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AMG (Amazon, Microsoft, and Google, the leading cloud providers) reported their quarterly results last week, with many decrying the results and predicting that cloud computing has downshifted permanently to a lower growth rate.
AWS revenues, for example, came in at $20.5B, lower than analyst estimates of $21.1B. As can be seen from the below chart, AWS’s steady up-and-to-the-right trajectory definitely leveled off.
As can be seen by looking at aggregated AMG revenues, the three giants totaled just over $40B ($41.4B, to be exact). Aggregated growth, however, dropped to 24%.
As a result, many pundits took to the airwaves — particularly outlets like CNBC — to discuss how these results reflect a permanent state of affairs. They opined that that the cloud providers will remain mired in mid-20 percent growth rates, consigned by the law of big numbers and, well, an unspecified anti-cloud customer malaise, to a dimmer future.
Some intimated that this quarter is just the first downward step in a future that will show growth rates coming to rest in the mid-teens — good but a far cry from the spectacular numbers of the past.
So is that it? Are AMG financials about to drop off a cliff? Is cloud computing about to become boring?
Maybe so. But drilling down a bit deeper may tell a different story.
Also see: Why Cloud Means Cloud Native
Recession, Exchange Rates, and Fear, Oh My!
You might have noticed that the last couple of years have been a wild ride. We have had a terrible, ongoing pandemic challenging existing business and living arrangements, creating a business environment so unsettled as to make planning difficult. In such an environment, businesses pull back and hunker down, reducing their appetite for investments in new technology.
Associated with COVID have been supply chain woes. Manufacturers had a difficult time obtaining parts. Shipping companies couldn’t offload all their containers. Trucking companies experienced driver shortages. I can attest to this supply chain misery; I was recently told a new dishwasher I wanted to buy had a one year (!) backorder timeframe.
Added to supply chain disruptions is a general labor shortage — it seems every business large and small is unable to hire enough people and as a result pays more to employees it can land. So wages are up.
The net result of all of this disruption has been inflation. Consequently, the US Fed is applying its traditional medicine — increased borrowing costs via rate hikes. These hikes have brought on recession fears. This is another reason businesses have slowed their cloud adoption plans — after all, if a recession occurs, company revenues will drop and corporate spend needs to be reduced.
A Specific Factor
Beyond this natural tendency of avoiding risk during unsettled times, there is a specific factor that affected AMG growth rates this quarter. As noted, the US Fed has increased interest rates sharply. Beyond making borrowing money in the US more expensive, this has made the US dollar more attractive to international investors, and the result is that most global currencies have depreciated against the dollar.
This depreciation has affected AMG quarterly results. The exchange rate changes over the past few months mean that quarterly growth rates look smaller, driven by converting cloud services priced in, say, Euros, to the higher dollar exchange rates.
Microsoft, for example, stated that Azure revenues would have been 7% higher were it not for exchange rate changes. Synergy stated that “had exchange rates remained stable and had the Chinese market remained on a more normal path, then the growth rate percentage would have been well into the thirties.”
In other words, taking “well into the thirties” as implying at least 33%, the growth rate, instead of 24%, would have been at least 9% higher. One guesses that adding 9% to AWS revenues would have comfortably put them above financial analyst predictions, resulting in far less sturm and drang media commentary.
The Synergy analyst went on to say “Despite that all three have increased their share of a rapidly growing market over the last year, which is a strong testament to their strategies and performance.”
I think it’s fair to say that lost in the general financial analyst anxiety is the fact that, despite the disappointing numbers, AMG are in overall terrific condition. To make the point very obvious: this is a $180B market growing at 24%. That is by far the most important trend in the industry.
this is a $180B market growing at 24%. That is by far the most important trend in the industry.
CFOs Say “Enough!”
An interesting breeze in the cloud zeitgeist the past few months has been a rumor of a cloud backlash from CFOs and corporate finance groups. I’ve heard this from industry friends and observers. The driving force of this backlash: cloud is too expensive. The response: a demand that cloud migration stop.
Some of my contacts say this is taken as far as insisting applications currently deployed in the cloud be deployed back into company data centers.
The rationale for this demand goes something like this:
- Cloud was supposed to solve a bunch of problems with our on-prem environments — like extended resource deployment timeframes and poor resilience.
