Profits in the Clouds

When you look at one of the major earnings themes over the past 12-18 months for Microsoft, Google, and Amazon specifically you observe the incredible growth in revenue from their cloud services businesses. I had remarked on Twitter, that Microsoft will be a case study in missing a major platform and still executing a turnaround. One of the major things driving Microsoft forward is their cloud platform, and it is one of the biggest parts of the bull case for Microsoft.

Similarly, for Google which still oddly reports Google Cloud Platform in their “other revenues” category, GCP (Google Cloud Platform) is a significant driver of their earnings, and while this “other category” includes hardware and app sales, the category grew a solid 37% driven largely by GCP.

AWS remains a significant growth category for Amazon. While they are yet to report Q2 2018 earnings, their Q1 2018 AWS revenue was up 49%. I expect more of the same when they report their Q2 earnings on July 26th.

This incredible growth in cloud revenue by these three companies is significant for a few reasons.

Cloud Services Will Drive Margins
Some quarters will yield more pure profit for these companies, but in the big picture, the margins on the cloud will be significant. Certain quarters where operating profits in their cloud businesses are down will be because of higher CapEx spends for these to compete. But overall, this category for Microsoft, Amazon, and Google will yield significant enough profits that it will allow them to take losses, or even wisely invest those profits in other areas of their businesses.

While we will talk about Alexa for Amazon, or Android (perhaps Fuschia next) or self-driving cars for Google, or Office and Augmented Reality for Microsoft, the reality is the cloud platform is the next major platform battle happening and these three companies are the leaders. This is where the foresight in these companies to build a cloud platform is admirable. And with Microsoft’s case, Azure will be viewed as the thing that saved them from falling into irrelevance after missing the mobile platform. Both Google and Amazon added these businesses during their growth curves, where Microsoft was the dominant platform in the PC era and completely missed mobile. For this reason, I consider Microsoft being right there competing with Amazon and Google for the next major platform as the most impressive business move of the three.

Cloud as the Next Platform
While there is a lot of game theory to flesh out on this point, I am beginning to believe the next major platform is not some operating system around augmented reality, etc., but truly the cloud platform backend. Everyone, including Apple at this point, will depend on either Microsoft, Amazon, or Google’s cloud platform for their backend business solutions. And most importantly, as machine learning and AI become the fundamental architecture that touches every single piece of hardware and software, these three platforms, and the proprietary AI/ML technologies they offer will become the invisible backbone of the vast majority of companies solutions.

Even as we think of things like self-driving/automated systems, even AR/VR, will all depend on one of those three cloud platforms to operate. Even as these solutions manifest themselves behind the scenes they will power all the interesting an unique solutions branded by businesses and companies dependencies on these third-party cloud platforms is no less significant.

As we look at these new cloud platform wars, the other important observation for this new era is that it is not a winner take all market. The PC Era was winner take all with Microsoft winning. The Smartphone era allowed for two winners in both Microsoft and Apple. The cloud era will offer at least three winners. There is a pattern here that is quite interesting that as the tech industry evolves, matures, and becomes more global touching 5 billion or more humans, the landscape allows for many winners, not just one.

As Google’s Cloud platform conference happens today, I’ll likely have some follow up thoughts to share on the competitive landscape and how the different competitive drivers for each platform impact their position in the market.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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