AWS, Azure, GCP. What makes them different in the eyes of customers? - research
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Hi everyone,
the cloud industry is one of the biggest tech subsectors of the last decade. It will be the most important subsector in technology in the future, which is why I follow the industry very closely. It is also the biggest sector in my portfolio. This article is about my recent research on the three big cloud hyper scalers: AWS from Amazon, Azure from Microsoft, and GCP from Google. Given the recent revelations, I am breaking down three key things about these companies:
Size – how big are AWS, Azure, and GCP? Do we finally have the data?
How do clients perceive them? What makes each of them unique? A qualitative analysis analyzing more than 100 expert interviews and their opinions and quantifying the results.
Outlook for the cloud industry in the short and mid-long term
Let’s dig in.
Size
Documents filed by the U.S antitrust regulators this month shed light on the size of Microsoft's public cloud business Azure. The filings were later removed from the court website. This was the first time investors got a glimpse of how big Azure is, given that Microsoft doesn't break down the size of Azure in its earnings results (just the growth rate). This has kept many analysts wondering about the size of Azure. So what did the filings show?
The court filings revealed that Microsoft's Azure business had $34B in revenues in the 12 months ending in June 2022. This was less than half of Microsoft's competitor Amazon's AWS unit's revenue in the same period. This was a slight shock for those following the industry as many analysts were already modeling Azure to be in the 70-80% of AWS size by now.
But now that we have the numbers, we can do a more accurate analysis of the current market share of each prominent cloud provider and how they are growing in relative and absolute terms.
So if we take the data from the court filings together with public data on AWS and GCP, the revenue breakdown on June 22 looks something like this:
AWS - $72B in revenue
Azure - $34B in revenue
GCP - $22.6B in revenue
Of course, these 3 are not the only public cloud providers, but they control most of the market. So for a more straightforward calculation, if we say that these 3 have 100% of the market, the market share breakdown would be the following:
Now that we have an anchor point on June 2022, we can also estimate how each cloud player, based on growth rates, is growing in market share. We will soon get Q2 2023 results which will make the comparison even more accurate, but already with Q1 2023 data, we can make rough assessments.
Last Q1 2023 growth rates for the three cloud players were:
AWS - + 15.8% YoY
Azure + 27% YoY
GCP - + 28% YoY
So if we put that figures in absolute terms, that would mean AWS would, at that growth rate, add roughly $11.37B per year of new cloud revenue, Azure $9.18B, and GCP $6.34B.
Based on this, we can estimate how new cloud budgets are being shared between these three players:
Again, I want to remind everyone that this is not 100% accurate as the compounding effect also changes things and because we didn’t have Q2 data but Q1 data, but still, given the recent data, this is as close to an estimate as any.
Regarding these findings, the size of Azure vs. AWS at this point is disappointing to me. Yes, AWS had the first mover advantage, but let’s be honest AWS launched for the public in 2006; Microsoft launched their cloud platform named “Project Red Dog” in 2008 and was 2010 renamed to Azure. But in those early years, AWS did not generate much revenue. AWS revenue in 2010 was around $500M. So yes, it’s a head start, but the “base” was not that big, and it’s been more than 13 years since then. On the other this data shows that GCP is much closer to Azure that what I or many other analysts were expecting. While profit margins are still a secret at Azure, GCP in the last quarter for the first time showed a profit, while AWS was profitable for quite some time now.
How are AWS, Azure, and GCP different in the eyes of clients?
For this part, my team and I analyzed hundreds of interviews with former employees, clients, competitors, and other industry experts. And we did this because these interviews when summarized and analyzed in bulk, give a clearer picture of where some of these companies have advantages or disadvantages and why customers choose one or the other. I believe these expert given their experience and background, industry position give a better picture of the qualitative advantages and disadvantages of these companies than an average cloud client.
To understand the quality, these findings were taken from interviews with former Amazon, Google, and Microsoft employees and from people working at companies like IBM, Box, Salesforce, AT&T, Riot Games, Carrefour, Fastly, and many more. We took only the most recent data in this research from the last few months of this year. We went through these interviews and then quantified the insights into numbers. We then ranked these findings into a spider web matrix. The final matrix comprises more than 50 of the most relevant views from these industry experts.