- We issued a mandate that everything move to the cloud really quickly.
- Now that we’ve moved to the cloud, it’s costing a lot, which we don’t like.
- So let’s stop moving to (or move back from) the cloud.
Left unsaid in this rationale is the common expectation that using cloud computing is cheaper than running your own data centers. I don’t know if one should believe this in general, but for sure expecting to move applications in a hurried manner and have them run better and cheaper is naive, to say the least.
The truth is, running an application cost-effectively in the cloud means understanding the characteristics of cloud environments and architecting and operating the app consistently with those characteristics. That is why I wrote an article last year called “Why Cloud Means Cloud-Native,” in which I describe achieving the best application results means adopting a new set of practices, commonly referred to as “cloud-native.”
The best case for this recent trend is as a reaction to the rocky economic times we’re experiencing. When finances are tough, it’s appropriate to trim spend as much as possible. It’s typically cheaper to maintain an app as-is on-prem than to make the investment to move it to the cloud, either unchanged or rearchitected to cloud-native.
But thinking that halting cloud adoption is a long-term smart move is wrong. After all, there are powerful reasons to move out of one’s own infrastructure environment — remember the “extended resource deployment timeframes and poor resilience” mentioned above? Those problems stay unsolved if the app never moves.
I predict that this cloud backlash will prove a short-lived phenomena. In tough economic times, the CFO has the upper hand and can impose spend discipline; in better times, which will inevitably re-emerge, the business units are able to demand action as a way to grow revenues.
Also see: Top Cloud Companies
What Does the Future Hold?
So today we have turmoil and a newly-found enthusiasm for reducing cloud spend. Does this mean AMG’s future is less bright?
A hint comes from IDC. Analyst firms have the widest field of view in the industry and should be able to predict how cloud computing looks over the next decade.
In an interesting blog post discussing the less-than-stellar quarterly cloud results, the author included this chart:
In the lower right hand corner is a box containing “4x Growth in New Cloud-native Apps by CY25” along with a footnote number. In the footnote (in very tiny print, for which I apologize) it says “IDC — 750 Million New Logical Applications,” along with a report identifier. Left undefined is exactly what a logical application is. But let’s take it as representing a complete set of code implementing a business function.
Based on this reading, I interpret the number as an IDC prediction that users will deploy a huge number of new applications into AMG over the next three years. If one applies a very conservative annual cost per application of $1,000, that would come to $750 billion, an astonishingly large number.
However, from an arithmetical perspective, that number is roughly four times the current AMG revenues of an annual $160B. So it’s internally consistent with the as-is state.
I have to say that I am not convinced of IDC’s prediction, but not based on a smaller future potential opportunity for AMG. As I projected in another article, AMG have a very believable TAM of $4T, with a potential TAM of $8T or more.
So I don’t disagree with IDC on the magnitude of the opportunity they foresee. Where I part ways with the firm is how quickly this opportunity can be realized. There are constraints on how quickly applications can be moved into AMG. Writing (or rewriting, or lifting-and-shifting) the applications, migrating data, putting operational support into place — not to mention AMG themselves installing enough infrastructure to host so many applications — make a three year journey to 750 million applications very suspect.
But I agree with IDC on the overall scale of the opportunity. The potential for AMG probably accounts for their continued capital investment today despite poor current results. As this article points out, both Amazon and Microsoft said during their quarterly results calls that they plan to increase capital spend for their services this year, despite the “poor” results and ongoing economic turmoil. That’s the mark of a company that expects lots of future growth, not that a single sub-par quarter portends a longer-term trend.
…both Amazon and Microsoft said during their quarterly results calls that they plan to increase capital spend for their services this year, despite the “poor” results and ongoing economic turmoil. That’s the mark of a company that expects lots of future growth, not that a single sub-par quarter portends a longer-term trend.
I don’t know if AMG will re-attain their former growth rates. It can certainly be argued that they’re starting an inevitable drop in revenue growth, if for no other reason that they make so much revenue now that a slowdown is likely. But that shouldn’t be interpreted as a bleak future. Cloud adoption is a long-term, irresistible trend. Short term problems aren’t going to hold back the future for long.