AMG 2017 Capex: The Big Get Bigger

AMG Crush Their Q417 Cloud Numbers
February 4, 2018
Assume a Can Opener
March 29, 2018

My recent analysis of Q4 2017 AMG revenues limned a single message: AMG are killing it.

As the saying goes, you’ve got to spend money to make money. And a just-released Goldman Sach report that I came across, Cloud Quarterly (sorry, I can’t seem to find a link; if someone can provide one, I’ll gladly post), shows just how true that is for AMG.

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The report has a couple of fascinating charts that highlight just how much AMG is investing in their cloud offerings. This one shows annual capex by each of the companies, as well as several competitors. I’ve placed arrows on several of them to highlight investment trends. (NOTE: Amazon numbers are total for the entire company; AWS capital investment for 2017 was “only” $9.2 billion, comprised of both cash and capitalized leases).



Microsoft’s $11.4 billion included both Azure and other cloud services like Office 365. Likewise, Google’s capex included infrastructure for search, maps, and so on, so its $12.6 billion capex was not pure cloud investment, either. Goldman regards both inclusive numbers as proxies for the companies’ cloud investments, however. Summed, AMG invested around $35 billion.

Notwithstanding the inconclusiveness of the numbers, it’s obvious that AMG are investing heavily. Very heavily. One might expect that of the total of around $35 billion, perhaps $25 billion of total capex was directed toward cloud infrastructure. And the arrows vividly illustrate that all three are growing their cloud investment dramatically.

The table below shows capex and total cloud revenue for AMG. Only AWS has more revenue than it is investing ($17.5 billion revenue against $9.2 billion capex). According to Goldman, Microsoft attained $5.8 billion in Azure revenues against $11.4 billion capex; for Google the numbers were $2.0 and $12.6 billion.



So, AMG are investing a ton of money in cloud infrastructure. What conclusions should we draw from this?

They’ve got deep pockets and aren’t afraid to reach into them

The tech industry has never seen this level of investment. Mix webscale and network effects, and companies that want to be winners need to spend, spend, spend. All three recognize this fact and are shoveling money into their facilities to ensure sufficient capacity and necessary geographic coverage.

For Microsoft and Google, spending at this level is relatively easy. Each is the dominant entrant in an industry that is far richer than any ever seen before (software and online advertising, respectively). Both show amazing profitability and throw off ungodly amounts of cash (I’ve speculated that one reason they take on expensive off-mission initiatives is to reduce income to a socially acceptable level).

Amazon is a bit different. Most of its revenue comes from ecommerce, which means its finances resemble a retailer. And its constant focus on lowering prices doesn’t help profitability. However, margin and net income are not how Amazon funds its capex. Looking at the first paragraph of a representative Amazon quarterly earnings announcement, one is struck by the emphasis on cash flow.


Amazon manages its business to throw off cash, and it plows that cash back into growing its business. I’ve heard plenty of bellyaching in the industry about how unfair it is that Amazon has such a high P/E ratio and doesn’t have to show the profits that mainstream tech companies do, but the truth is, AWS achieves its revenue on the back of canny operational management, not via the stock market.

Realistically, there are only three other companies that can possibly spend at the level AMG are:

  • IBM, although its 2017 capital expenditures were much less than AMG, at $3.31 billion, less than a third of AWS, and even less of a percentage of Microsoft and Google.
  • Oracle, which spent much less, at $2 billion (see chart), but maintains that its expenditure is much more efficient than AMG, so it punches above its weight, investment-wise.
  • Alibaba, which is making a big push out of China and whose business is like a combination of Amazon’s ecommerce, Paypal, and Stripe.

It remains to be seen how many chips each of the three is willing to push to the center of the table, but one can hazard a guess that it won’t be all three, and might be just one.

AMG is investing well head of revenues

Looking at history, there aren’t many companies that invest 50% of revenues in capital (AWS), not to mention 100% (Microsoft) or 200%-400% (Google) (adjusting both for the cloud/other ambiguity).

To reiterate, this investment pattern reflects the realities of the cloud computing market: it’s a platform-based industry with enormous network effects that requires sufficient capacity to support exploding, spiky demand, much of which can emanate from geographies that require local infrastructure. That’s a recipe for needing to plow huge amounts of money into the business.

Amazon, of course, was the pioneer of cloud computing. And, as a company, it has always shown the inclination to invest heavily in successful ventures that it believes offer large growth potential (I have been told by AWS executives that they believe its cloud division can grow to multi-hundred billion dollar annual revenues). Microsoft and Google have, apparently, concluded that cloud computing will be the dominant IT computing platform going forward, and, if they want to succeed in that environment, they need to spend now.

It would seem that this investment pattern will at some point tail off to (only) 100% of annual revenues, before eventually settling into much lower levels. But I wouldn’t bet on that occurring any time soon.

AMG is confident about future demand

I have heard many in the industry predict that cloud revenue growth will soon drop into single digits. It is evident that AMG don’t agree.

As I noted a couple of paragraphs ago, AWS believes it has multiple hundreds of billions of dollars in annual revenues in its sights. Likewise, I know from conversations with the “MG” part of AMG that they, too, believe the total cloud market will eventually reach well into the hundreds of billions, if not well above a trillion dollars, each year.

If you truly believe there is a market that will become that gargantuan, of course you will be willing to invest as much as is needed to participate. It appears they agree with my assessment of cloud adoption: that we have just passed the inflection point of the adoption S curve, and growth rates are about to skyrocket.

If that’s true, AMG are right to be confident about future demand, and their current investment effort is entirely rational preparation for businesses that will grow into behemoths.

We’ll be able to spot the nascent signs of this kind of growth by watching the kinds of topics raised by enterprises in their cloud discussions. Today, these discussions are about digital transformation: building new applications to address mobile, machine learning, and so on.

If we begin to see those discussions shift toward application rewrite, rearchitecting monolithic applications into microservice topologies, and portfolio migration, we’ll know that the dam has burst on cloud demand. As one might expect, my opinion is that this a question of how soon, not if. And when this happens, it will arrive like a thunderclap — sudden and massive. Being caught short on capacity will mean an inability to serve new customers and even alienating existing customers who discover to their dismay that their cloud provider cannot service their needs.


The investment we’re seeing in cloud capacity really has no precedent, save perhaps Henry Ford’s manic factory building for his Model T, the US government’s armaments efforts in WWII, and Foxconn’s manufacturing support for smartphones.

This investment is indicative of the fact that our economy, our society, is shifting from atoms to bits. As Ford’s efforts presaged the boom growth of the industrial economy, so too do AMG investments augur the explosion of the digital economy.

And just as Ford hammered his rivals into irrelevance and bankruptcy, AMG will force change into the tech industry. We will see more disruption over the next five years in the technology industry than we’ve seen during its entire preceding history.  You’ve seen how AMG are spending their money — the question is how will you place your bets?



  1. […] their own part, AMG clearly believe in this trend and are investing billions of dollars in computing facilities. The article quoting Dinsdale is headlined “Enterprises spend more on cloud IaaS than on-premises […]

  2. […] this, of course, is massive capital investment, which I’ve written about in the past. Cloud providers the world over, and especially AMG, are spending tens of billions of dollars […]

  3. […] Golden does a nice job giving a rundown of the money earmarked by the Big 3 for their cloud development in 2018, and the estimates are mind boggling. The revenues-to-capex stats are even more […]

  4. […] for example, is benefiting from the shift to cloud computing, because, as I wrote a few weeks ago, AMG are pouring money into new data centers, which requires servers, which in turn require […]

  5. ouissal says:


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