COVID-19 means work, learning, and life in general are increasingly happening online. Shouldn’t that mean more cloud usage and thus more cloud revenue? Yes, and it does. But that doesn’t necessarily translate to more cloud revenue growth for the three tech giants. Microsoft reported its fiscal Q4 2020 earnings last week, while Amazon and Alphabet reported their respective Q2 2020 earnings yesterday. We thus now have a full quarter of results for the three biggest cloud providers during the coronavirus pandemic.
The good news is that they’re all still generating more billions of dollars than ever. The “bad news” is that growth slowed more quickly than before. All sorts of industries rely on the cloud, from keeping their websites up to using the latest cutting-edge machine learning models. The slowing cloud revenue growth doesn’t mean any of that is going away. It’s a sign that businesses are sagely cutting costs and driving for efficiency.
Amazon Web Services
Amazon is the market leader and also the only one that properly breaks out its cloud revenue number. In Q1, Amazon Web Services (AWS) passed the $10 billion revenue milestone. In Q2, AWS growth fell to 29% — its first sub-30% growth rate since Amazon started breaking out AWS numbers. The growth rate has been falling steadily for the past two years, and COVID-19 didn’t help:
$AMZN AWS revenue growth
– Q1 2017: 43%
– Q2 2017: 42%
– Q3 2017: 42%
– Q4 2017: 45%
– Q1 2018: 49%
– Q2 2018: 49%
– Q3 2018: 48%
– Q4 2018: 45%
– Q1 2019: 41%
– Q2 2019: 37%
– Q3 2019: 35%
– Q4 2019: 34%
– Q1 2020: 33%
– Q2 2020: 29%https://t.co/r0XghGABL2
— Emil Protalinski (@EPro) July 30, 2020
A four percentage-point drop is significant, but as you can see, AWS has seen such declines twice before.
The concern is, given the current environment, whether this decline will continue. On the Q2 earnings call, Amazon CFO Brian Olsavsky was asked about today’s pace of IT decision making and whether AWS is being impacted by some clients that are more highly exposed to challenged verticals. Here was his response:
So in AWS segment revenue, what we see is companies working really hard right now to cut expenses, especially in the more challenged businesses like hospitality and travel, but pretty much across the board. We’re helping them. We’re actively, with our sales force, looking for ways that we can help them save money. This includes things like scaling down the usage where it makes sense or benchmarking their workloads against our architectural best practices. So that’s not going to help our usage growth in the short run, but it’ll help those customers save money, and we think that’s the right thing to do, not only for their success, and so they can come out of this at a better shape, but also for the long-term health of our relationship with them as an AWS provider.
But we’re also seeing a lot of companies that are really wishing that they had made more progress on the cloud because they’re seeing how companies that are on the cloud can turn into a variable cost and scale up or scale down, depending on their particular situation. They realized their on-premises infrastructure is not really flexible to go up or down. And especially in the time of sinking demand, it’s a big fixed cost for them. So, we expect — we’re seeing migration plans accelerate. That’s certainly not going to happen overnight, but we see companies moving more in that direction. We think that will be a good long-term trend. And there are certainly winners in this area right now. Things like videoconferencing, gaming, remote learning and entertainment, all are seeing usage growth. And it’s a bifurcated world out there.
So Amazon is helping its AWS customers cut expenses, but it’s also still seeing enterprise interest in migrating to the cloud. This was the most succinct response of the trio.
Cloud growth has been slowing at Microsoft for years as well. In the most recent quarter, Azure growth fell to 47%. Like with AWS, slowing growth is normal at Azure’s size, but again COVID-19 didn’t help:
$MSFT Azure revenue growth
– Q1 2018: 90%
– Q2 2018: 98%
– Q3 2018: 93%
– Q4 2018: 89%
– Q1 2019: 76%
– Q2 2019: 76%
– Q3 2019: 73%
– Q4 2019: 64%
– Q1 2020: 59%
– Q2 2020: 62%
– Q3 2020: 59%
– Q4 2020: 47%https://t.co/wJNRYep9CB
— Emil Protalinski (@EPro) July 22, 2020
A 12 percentage-point drop is the first double-digit decline for Azure.
