AWS and Microsoft reap most of the benefits of expanding cloud market

While it appears that overall economic activity could be slowing down, one area that continues to soar is the cloud business. Just this week, Amazon and Microsoft reported their cloud numbers as part of their overall earnings reports.

While Microsoft’s cloud growth was flat from the previous quarter, it still grew a healthy 76 percent to $9.4 billion, or a $37.6 billion run rate. Meanwhile AWS, Amazon’s cloud division, grew 46 percent to $7.4 billion, or a $29.6 billion run rate. That’s up from $5.11 billion a year ago. As always, it’s important to remember that it isn’t necessarily an apples to apples comparison, as each company counts what they call cloud revenue a little differently, but it gives you a sense of where this market is going.

Both businesses also face the law of large numbers in terms of growth; that is, the bigger you get, the harder it is to keep growing at a substantial rate. The two companies are doing quite well, though, considering how mature their offerings are.

Last year Synergy Research reported the overall cloud market worldwide grew 32 percent to $250 billion. In Synergy’s last report on cloud market share in October, it had Amazon well in the lead, with around 35 percent and Microsoft around 15 percent. A Canalys report from the same time period had AWS with 32 percent and Microsoft with 17 percent, so close you could call it a tie for statistical purposes.

Alibaba just reported earnings was up 84 percent, but only have a small worldwide market share. IBM, which bought Red Hat for $34 billion last year hoping to grab a bigger piece of the hybrid cloud market, reported cloud revenue was up only 12 percent for 2018 in its earnings report last week, which seems pretty paltry compared to the rest of the market. It’s worth noting that the Red Hat sale won’t close until later this year. Google will be reporting at the beginning of next week, but has not been breaking out cloud revenue recently. It will be interesting to see if that changes.

Most experts agree that we are just beginning to scratch the surface of cloud adoption and that the vast majority of workloads are still locked in private data centers around the world. That means even if there is a broader economic downturn in the future, the cloud could be somewhat insulated because companies are already in the process of moving parts of their businesses to the cloud.

As these companies grow, it requires increasing numbers of data centers to deal with all this new business, and a Canalys report found that Microsoft and Amazon have been busy in this regard. Amazon currently has 60 cloud locations worldwide, with another 12 under construction. Canalys reports that the company’s CapEx spending (which includes non-data center spend) reached $26 billion, up a modest 7 percent. Meanwhile Microsoft, which is chasing AWS, had much more aggressive infrastructure spending, with expenditures up 64 percent to $14 billion.

You can expect that unless something drastic happens, the market pie will continue to expand, but the numbers probably won’t change dramatically as these two market leaders have hardened their market positions and it will become increasingly difficult for competitors to catch them.

Amazon’s AWS continues to lead its performance highlights

Amazon’s web services AWS continue to be the highlight of the company’s balance sheet, once again showing the kind of growth Amazon is looking for in a new business for the second quarter — especially one that has dramatically better margins than its core retail business.

Despite now running a grocery chain, the company’s AWS division — which has an operating margin over 25 percent compared to its tiny margins on retail — grew 49 percent year-over-year in the quarter compared to last year’s second quarter. It’s also up 49 percent year-over-year when comparing the most recent six months to the same period last year. AWS is now on a run rate well north of $10 billion annually, generating more than $6 billion in revenue in the second quarter this year. Meanwhile, Amazon’s retail operations generated nearly $47 billion with a net income of just over $1.3 billion (unaudited). Amazon’s AWS generated $1.6 billion in operating income on its $6.1 billion in revenue.

So, in short, Amazon’s dramatically more efficient AWS business is its biggest contributor to its actual net income. The company reported earnings of $5.07 per share, compared to analyst estimates of around $2.50 per share, on revenue of $52.9 billion. That revenue number fell under what investors were looking for, so the stock isn’t really doing anything in after-hours, and Amazon still remains in the race to become a company with a market cap of $1 trillion alongside Google, Apple and Microsoft.

This isn’t extremely surprising, as Amazon was one of the original harbingers of the move to a cloud computing-focused world, and, as a result, Microsoft and Google are now chasing it to capture up as much share as possible. While Microsoft doesn’t break out Azure, the company says it’s one of its fastest-growing businesses, and Google’s “other revenue” segment that includes Google Cloud Platform also continues to be one of its fastest-growing divisions. Running a bunch of servers with access to on-demand compute, it turns out, is a pretty efficient business that can account for the very slim margins that Amazon has on the rest of its core business.