The Skies Look Gloomy for Big Tech’s Cloud Ambitions

For a while, cloud computing was Big Tech’s cash machine. As the digital economy grew, companies across the economy developed a greater need for flexible data storage and processing power. This created an opportunity for tech companies to rent out such capacity. The pandemic accelerated the trend, creating years of good news for AlphabetMicrosoft

Their cloud computing businesses are still getting bigger, but not as quickly as they once were. The rate of growth for each of the three market leaders in the fourth quarter fell at least 10 percentage points from the previous nine months. That’s partially because a shaky economy means “every dollar is being inspected” at existing customers, says Rikin Shah, founder and chief executive officer of Slower.ai, which helps companies migrate to the cloud. Most cloud infrastructure is priced based on usage—so customers can lower their bills by simply using less. Amazon.com Inc. Chief Financial Officer Brian Olsavsky said on a Feb. 2 earnings call that mortgage lending and crypto trading were two examples of the many slowing industries dragging cloud growth.

For the first time in the history of the industry, there are signs that the amount of business migrating to the cloud is slowing. The companies for which the transition made the most sense have already done so, meaning the customers doing so now often have more complicated and time-consuming projects. This complexity can mean newer customers are less lucrative for cloud providers than the ones they signed up in the past.

This is an uncomfortable shift for Big Tech, which has seen renting out computing power and storage as an attractive second act. Amazon Web Services generates less than one-sixth of Amazon’s revenue, but the company wouldn’t be profitable without its cloud division. Microsoft Corp.’s Azure has fueled a revenue resurgence in the past decade. Alphabet Inc.’s Google, which lagged behind its main rivals in starting a cloud business, is hoping its still-unprofitable cloud division will help the company diversify beyond advertising. (Alibaba Group Holding Ltd., the Chinese tech titan that’s the fourth-largest global cloud provider according to Synergy Research Group, has fared worse than US counterparts in recent months, because of a broader economic slowdown in China.)

As they rushed to the cloud, many businesses didn’t find the most cost-effective ways to carry out the transition. Some of them are now focused on reducing their cloud computing expenses, according to Dave McCarthy, a vice president at IDC’s infrastructure practice. “If cloud cost optimization wasn’t already high on the priority list for CIOs, now it is,” he says. This cost-consciousness is a sign the market is maturing, says Sid Nag, a vice president at Gartner Inc.

Microsoft CEO Satya Nadella described the new atmosphere on an earnings call on Jan. 24. “Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend,” he said.

The growth isn’t exactly coming to an end. The cloud makes up only about a fifth of the almost $1.9 trillion annual IT market globally and has plenty of room to grow, according to Bloomberg Intelligence analyst Anurag Rana. The next phase of expansion will be spurred by big companies that have long used on-premises servers and storage shifting to rented computers over the internet, Rana says.

Industries such as finance and health care are often cited as holdouts. Oracle Corp., which has also been slow to build out its cloud business, spent $28.3 billion in 2022 to acquire Cerner, a provider of electronic health records, in part as a bet on the hard-to-crack market. New artificial intelligence products including OpenAI’s ChatGPT and Google’s Bard could provide significant cloud demand if they grow as expected. Nadella said in Microsoft’s earnings call that Azure’s machine-learning revenue has at least doubled for five consecutive quarters.

Still, the promise of economywide cloud conversion has been delayed, inspiring leaders to think about their next big bet. Much of Amazon’s Feb. 2 earnings call focused on the slower AWS growth. But CEO Andy Jassy ended the meeting by looking beyond the cloud. He reflected on which future investment could transform the company again.

“Think about how different a company Amazon would be today if we hadn’t invested in AWS—that informs some of the other meaningful investments we’re making,” Jassy said, citing health care and a plan to launch thousands of internet satellites into Earth’s orbit. “It only takes one or two of them becoming the fourth pillar for Amazon for us to be a very different company over time.” —With Dina Bass and Julia Love

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