of each year’s new customers.

Wow, thanks Stenlis, that really captures it. And Amazon signs up almost three times as much new cloud business as Microsoft, and six times as much as Google. They get to eat most of the pie!

Saul

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What about Adobe and Creative Cloud? Or is that too small and specialized?

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Or Apple?

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I’m not sure it makes sense to throw Office 365 into the cloud provider comparison. O365 is Microsoft Exchange, Word, Excel etc. It’s a different animal - a suite of apps aimed at businesses, that has a rich history of being delivered via purchase of CD/DVD and installed on a PC or a company server. Yes O365 is transitioning to being hosted as a service (not a product) in the Microsoft cloud, and yes it’s going well, but I’m not sure that’s relevant to Amazon and Google’s general cloud-hosting prowess. Or am I missing something?

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I’m not sure it makes sense to throw Office 365 into the cloud provider comparison. O365 is Microsoft Exchange, Word, Excel etc. It’s a different animal - a suite of apps aimed at businesses, that has a rich history of being delivered via purchase of CD/DVD and installed on a PC or a company server. Yes O365 is transitioning to being hosted as a service (not a product) in the Microsoft cloud, and yes it’s going well, but I’m not sure that’s relevant to Amazon and Google’s general cloud-hosting prowess.

It’s a legitimate cloud offering like any other. From an investor point of view Microsoft is just moving earnings from their software division into their cloud division, possibly changing from larger one time license sales into recurring revenue. Nothing wrong with that.

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I’m not sure it makes sense to throw Office 365 into the cloud provider comparison. O365 is Microsoft Exchange, Word, Excel etc. It’s a different animal - a suite of apps aimed at businesses, that has a rich history of being delivered via purchase of CD/DVD and installed on a PC or a company server. Yes O365 is transitioning to being hosted as a service (not a product) in the Microsoft cloud, and yes it’s going well, but I’m not sure that’s relevant to Amazon and Google’s general cloud-hosting prowess. Or am I missing something?

There is a version of Office that is completely Cloud based that is similar to what Google has with its Google Apps so revenue from that certainly should count.

There is also a version that still works like a stand alone installed version on the PC that also can utilize the One Drive storage of the cloud as part of the price of the software. That one is difficult place, to me it should be counted as “Office Revenue” as the software is installed on the PC but they give you something like 50GB of cloud storage for your Office files and email.

But there is a difference for MS to Google, for all the increase in Cloud revenue due to Office 360, it probably eats into the Office Application revenue.

For Google, it would all be incremental to them as they are taking it away from MS.

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Just summing up the numbers here.

AWS Revenue 2016: 14 billion with 46% growth

Azure Revenue 2016: 2.7 billion with 102% growth

Azure numbers an estimate from an analylst from the below link as Microsoft doesn’t actually reveal them:
https://thetechportal.com/2017/02/18/analysts-believe-micros…

Azure is therefore standing at 19% of AWS.

Azure is definitely a threat because of the rest of microsoft’s SaaS. But so far, nothing appears to have changed since November.

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