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What the slowdown in Amazon's cloud growth means for Google and Microsoft

With Amazon Web Services' growth rate continuing to decline over successive quarters, what does this mean for its cloud rivalry with Microsoft and Google?

Any company that enjoys a meteoric rise to market dominance will face questions from industry watchers about how long its reign can continue for, and cloud giant Amazon Web Services (AWS) is no different.  

Over the course of the past decade, the company has played a not insignificant role in shaking up the status quo of enterprise IT, as CIOs have increasingly come to realise the limitations imposed on their business by continuing to invest in on-premise datacentres.

AWS has also attracted its fair share of detractors, namely in the form of rival IT suppliers intent on taking the company on.

Only a couple, mainly Microsoft and Google, appear to have made much in the way of a dent in the company’s hold on the market, and with the company’s growth rate slowing down, is its assured position as the leader of the cloud infrastructure services market in jeopardy?

Amazon only began sharing details in early 2015 about how big a contribution its cloud business activities make to the retail giant’s overall financial performance, with the firm’s second quarter results revealing AWS alone had banked $1.82bn in revenue, up 81% on the previous year.

Since then, though, the company’s year-on-year revenue growth rate has slowly, but steadily, declined during successive quarters, from 78% in Q3 2015 to 43% in its latest set of financial results (Q1 2017), published on 27 April.

The results tracked the performance of AWS during the three months to 31 March 2017, during which the company banked a profit of $890m and made revenue of $3.66bn, while retaining an operating margin of around the 24% mark.

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During a conference call to discuss the results, transcribed by Seeking Alpha, the slowdown in revenue growth went unremarked upon, while the company’s chief financial officer, Brian Olsavsky, said Q1 performance of AWS makes it a bone fide $14bn run rate business.

“We’re happy with the business and the team, and again, for us innovation is going to be key as we move forward,” he said.

The company is widely considered to be the one to beat by IT analysts and market watchers within the infrastructure as a service (IaaS) market, followed by Microsoft and Google, with the economies of scale it operates at (and the price cuts this allows it to pass on to customers) often cited as being instrumental factors in its success.

Such a business model is only viable long-term, providing the services on offer are being consistently consumed, and in ever-growing amounts, by customers, which is clearly the case with AWS.

To ensure that continues, AWS is renowned for reinvesting in its platforms, allowing the company to either roll out new standalone offerings or to expand the feature-set and functionality of its existing ones to encourage its customers to maintain and deepen their investments in its services.

Rivals poised to play catch-up

Kate Hanaghan, research director at UK-based IT analyst house TechMarketView, said that while AWS’s revenue growth rate remains higher than those reported by the wider “traditional infrastructure services” market, it is now in a position where others are better positioned to play catch-up with it.

“Whichever way you look at it, growth of more than 40% is not be sniffed at and, of course, it blows the traditional infrastructure services market growth rate out of the water,” said Hanaghan, in TechMarketView’s daily subscriber alert. However, it is a figure that some traditional players are able to compete with in their own fast-growing cloud businesses.”

Expecting the company to consistently deliver revenue growth in the region of 80% is unrealistic, given AWS is a far larger organisation than it 12-18 months ago.

During that time, its rivals – Microsoft and Google – have fine-tuned their own growth strategies, ramping up the competitive pressure AWS now finds itself under too.

To back this point, Hanaghan pointed to the fact Microsoft’s third quarter results, also published 27 April, saw the software giant declare its Commercial Cloud division a $15.2bn run rate business, having reported a 52% uptick in year-on-year revenue.

The division oversees the work of Microsoft’s public cloud platform, Azure, as well as its business productivity and line of business applications, including Office 365, Dynamics 365 and its enterprise mobility offerings.

Breathing space between Microsoft and AWS

The revenue generated by Azure alone was up 93% in Q3, said fellow TechMarketView research director Angela Eager, but there is still plenty of breathing space between Microsoft and AWS in the cloud for now.

“This is the second consecutive quarter with this level of Azure growth, so traction is strong and increasing – but it no doubt has a long way to go to catch up with AWS,” she said.

Google’s parent company, Alphabet, also released its Q1 results on 27 April, where the firm’s cloud activities were similar hailed as being a major contributor to the fact the firm accrued $24.8bn in revenue during the three months to 31 March – up 22% on the previous year.

Unlike AWS and Microsoft, Google does not separate out the contribution cloud makes to its overall financial results, making it difficult to provide much in the way of a side-by-side comparison of how its infrastructure (IaaS) and software as a service (SaaS) activities perform against its competitors.

Even so, on a conference call to discuss its Q1 results, Ruth Porat, chief financial officer of Alphabet, described Google Cloud as being one of the fastest-growing parts of the company’s overall business, fuelled by the adoption of its platform by a slew of enterprise customers.

Making Google more enterprise-friendly

Google CEO Sundar Pichai continued this theme elsewhere on the call, where he appeared to reference the changes the company has embarked upon over the past two years to reorganise its cloud business to make it more enterprise-friendly.

This process began in earnest in late 2015, with the hiring of VMware founder Diane Greene, to oversee the running of its newly unified cloud infrastructure and software business.

“There is a strong recognition that we have pivoted to being a deep enterprise company, and our conversations are very strategic. We are engaging at the highest levels within companies and I can see qualitative lead and momentum there,” he said.

“When we are in the middle of deals, we find we are very competitive, and there are areas where customers perceive us as best-in-case already. So it’s been exciting to see.”

Furthermore, at the recent Google Next user conference in San Francisco, the company credited the growing appetite within enterprises to source cloud services from multiple providers as giving it an entry point into deployments that were previously the exclusive preserve of AWS.

AWS still in a league of its own

Even with two of its major competitors mobilising and reporting strong growth, AWS remains in a league of its own, according to John Dinsdale, chief analyst and research director at Synergy Research Group, and “substantially larger” than its next five competitors combined.

“While [AWS] is maintaining a steady market share in a rapidly growing cloud market, there is a chasing group of five major cloud providers, each of which is achieving growth rates higher than AWS,” he said

“The law of large numbers almost dictates that the AWS growth rate has to moderate, but it does continue to grow at a similar pace to the overall market and is therefore maintaining its overall market position.”

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