Amazon’s cloud computing growth in the latest quarter dropped to 29%. Microsoft’s cloud revenue growth also slowed, but it still grew 47%. Google’s cloud revenue growth increased, posting a 43% gain. Are we seeing some important shifts in the public cloud space? I think so, but most of them have their roots in a broader shift in the cloud market that’s been happening for at least three quarters.
It’s interesting that, with everyone saying that the cloud is a bright spot in the lockdown-and-virus recession, the top cloud providers saw less-than-usual revenue growth. I attribute this in part to the fact that, as we’ll see below, corporate cloud buyers account for only a portion of cloud revenues. Much of the “online” companies consuming cloud services are ad-driven, and that group is clearly impacted by a decline in advertising resulting from the lockdown-linked retail slump. But this isn’t the whole story.
None of the cloud providers offer a good breakdown of how their cloud revenues are derived, but most people realize that public cloud revenues are historically the combination of web-company revenues (OTTs, often social media sites or related services) and enterprise cloud spending. In the early days of cloud computing, the first of these sources outstripped the second by margins of better than 3:1. Amazon has always gotten a greater piece of the OTT-cloud business, and so it jumped out to an early lead. Amazon’s greater exposure to this space is also likely a contributor to its slowing revenue growth in the quarter.
Cloud computing for enterprises, during this early period, was hampered by the lack of a realistic and practical model of cloud adoption. The early expectation, the one that got all the media attention, was that enterprises would “move applications to the cloud”, meaning shift entire applications out of the data center to the cloud. That was a practical response for some applications, but not the mission-critical ones that make up most of enterprise IT. As a result, public cloud adoption by enterprises was slower than the cloud growth numbers (which included the OTT piece) showed.
In 2019, enterprises started to understand the ways in which public cloud computing could augment their data center apps rather than replace them. The “hybrid cloud” talk that emerged was an imperfect description of what was starting to happen, which was that enterprises were adding cloud front-end pieces to legacy applications to enhance their accessibility via browsers or mobile apps. The back end, the data center piece, of these applications weren’t really cloud at all, they were the same stuff that had run in the data center all along.
The front/back application model resulted in significant growth in cloud adoption by enterprises in 2019, and that resulted in Microsoft, the public cloud provider with the best credentials for enterprise cloud applications, gaining market share on Amazon. It also gave other providers of public cloud service, notably IBM and Google, a bit of a road map to how to achieve better public cloud sales.
In 2020, obviously, COVID came along, and the uncertainty associated with the virus and lockdown discouraged companies from making new capital investments in IT. Expensing public cloud services made more sense. In addition, COVID and the lockdown created a massive push for work-from-home (WHF), which created a massive push for creating secure and productive interfaces for core applications that could be pushed out to remote workers. This is the dominant driver in the cloud market wars today.
The growth rate decline for both Amazon and Microsoft is a reflection of the fact that the front/back model of cloud applications came as a surprise to everyone, including users. While most enterprises now understand “hybrid cloud” means front/back application separation between cloud and data center, most have only begun to deploy based on this new realization. I think that the next two quarters will show cloud revenue gains based on the exploitation of this model.
The front/back model of applications that’s now dominating is different from “hybrid cloud” because the latter term implies public and private clouds, and as I’ve noted, the current model is almost always implemented using a cloud front-end and legacy data center deployment in the back. Since Amazon, in particular, initially viewed hybrid cloud more literally, their approach presumed that users would structure on-premises hosting to mimic AWS cloud services, which wasn’t the model that was succeeding. Amazon is currently working to adapt their approach (more on that later, below), and the other cloud providers are doing likewise. The way they approach the future, the pace at which their approach can address opportunity, and the extent to which the future opportunities align with each provider’s approach, will decide who gains share and who loses.
A second market kicker that’s emerging is the public cloud provider recognition that “carrier cloud” could represent a truly enormous public cloud opportunity. My modeling said about eight years ago that carrier cloud could, by 2030 and if all the drivers were realized, generate 100,000 incremental data centers, most at the edge. It would then be the largest single driver of cloud services. When, in 2020, operators started to show signs they might outsource some of their own carrier cloud applications, all the public cloud providers saw gold in them thar hills, as they say.
There isn’t an explicit need for cloud provider strategies for enterprises and for carrier cloud to line up; the positioning of the two would likely be very different, for example. Some technological harmony might be helpful if the cloud provider intended to launch a sweeping strategy for the future cloud. Let’s look at the providers and see what’s what.
Amazon has no specific account presence at the data center level, and rather than trying to develop one, it seems to want to establish a series of partnerships with key providers of data center technology. VMware is an example; vSphere is a dominant data center platform, and Amazon’s been working with VMware to provide a means of linking vSphere and AWS efficiently.
One emerging force in this effort is container and Kubernetes technology. Enterprises realize that containers are a good way to deploy both data center and cloud applications, and while harmony in deployment isn’t essential in creating a front/back cloud application model, it would offer a way to provide users with the opportunity to burst application components across the cloud/data-center boundary, which could facilitate further cloud migration down the line.
Microsoft is in a better basic position for the enterprise cloud than Amazon, having better data center account engagement and a better front/back integration capability almost from the first. However, they’ve also been enhancing their container approach, focusing strongly on “federation” of cloud container and Kubernetes deployment with the data-center counterpart.
In Microsoft’s carrier cloud story, there’s a strong element of edge computing. Edge computing could also be used by Microsoft to create a kind of bridge between cloud and data center, particularly where development of applications focuses more on cloud-native technology, making it possible for the cloud architecture to leak over the boundary to the data center.
Google seems to have the most “futuristic” approach. They’re building a cloud-native platform and even creating development tools needed to optimize for that vision. Their theory, which is valid, is that it’s relatively easy to link cloud and data center simply to have a workflow cross over. The question is how both sides of the boundary might optimize for the new cloud/data-center relationship. If applications can be built and deployed for a universal application PaaS-like model spanning all hosting options, then future applications can exploit the cloud without change, so if enterprises lose their compliance and security fears, even mission-critical elements might qualify for cloud hosting.
Architectures can cut both ways, as I’ve noted in past blogs. Container hosting is a credible requirement for our universal application architecture, and that could take the form of managed Kubernetes federated across into the data center, or in the form of data center Kubernetes driving a cloud implementation. In the latter case, there’s little opportunity for cloud providers to differentiate themselves, which may be why the providers are looking at making some fast moves. Wait too long and a vendor like VMware or IBM/Red Hat might just come out with a cloud-independent vision. That could level the cloud playing field.