A blowout earnings cycle hides strategy shift from cloud vendors

Earnings season this week again produced some incredible performances from the big three cloud providers.

Revenue at Microsoft’s Azure was up 50% annually, Google Cloud rose 46% over the same period, and market leader Amazon Web Services reported a 32% year-on-year leap in revenue, making it a $54 billion annual business just 15 years after its launch.

The performances highlight the significant shift to the cloud that’s taking place globally. The hyperscale cloud providers continue to benefit from the structural changes affecting most industries, where cloud computing has been instrumental in helping businesses transform operations, save money, and address shifts in customer demand over the past year.

There’s also little sign of this demand abating. According to CCS Insight’s survey data, 65% of enterprises are increasing their IT budgets for the next 12 months, with over half expecting to have migrated at least 50% of their IT workloads to the cloud by the end of the year. This compares to just 20% of those surveyed in 2018.

The growing importance of data and AI

But beneath the growth, the earnings this time around also highlight other important factors driving the hyperscalers’ direction.

Cloud computing may dominate the headlines, but arguably the most important story is the huge investments over the past few months in the areas of data, artificial intelligence and, in particular, higher-level services in these domains as they apply to vertical markets.

These areas are where hyperscalers are making the biggest attempts at differentiation and focusing their efforts.

Take, for example, AWS, which in December at its re:Invent conference implemented a big change in strategy by unveiling a host of AI-driven solutions focused on specific industries such as industrial manufacturing and healthcare. They include defect detection and predictive maintenance in industrial manufacturing, as well as a number of HIPPA-compliant solutions in healthcare such as HealthLake, which applies machine learning to large volumes of health data. Another industry is telecoms, where AWS is becoming an early leader in the industry’s transformation with the advent of 5G, highlighted by a deal with Dish Networks announced last week.

The announcements indicate AWS is doubling its efforts to target industry verticals as part of its strategy and reaching new audiences beyond its core developer and IT communities, such as business leaders and operations executives. In focusing on higher-level services targeting industry and business problems, it is also trying to become more purposeful with the new products it releases.

Google Cloud is following a similar playbook. Its bottom line, although improving this quarter, has been hit hard recently by the investments it’s making in hiring senior industry executives to build its vertical market expertise.

Since CEO Thomas Kurian took the helm in January 2019, Google Cloud’s strategy has been laser-focused on making the most of Google’s credibility in data and AI to push industry-specific solutions in the areas of Contact Center AI, Document AI, and in fraud detection.

Google’s foundations in data analytics and large-scale AI, applied to vertical markets, form an important differentiator for its customers.

As Google CEO Sundar Pichai implied during this week’s earnings announcement, this approach is contributing to its growth: “Our expertise in real-time data and analytics is winning companies like Twitter and Ingersoll Rand, who are moving their complex data workloads to Google Cloud. Our strength in AI and machine learning is also helping financial services customers like HSBC, Commerce Bank, SEB Group, and BBVA improve efficiency of payments, reduce fraud and risk, and deliver faster payment solutions.”

The biggest bet yet

The biggest stake in this game has been placed by Microsoft, which earlier in April announced it would acquire Nuance Communications, a healthcare software and AI supplier, for $19.7 billion, its second-largest acquisition on record. Nuance offers Microsoft a more mature set of AI solutions for the healthcare industry as part of Microsoft’s expanding vertical market strategy, which saw the launch of Microsoft Cloud for Healthcare in October 2020. Areas where Nuance specializes, such as speech recognition, document processing, fraud detection and image recognition, will now become central to how Microsoft differentiates its cloud services to the healthcare industry.

Commenting on the acquisition in Microsoft’s earnings call, CEO Satya Nadella summed up the strategy by stating, “They’ve done a fantastic job of taking what is perhaps the most defining technology of our times, which is AI, and applying it to healthcare, which is the most important application space.”

The cloud competition is changing

While revenue growth will rightly garner most of the headlines in the current earnings cycle, it hides some important changes in direction of the cloud providers during the past year.

As customers shift from a reactive approach to technology to a phase now characterized more by growth, reimagining their businesses and taking advantage of their data as a strategic asset, the nature of competition between the cloud providers is also changing.

Customers are requiring more from these giants as they push more heavily into AI and look for solutions that align innovation with success in their particular industry. This trend will shape the direction of the cloud providers perhaps more than any other in the future.

Nick McQuire is Chief of Research, Enterprise at CCS Insight.

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