Before going to the spider web graph, here are a few general findings when conducting this research.
A general view is that there are not a lot of differences in the offerings and product quality of these three cloud providers. Clients have gotten used to AWS and Azure being similar products, but GCP has grown to a level that is now also mentioned most often with the other two. That was not the case back in 2017 when GCP was often not on clients' minds when choosing a prominent cloud provider.
The second thing is security and reliability. Going into this research, I expected many of these experts to talk about security & reliability as a significant factor in deciding which cloud provider to choose, but the opposite turned out to be true. Security and reliability were brought up in a very small number of times. The concept that prevailed here is that security and reliability are tables stakes. It is perceived as default that all these three providers have the best security and reliability when using their services. Clients expect this as default, so they do not differentiate them based on that. That could change big if we had a big data breach event or something at one of the providers.
Another thing that came up often was having a multi or hybrid cloud strategy. While this is growing in popularity, it is only present with big companies rather than smaller ones because maintaining two cloud environments is expensive in training the internal team and developers. In addition to this, a lot of experts mentioned that it is hard to switch cloud providers because of data transfer costs but also again because you build out your internal developer team based on the products/services that one of the cloud providers offers, so switching to another requires a lot of training also from your team which is probably the biggest hassle in any organization.
Now let's see at the spider matrix on what these interviews showed as the most significant differentiation factors between the three hyper scalers:
By far, the thing mentioned most often in these interviews is that Azure benefits immensely from Microsoft's ecosystem and Microsoft's ability to leverage the company's portfolio of clients to sell them Azure. The clients are onboarded more easily because they already have relationships with Microsoft products like Office365, Dynamics, etc. And the sales teams at Microsoft already know these clients.
The finding is that clients do not make decisions based on who has the best generative AI features, at least for now. But what is clear from our research is that GCP is seen as the leader in AI/ML. In fact, GCP used to be well known strictly for AI/ML, but before this AI boom that we had in the last year, clients were more focused on essential infrastructure services than AI. Even though Microsoft now has the factor of OpenAI, when it comes to non-generative AI features, it is viewed in line with Amazon's services and behind Google.
Another thing that was confirmed is also the fact that AWS has the most dominant base of startups and cloud-born companies, while Microsoft is the strongest on the enterprise level. Regarding startups, GCP is also better positioned in the client's eyes than Azure.
GCP is also the only one of the three viewed as a "backup cloud provider," while the other two are less and more the leading cloud provider. This makes sense, given its position as the number 3.
A thing frequently mentioned was that AWS is often perceived as a competitive threat to some clients, so some stay away from it. The examples cited are the retail industry. It was also mentioned multiple times that AWS often competes with its partners and other SaaS providers. Examples of this were from the open-source products, which AWS takes and offers their generic version of the product (MongoDB, Elastic…). Also, not to forget Netflix is one of AWS's biggest clients, yet Amazon, with Prime Video, is a direct competitor.
Regarding partnerships, Microsoft has the most build-out network out of all. A former employee at Microsoft explains that 95% of Azure business is coming from partners, where Google is in the 15%-20% range and AWS somewhere in the middle of the two.
Several times, a point brought up was cloud providers making their own chips. Some experts noted that as an advantage, especially as more AI services come to the cloud. Here Google's TPUs and Amazon's Graviton chips were mentioned.
To summarize it in a few sentences. From only this qualitative data, Microsoft seems very well positioned with enterprises because of their relationships and product portfolio that they successfully leverage. The CEO of Microsoft, Satya, is super focused on the cloud. He often jumps on the calls with clients himself to convince them to choose Azure. Many experts expect Azure to become the number-one cloud in a few years.
GCP is seen as the leader for AI/ML, which might be useful in the future. The current GCP CEO, Thomas Kurian, has a similar approach as Satya, as he supposedly spends 60% of his time on customer-facing calls. He is also trying to make strides at enterprises, not just startups, where GCP before his leadership lacked the most.
