The big three announced their quarterly results over the past few days. Last quarter I said, using movie lingo, that the numbers were boffo box office. Well, continuing the movie metaphor, this quarter’s sequel outdid the original. It was, to quote Larry David, pretty, pretty good.
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If one looks at the overall numbers for the quarter, it’s obvious that each of the three is on a fantastic run (interestingly, on the day I published this, the New York Times carried this piece on Amazon and its approach to investors, underlining how unusual it is among most companies; I would say the same is true for Microsoft and Google as well). The table below shows that each of the companies is an enormous business; each has an area of specialization from which their cloud offering springs.
What’s interesting to me is that, of the three, only Microsoft would seem to be a logical candidate for cloud computing. One can discern a straight line between software as a thing, and software as a service. Google is more of a stretch. And Amazon? As one competitor once put it: how can a seller of books be successful in selling computing?
Nevertheless, each of them, it its own way, found a path to becoming a cloud provider. And today, for each of them, cloud computing now represents a significant, standalone business.
Just how big a business came into focus over the past week as AMG announced the Q417 financial results for their cloud businesses, as can be seen in the below chart.
For the quarter, AWS did $5.1 billion. Its CFO said AWS is now a $20 billion annual business. For Microsoft and Google the quarterly numbers are a bit more difficult to nail down. Because they integrate their computing business with other cloud services, it’s impossible to know exactly how much computing services they sell, so one is left to estimate the revenues.
Azure is perhaps the hardest for which come up with a number, since Microsoft places it into a large revenue category — so how much should one attribute to Azure?
With respect to Google, for this first time this quarter the company broke out its cloud business from the “other” category, announcing its cloud business now tops one billion dollars per quarter.
Given the difficulty of truly knowing what proportion of overall category revenues computing services represent, I have (rather arbitrarily) chosen to attribute 50% of total revenues to cloud computing for both companies.
So, summing hard numbers for Amazon, and estimates for Microsoft and Google, the three sold $8.2 billion of computing services in the last quarter of 2017.
In terms of growth, all three show blistering rates of increase. Microsoft says it achieved 98% growth. Google maintains it has the highest growth rate of the three, so I call it 98%+. Amazon’s growth rate was 44%. My (again arbitrary) overall growth calculation puts the combined annual increase of the three at 60%.
My reaction: Wow.
Living our daily lives in the trenches of IT, we typically don’t have the time to reflect on what these numbers and growth rates indicate: a sea change in the way computing is being done in our economy and society. AMG are coming to dominate the future of IT. They truly are the pacesetters.
So, of all the quarter’s figures, what is the most important one?
AWS’s growth rate.
As I said in a previous post, I regard that number as the most important number in IT. After declining for almost three years, AWS posted an increase in its annual growth rate — from 42% to 44%.
A small increase, but one that reflects what I stated in last quarter’s AMG analysis: IT is now moved past the inflection point on the S curve of cloud use, and adoption rates are about to move into hyper-growth territory.
To get a sense of what this looks like, look at this chart. It shows what’s going to happen to AMG total annual revenues over the next five years. To account for the likelihood that Microsoft and Google growth rates will decline, I have set the overall growth rate at 40% for the next five years; this is less than I expect, given the fact that we have moved past the inflection point and are now on the steep part of the S curve, but 40% illustrates the point quite well.
In 2022, AMG will be doing $123 billion annually and will occupy the central position within technology industry. End users will regard AMG and their offerings as the core of their computing strategy and will use their services as the foundation of their IT vision.
There will be important secondary effects as well. In 2013, research firm R.W. Baird estimated that each dollar spent on AWS displaced $3 to $4 of traditional IT spend. That implies that around $500 billion of annual revenues are going to disappear over the next five years. Apocalyptic? Maybe. But I wouldn’t bet against this scenario.
In 2022 the IT landscape will be vastly different from today. The amount of change that will be compressed into the next five years will be mind-boggling. Like it or not, resist it or not, if you are part of the technology industry, AMG is going to be the central focus of your world.
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