Google Cloud is now approaching a $16 billion annual revenue run rate, but Google’s ad business is likely to subsidize it for the foreseeable future. The mirror image is AWS, which delivers operating income that dwarfs Amazon’s core retail business.
Alphabet, Google’s parent, detailed how much its ad business subsidizes its cloud expansion. In the fourth quarter, Google Cloud, which includes platform, infrastructure, and Workspace, delivered an operating loss of $1.24 billion on revenue of $3.83 billion, up from $2.61 billion a year ago.
Amazon founder Bezos will give CEO role to AWS leader Andy Jassy, become executive chairman | Alphabet beats Q4 estimates, Google Cloud revenue climbs
Meanwhile, Google Services delivered operating income of $19.06 billion in the fourth quarter on revenue of $52.87 billion.
Simply put, Google’s ad business is subsidizing the company’s cloud ambitions to be more than No. 3 behind AWS and Microsoft Azure. But given the starting point, Google Cloud may never look as good as the ad business when it comes to profits. An assessment that stretches the useful lives of servers and network equipment will boost operating income by about $2.1 billion in fiscal 2021 so Google Cloud results will look better.
Google’s fourth quarter snapshot.
In 2020, Google Cloud’s operating loss was $5.61 billion.
Google CEO Sundar Pichai said on an earnings conference call:
We’ll continue making disciplined investments to scale the business and improve profitability. Google Cloud delivered revenue growth of 47% year-over-year, with GCP growth remaining meaningfully about the growth rate for cloud overall. In addition, our backlog grew to nearly $30 billion, up from $19 billion in Q3, nearly all attributable to cloud. We continue to invest strongly in the business given the momentum we are seeing. These investments in our go-to-market organization have helped us win larger deals including several billion-dollar deals in 2020. Deals over $250 million more than tripled in the same period.
Comparing cloud giants is fascinating given that they all come from a different orientation and business model. Amazon looks to AWS (and increasingly an ad business) to boost the paltry profit margins in e-commerce. Google Cloud is taking its well-heeled ad business to get into the cloud. If we wanted to put Microsoft Azure and its Commercial Cloud in the mix it’s clear that the company’s software footprint transitioned to subscriptions well.
AWS in the fourth quarter delivered revenue of $12.74 billion and operating income of $3.56 billion. Amazon’s retail business (North America and International) delivered fourth quarter operating income of $3.3 billion on revenue of $112.8 billion. For 2020, AWS generated operating income of $13.53 billion relative to Amazon retail’s $9.37 billion. Amazon’s retail business needed $340.7 billion in sales to generate that operating income. AWS needed $45.4 billion.
Given AWS’s profit it’s not that surprising that AWS CEO Andy Jassy will take over for Jeff Bezos as chief of Amazon. Bezos becomes executive chair in the third quarter. If you’re surprised that Jassy will run all of Amazon’s operations then you just weren’t following the money.
