In the old industrial economy, if you talked about the “Big Three” in the US it was obvious what companies you were referring to: GM, Ford, and Chrysler. They powered the auto-centric society we lived in.
Today, we live in a new world — the digital economy. It’s powered by cloud computing. And there’s a new big three: AWS, Microsoft Azure, and Google Cloud. I refer to them as “AMG.” They will have as strong an influence in this century as their auto counterparts did in the 20th century.
The cloud era is still young, but as I wrote here, cloud computing has hit a tipping point. Adoption has hit the steep part of the S curve and it won’t be long before it is the de facto way organizations large and small perform their computing operations.
We got a good glimpse of their progress over the past two weeks as all three of the AMG companies reported their quarterly numbers. AWS came in at $4.1B. Microsoft announced a 97% YoY growth rate. And Google said it is seeing significant traction.
But what do these numbers indicate?
Here is my take.
Here is a table with the numbers from the cloud big three:
It’s impossible to be precise about the numbers because only Amazon breaks out AWS in its financials. The others dance around their actual cloud revenues, lumping them in with other services. So this table is a guesstimate.
However, while not precise, it is directionally accurate, and what is obvious is that cloud is big and getting bigger fast.
On a forward-looking four quarters, the big three are probably on a $30B run rate. Growing at around 60%.
Meanwhile the legacy players continue to gasp for air. IBM just announced shrinking revenue for the 21st straight quarter. The last time it saw revenue growth Obama has just been inaugurated for his second term.
HP hasn’t announced numbers for this quarter, but last quarter it saw revenues shrink 13%, and the latest rumor is that Meg Whitman is about to jump ship to become Uber’s CEO. It’s never a good sign when a company’s CEO is looking for an out.
It’s impossible to tell how Dell is doing (I defy you to comprehend this financial announcement), but, as I noted in another piece recently, Dell is in a very different position than its peer companies: it is privately held and has the benefit of being managed for cash flow (much like Amazon rather amazingly is able to do, even though it is publicly held) rather than announced profits. Dell also has some real bright spots, too: VMware revenue was up 9%, for the quarter and Pivotal appears to be doing well, too.
Oracle, which is a software company, and should be wildly prospering in a “software eating the world” environment, achieved a 3% revenue increase in its quarterly numbers. In other words, it’s doing terribly.
So, in sum, cloud computing has hit a tipping point and the evidence is clear.
Naturally, there are those who reject this perspective and forecast that cloud revenues are about to decelerate. I had to laugh at this Deutsche Bank analyst’s confident assertion that AWS growth rate was dropping — from 40% down to 39%. Now that’s precision!
But his prediction aligns with many others who believe that cloud provider growth is about to hit a wall and come down to single digits. Reasons cited for this include:
I’ve got news for them: they’re wrong.
When I speak, I often share this chart to show just how strong AMG’s future is:
JPMorgan Chase did a survey of large enterprises and asked them what percentage of workloads they had running in public clouds as of 2016. The number was fairly low: 16%
Then they asked about their plans for 2020. The number: 41%.
So there’s a lot of growth ahead for AMG. And JPMC didn’t ask about post-2020 plans, but it’s hard to think of a reason the trend would suddenly slow down.
I keep saying that the future has 80% of workloads running in public environments. And I keep having people tell me I’m crazy. But when I ask why I’m wrong, it’s crickets.
Too much of provider commentary focuses on trivialities. Can Azure get larger than AWS? Can Google “get” the enterprise. And so on.
Worrying about which one is bigger today is focusing on the trees instead of the forest.
AMG have virtually unlimited opportunity ahead of them. Because AMG functionality and capabilities align with what applications increasingly need.
The legacy infrastructure players were fine when IT built applications with predictable loads and stable user populations. That was yesterday.
Today, incumbents in every industry are being challenged by digital-first innovators. Lyft. Airbnb. SoFi. The list goes on and on. Their applications require scale. And elasticity. And rich, easy-to-use services. Like AMG provide.
In response, smart incumbents like Capital One are adopting the same strategies as the innovators. They’re building apps that need all the same kind of capabilities as the innovators.
Both need cloud. Both are being born in or quickly adopting cloud. That’s their future.
So AMG are taking share from the legacy players and addressing a growing TAM that is the digital economy.
AMG will eventually achieve revenues in the hundreds of billions of dollars. The only question is how soon they’ll reach those kind of numbers. And I predict that all along the way naysayers will declaim that they will falter real soon. And they’ll be wrong every time. But they really can’t help it. They’re the same kind of people who in 1923 would have predicted that the world would soon have enough Model Ts and people would come back to horses.