AMG Earnings Q3 19: The Future of the Tech Industry

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Last week all three of the most important cloud providers (I refer to them collectively as AMG — Amazon, Microsoft, and Google) announced their financial results. All continue to see impressive growth and, as a group, have achieved very significant results. The chart below indicates that the three are generated something like $16B or $17B for the quarter, although it’s impossible to be precise because Microsoft and Google do not break out their pure cloud computing revenues.

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Because of this imprecision, when discussing cloud computing trends, I focus on AWS, since Amazon breaks out its financials separately. As can be seen in the chart below, AWS did just under $9 billion for the quarter with a growth rate of 35%. I regard the AWS growth rate as the most important number in the entire industry, as it crystallizes  the general IT industry uptake of cloud computing.

In addition to AWS itself, it’s important to look at the general trend of the three providers’ numbers, because they hold important meaning for every person and company in the tech industry, whether vendor or user. Unless one drills down into what lies beneath the headline numbers, it’s easy to misunderstand just how important AMG are and what their continued growth holds for the future

Growth is Dead, Long Live the Growth

This quarter there was lots of angst about AWS’s growth rate — it was only 35%!  While the chart shows that AWS continues its steady up and to the right revenue growth, its growth rate is markedly lower than a year ago. Many observers assigned the cause to reduced customer appetite for AWS. However, just as plausibly, the slowdown could be attributed to the challenges AWS experiences as it responds to continued growth — for example, difficulty hiring and deploying enough staff to help customers adopt and grow their AWS usage. The notoriously tight-lipped Amazon did not elaborate on what caused the growth deceleration, so it remains a mystery.

However, getting wrapped up in reading the tea leaves to discern why AWS’s growth is slowing is to miss the larger — and more important — point. Taking the tech industry as a whole, its overall growth has decisively shifted to AMG. Virtually every new application deployment is being placed with one of the three. 

This extent of this shift can be seen by comparing AMG to other large tech companies. IBM just reported its fifth straight quarter of declining revenues. HPE revenues dropped 7% YoY, and the CEO announced how proud he is of how the company is performing. Even HCI leader Nutanix appears to be encountering headwinds in a segment widely regarded as the brightest in the on-prem market. 

Nothing could symbolize how powerful the revenue trend is than one financial analyst’s announcement that he expects AWS to displace Oracle as the second largest enterprise software vendor next year

Therefore, it’s important to view AMG growth rates in the context of the overall industry and to recognize just how dominant they are becoming. Even more important is to understand the longer-term direction of this trend — that despite slowing growth rates, AMG will continue to absorb most of the growth in the industry, with inevitable consequences in terms of user mindshare.

Cloud Defines the Future of Applications

While many still adhere to the established IPS model of cloud computing (which I discussed in my most recent posting), AMG have moved way beyond core computing and application services. Today, they are rolling out new services that can best be understood as only being possible  in the massive computing environments they operate. That is, they are delivering services that could not exist outside of the hyperscale environments that only these three providers can afford. Users who want to build the next generation of applications only have three options to choose from — any every other deployment option falls short of being able to support this new breed of applications.

As an example, consider database services. The exemplar of traditional database technology is Oracle. While it worked perfectly well for a previous generation of applications, today’s applications require vastly more scale and address a globally distributed user base. AMG have responded with new database technologies implementing innovative approaches to address these requirements. GCP’s Spanner is a relational technology only possible when delivered by a provider with advanced data center technology. Likewise, AWS’s DynamoDB draws upon designs created to address Amazon scale and transaction rates and to deliver an essentially unlimited key/value store. And Azure’s Cosmos DB offers extremely flexible use patterns executed by a globally scaled backend.

And database services are only one example. AMG offer unlimited storage, allowing much greater machine learning opportunities. And they provide staggering amounts of bandwidth to support massively scaled event handling. 

In effect, AMG are developing new services that reflect their capabilities in agile resource delivery, massive scale, and unprecedented connectivity. And supporting those resources are advanced operational practices founded on administrative automation. 

With these resources and operational practices, users are able to create applications impossible to implement in a non-cloud environment. The result is a new breed of online offerings unimaginable just a decade ago. Just as we discuss a younger generation of people as digital natives — people who assume the availability of online interactions, so too will a new generation of application developers across the industry internalize the capabilities of cloud computing. They will assume computing services available only from AMG will just, you know, be there — and will judge any other infrastructure as inadequate if it doesn’t offer the same kind of services. The result will be a transformation in what applications deliver — and they’ll all be based on computing capabilities only available from AMG.

Cloud Providers Define the Future of Enterprise IT

It’s no secret that building cloud-native applications is hard. Most enterprise IT organizations face a dilemma — under pressure to implement a digital transformation but lacking the skills to do so themselves. And the nature of this pressure is quite different than historical skill upgrades; unlike previous transformations that were technical in nature — think moving to relational databases from flat files — these transformations are being driven by the business side of the house. The driver for digital transformation the business need to respond to changing consumer preferences (all those digital natives, right?) and to operate digitally-based offerings as efficiently as cloud-native competitors. 

Faced with this pressure and short of the internal ability to execute, enterprise IT organizations will turn to external entities to help them plan and implement their digital initiatives. The logical candidates to offer help are AMG. It’s easy to understand why — enterprise IT shops will choose a digital computing platform and build their digital strategy around the capabilities of the platform. Naturally, they will turn to their chosen provider and ask for guidance as to how best to create cloud-native applications from those capabilities. 

There is one other digital guide enterprises will turn to: VMware/Pivotal. The reason for this is two-fold:

  1. First, VMware is the dominant software platform for on-prem environments. Every IT organization has to figure out how to extend and incorporate existing infrastructure and applications to their new AMG-based applications, and VMware is a natural partner to help them design their strategy
  2. VMware has also quite cannily positioned itself as a neutral partner of all members of AMG — a technical Switzerland, if you will. This neutrality will cause many enterprise IT organizations to turn to VMware for impartial advice as to how best to integrate cloud computing into their legacy environments. And the addition of Pivotal to VMware allows the company to extend those recommendations further up the software stack to container orchestration and application design.

The platform companies are going to be in an extremely powerful position in the future. Far more than a more convenient place to deploy applications, AMG and VMware will direct the strategy of enterprise IT organizations as they chart their path forward. It’s difficult to overstate the central role AMG and VMware will play as the industry undergoes a decade-long transition to digital-native.

Conclusion

In the press of quarterly results and daily feature announcements, it’s easy to overlook just how powerfully AMG are reshaping the technology industry. The journey to cloud-native is nowhere near complete, but we can already see the effects. Applications designed for what AMG provider aren’t just bigger or faster than traditional apps — they are a completely different species. Cloud computing is the foundation of the ongoing digital transformation of our economy and society and AMG are both the cause and beneficiaries of this phenomenon.

1 Comment

  1. […] be spending more than $100 billion on public cloud. This is consistent with AMG financial results I discussed in a recent post. This is clearly the fastest adoption of a new technology in the history of the industry. It’s […]

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