Tech Giants’ Cloud Pains Aren’t Shared Equally

That shouldn’t come as a significant surprise. Demand for cloud-computing services increased even before the pandemic as corporations moved away from legacy on-premise software. Covid-19 juiced that growth even more as companies suddenly found they needed to operate remotely. But the inevitable cooling of that demand has also run headlong into a global economic slowdown, forcing businesses to scale back their spending. Some industries are getting hit harder than others; in Amazon’s earnings call Thursday, Chief Financial Officer Brian Olsavsky called out reduced mortgage volume and cryptocurrency trading as factors affecting usage of the company’s AWS cloud service in the recent quarter.

Cloud segment revenue per calendar quarter

Amazon has been on top of the public cloud business since before most people knew it. The company first announced the launch of “Web Services” in 2002—straight from the carnage of the dot-com meltdown. It began reporting financial results for the segment, renamed AWS in 2015 when the business generated more than $5 billion in revenue annually. That has since grown to over $80 billion, making AWS larger than any stand-alone corporate software company except Microsoft.

But that great size, plus Amazon’s dependency on AWS for the bulk of its operating profit, make the e-commerce giant more exposed to the ill effects of the slowdown. Mr Olsavsky noted that AWS’s revenue growth slowed to the midteens in January after hitting a record low 20% year-over-year in the fourth quarter. That is below the mid-20% growth range Microsoft projected for its more minor Azure cloud service in the March quarter. And while AWS is still larger than Microsoft’s Azure and much more significant than Google’s Cloud Platform, the latter two have far more profitable legacy businesses to fall back on. AWS generated $22.8 billion in operating profits for Amazon in 2022—a year in which the company’s more significant retail business lost nearly $12 billion.

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Analysts expect the slowdown in cloud spending to affect all three tech giants at least through the first half of this year. That problem could be exacerbated by a shift in how cloud customers structure their deals. In a report last week, analyst Timothy Horan of Oppenheimer said more businesses are shifting to term-based billing for cloud compute workloads, which he estimates can lead to savings in the range of 35%–70% over paying for usage on demand. “This is a major near-term headwind” for cloud-service providers, he wrote.

For Amazon, the cloud slowdown comes at a particularly inopportune time, as the company is still working to absorb an overbuild of its retail fulfillment network. It might also be facing new regulatory heat: The Wall Street Journal reported last week that the Federal Trade Commission is preparing a potential antitrust lawsuit against the company. That creates additional pressure on Chief Executive Officer Andy Jassy, who took the reins at Amazon in 2021 after making a name for himself through his highly successful shepherding of AWS.

Mr Jassy even broke from a long Amazon tradition. He joined the company’s earnings call last week, where he maintained that “we have a lot of growth in front of us” in the cloud, given that the majority of global corporate tech spending remains tied to on-premises software and services. But Amazon’s stock price has slumped since last week’s results and news of the possible FTC suit, and it is now off more than 35% in the previous 12 months—the worst performance among big tech peers Apple, Microsoft, Alphabet and now even Facebook-parent Meta Platforms Inc. Mr. Jassy needs to make it rain soon.