Cloud leaders Amazon, Google and Microsoft show the once-booming market is cooling down
Amazon CEO Andy Jassy speaks at the Bloomberg Technology Summit in San Francisco on June 8, 2022.
David Paul Morris | Bloomberg | Getty Images
As growth in traditional tech equipment and software slowed to a trickle in recent years, cloud computing gobbled up spending, reflecting a dramatic change in how companies were choosing to run applications and store data.
But in the past two weeks, the biggest names in cloud infrastructure issued clear warnings to suggest that the frenetic expansion of the past half-decade is cooling. Historically high inflation and a steady increase in interest rates by the Federal Reserve have led businesses to curtail spending and seek ways to get more out of their existing infrastructure.
Amazon, Microsoft and Alphabet, the three leaders in the market for cloud-based storage and servers, all reported deceleration in their respective businesses. On Thursday, Amazon Web Services and Google Cloud, which also includes Workplace productivity software, showed revenue for the fourth quarter that was below analysts’ estimates.
“In Q4, we saw slower growth of consumption as customers optimized GCP cost, reflecting the macro backdrop,” Ruth Porat, Alphabet’s chief financial officer, told analysts on the earnings call.
Google Cloud revenue growth slowed to 32% in the fourth quarter from almost 38% in the third period. Revenue of $7.32 billion trailed analysts estimates of $7.43 billion, according to StreetAccount.
Amazon, which pioneered the market over 15 years ago and maintains a commanding lead, said AWS revenue growth decelerated to 20% from 27%. The unit notched sales of $21.4 billion, while analysts were projecting $21.87 billion. As recently as 2018, AWS was growing over 45%.
Brian Olsavsky, Amazon’s finance chief, told analysts that large companies worked with AWS in the fourth quarter to trim their spending because of the difficult economy, a trend that started in the middle of the third quarter. He’s not expecting it to reverse anytime soon.
“As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters,” Olsavsky said.
Amazon CEO Andy Jassy, who started AWS with company founder Jeff Bezos and ran the division until taking the helm at the parent company in 2021, spoke up later on the call to tout the robust pipeline of cloud migrations. However, according to a regulatory filing, customers are showing less confidence in longer-term deals. Amazon reported $110.4 billion in commitments on contracts with original terms longer than one year. That was up 37% from a prior year, a decline from 57% growth in the third quarter.
Analysts at Bank of America lowered their forecast for AWS, and now expect growth for the year of 11% instead of 15%. That would be down from nearly 29% in 2022.
“We see LT cloud trajectory as bent and not broken,” wrote the analysts, who have a buy rating on the stock.
Results from Alphabet and Amazon follow Microsoft’s report last week. Microsoft’s Azure unit is second in cloud infrastructure to AWS.
Microsoft CEO Satya Nadella speaks at the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.
SeongJoon Cho | Bloomberg | Getty Images
Microsoft said its Azure and other cloud services revenue growth slowed to 31% from 35%, though the company doesn’t disclose the size of the business in dollars.
On the earnings call, Chief Financial Officer Amy Hood said growth in Azure consumption moderated in December. The company expects even slower Azure growth in the first quarter as organizations look for opportunities to run their existing applications in a more cost-effective manner.
CEO Satya Nadella acknowledged that trend, but said it’s not permanent.
“At some point, the optimizations will end,” Nadella said on the earnings call. “In fact, the money that they save in any optimization of any workload is what they’ll plough into new workloads, and those workloads will start ramping up.”
Nadella’s view is supported by at least some industry experts. Tech research firm Gartner is expecting the category to grow overall by 26.8% in the full year, compared with 25.9% in 2022. The Gartner prediction across all of IT is for revenue growth of 2.4%.
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Tik Tok creators gather before a press conference to voice their opposition to the “Protecting Americans from Foreign Adversary Controlled Applications Act,” pending crackdown legislation on TikTok in the House of Representatives, on Capitol Hill in Washington, U.S., March 12, 2024.
Craig Hudson | Reuters
The Supreme Court on Friday will hear oral arguments in the case involving the future of TikTok in the U.S., which could ban the popular app as soon as next week.
The justices will consider whether the Protecting Americans from Foreign Adversary Controlled Applications Act, the law that targets TikTok’s ban and imposes harsh civil penalties for app “entities” that continue to carry the service after Jan.19, violates the U.S. Constitution’s free speech protections.
It’s unclear when the court will hand down a decision, and if China’s ByteDance continues to refuse to divest TikTok to an American company, it faces a complete ban nationwide.
What will change about the user experience?
The roughly 115 million U.S. TikTok monthly active users could face a range of scenarios depending on when the Supreme Court hands down a decision.
If no word comes before the law takes effect on Jan. 19 and the ban goes through, it’s possible that users would still be able to post or engage with the app if they already have it downloaded. However, those users would likely be unable to update or redownload the app after that date, multiple legal experts said.
Thousands of short-form video creators who generate income from TikTok through ad revenue, paid partnerships, merchandise and more will likely need to transition their businesses to other platforms, like YouTube or Instagram.
“Shutting down TikTok, even for a single day, would be a big deal, not just for people who create content on TikTok, but everyone who shares or views content,” said George Wang, a staff attorney at the Knight First Amendment Institute who helped write the institute’s amicus briefs on the case.
“It sets a really dangerous precedent for how we regulate speech online,” Wang said.
Who supports and opposes the ban?
Dozens of high-profile amicus briefs from organizations, members of Congress and President-elect Donald Trump were filed supporting both the government and ByteDance.
The government, led by Attorney General Merrick Garland, alleges that until ByteDance divests TikTok, the app remains a “powerful tool for espionage” and a “potent weapon for covert influence operations.”
Trump’s brief did not voice support for either side, but it did ask the court to oppose banning the platform and allow him to find a political resolution that allows the service to continue while addressing national security concerns.
The short-form video app played a notable role in both Trump and Democratic nominee Kamala Harris’ presidential campaigns in 2024, and it’s one of the most common news sources for younger voters.
In a September Truth Social post, Trump wrote in all caps Americans who want to save TikTok should vote for him. The post was quoted in his amicus brief.
What comes next?
It’s unclear when the Supreme Court will issue its ruling, but the case’s expedited hearing has some predicting that the court could issue a quick ruling.
The case will have “enormous implications” since TikTok’s user base in the U.S. is so large, said Erwin Chemerinsky, dean of Berkeley Law.
“It’s unprecedented for the government to prohibit platforms for speech, especially one so many people use,” Chemerinsky said. “Ultimately, this is a tension between free speech issues on the one hand and claims of national security on the other.”
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