On last week’s earnings call, Microsoft CEO Satya Nadella was asked about the net impact of the current environment on Azure, including lower consumption growth among highly impacted industries, acceleration in digital transformation more broadly, and pay-as-you-go type arrangements. Here was his response:
Even in industries that have been impacted, say, economically, getting to the new efficient frontier of cloud economics is one way for them to in fact do better as they get into recovery. Right. So one of the things that we’re seeing in fact is some acceleration even of getting rid of the old and getting to the efficient frontier, so that then they can recover faster.
That doesn’t mean that some places where there is absolute real shutdown of economic activity, there isn’t a slowdown. But where people are looking to using that as an opportunity to come out stronger, we do see that. For sure, pay-as-you-go on Azure is going to increase and is increasing, and we are fundamentally focused on wherever people want to have this long-term commitments as well as pay-as-you-go customers. So we don’t in some sense discriminate between the two. What we want to be able to stay focused on is quarter over quarter, consumption growth by adding value to customers’ digital transformation projects.
That’s a lot of flowery language that amounts to “yes, our customers are looking to cut costs and/or pay only for what they use.”
We don’t have the same historical data for Google Cloud because Alphabet began breaking it out only two quarters ago. We have three data points: Google Cloud revenue was up 53% in Q4 2019, up 52% in Q1 2020, and up 43% in Q2 2020.
Somehow I doubt a nine percentage-point drop for Google Cloud in the same quarter that AWS and Azure also slowed is a coincidence.
In fact, it could have been worse. Google’s cloud division includes revenue from Google Cloud Platform as well as G Suite, making the comparison with other public cloud providers difficult. Google has consistently said that GCP growth tends to be higher than the cloud division overall, meaning G Suite’s growth is lower. On the Q2 earnings call, Google CFO Ruth Porat said that G Suite brought in more money because of a price increase:
Overall, the lower Google Cloud revenue growth in the second quarter relative to the first quarter reflects the fact that G-Suite lapped a price increase that was introduced in April last year. G Suite maintained a healthy growth in average revenue per seat as well as in seat growth, which does not include customers who took advantage of our free trials as they shifted their employees to work from home.
Also on the call, Alphabet and Google CEO Sundar Pichai was asked about the change in pace of customers migrating workloads to the cloud given COVID-19. He dodged the question:
Overall, from my vantage point, obviously with Google Cloud, we’ve been investing to scale up, especially on the people side, on engineering, go to market, and then obviously on our investment side with datacenters, cloud regions, and so on. So for me it’s been good to see as we are scaling up, we are executing more effectively. I’ve been personally involved in many, many conversations last quarter. We had many large customers come on to Cloud, big telco deals and banking deals, Deutsche Bank as an example. So overall I felt the momentum was strong, generally felt like things were continuing well through the course. Felt like more a secular interest in our digital transformation. Companies are deeply thinking long-term and planning for it. So overall I felt that the momentum was there, and I felt our execution as we are scaling up, obviously we are scaling up a lot, and so, the combination is working well.
Your second question in terms of puts and takes. Overall, I don’t know whether there’s anything significant worth me highlighting. Obviously you are right to point out that it doesn’t affect everyone the same, but nothing significant for me to highlight here today.
Again, Pichai had less to answer for than his counterparts at Amazon and Microsoft. To investors, Google Cloud is still a new line item. Plus, they were probably more concerned with Alphabet’s first revenue decline since going public. The positive cloud figure was the saving grace.
Putting it all together
Cloud revenue growth was already in decline. It declined further in the first full quarter under the coronavirus pandemic because some businesses are using the cloud less, and while many are using it more, everyone is trying to cut costs.
Businesses figuring out which cloud services are critical to their operations is a good thing. It’s a very healthy exercise for businesses to examine their costs so they only pay for what they actually use.
Amazon, Microsoft, and Google should not be concerned. If the growth suddenly flatlined, that would be a different story. Growth may have slowed to its lowest rate yet, but Q2 2020 was still the best quarter for cloud revenue to date. No one in their right mind would complain about a billion-dollar business that grows 29%, 47%, or 43% in these crazy times.
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