AWS is still seen as the market leader, the first mover, and often the preferred choice for startups or born in cloud companies.
Outlook
In the last few quarters, we saw a deceleration of revenue growth for all of the three hyper scalers.
The main reasons are client cost optimizations, because of macro uncertainty, and less demand than in the pandemic boom era.
For me, here are two essential things to consider when it comes to the long-term outlook.
The shift to the cloud is still ongoing, as a big chunk of IT spending is still on-premise.
The current cost optimizations are a one-time thing.
When it comes to the share of cloud spending compared to the total IT spending cloud is still in its early days. While it’s hard to say the most accurate number right now, the ranges in which analysts model the current % of total IT spending for the cloud to be 5% to 20%. My take is that we are somewhere in the 10-20% range right now, and cloud still has room to grow in infrastructure services and other services. I believe cloud market share will reach 80% of total IT spending in the next 10 years. Many industry insiders share a similar view. A unit head from a big data analytics company recently said he expects hyper scalers to continue to grow top lines in the 15-20% just based on infrastructure services like storage and computing. On top of it, the SaaS part of their offering will continue to grow and become a more significant part of the overall cloud bill, helping revenue grow even further.
It is also important to note that we are entering an AI era in which the need for computing is rising exponentially, and with it also storage, as specially LLMs need a lot of data on which they are trained. There is also a growing need for more SaaS services from the cloud providers on the AI front and in other segments. The current head of AI/ML Strategy at Snowflake and former AWS employee for 5 years believes current AI spending at AWS is only close to 5% but growing steadily and will become a much more significant part of the overall cloud spend in the following years.
Clients also prefer using white-label services from the three big cloud providers than using external SaaS providers that then connect to the cloud platforms. The primary reason is that it’s easier and requires less effort from the client.
While going through hundreds of expert interviews, not even one expected cloud revenue growth to stop. Most are not expecting the growth rates to rise back to pandemic levels. The main reasons are that these businesses are now significantly bigger than they were in 2019. And because adoption in the post-pandemic world is more steady than the exponential one in the pandemic.
I also think the current cost optimizations are a one-time thing. Companies are adapting to the end of the zero-interest rate period. This is the case, especially for startup companies with more challenging conditions to raise capital right now, with high-interest rates. That said, the lower cloud spends at some customers are not because they are leaving the platforms or shifting their business models back on-premise. It’s purely a cost optimization thing where before, they had left a lot of services up and running in these cloud environments even tho they might not have even needed them. I think we will reach a bottom point in terms of deaccelerating growth soon, possibly even in Q2 or Q3 of this year. A Leader at Capgemini, the technology consulting company, said the following a few days ago:
“AWS growth has slowed in 1Q and 2Q of this year very significantly, but Azure has not. Now, AWS growth will pick up in 3Q and 4Q and I'm seeing indications of that everywhere. It will return to level it was, to its previous levels by the time of 1Q and 2Q 2024”
Source: Stream
We also got commentary from Adam Selipsky, the CEO of AWS, that customers are largely through the cost optimization process, but other customers are right in the middle of it.
I think that opens up the timeline for reaccelerating revenue growth in Q4 this year. We will get more information when Amazon, Microsoft, and Google report earnings.
In general, the cloud industry is the most attractive in tech, both in terms of growth potential and profit margins. The industry is big enough for all three big cloud providers to do well. So far, there are no significant differences from a client perspective regarding AWS, Azure, or GCP offerings. There is more of a difference of approach, each leveraging their strengths to continue to grow.
As always, If you liked the article and found it informative, I would really appreciate sharing it. It can be online or by word of mouth. I am thankful for it either way! :)
Disclaimer:
I own Amazon (AMZN) and Alphabet (GOOG) stock.
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Excellent piece of research! Especially the spider map on differentiation was very insightful.
GCP does not break out into Cloud and Workspace sales. How did you estimate GCP Cloud revenue alone? My estimate is that Workspace is quite a big portion of the GCP revenue.