Context: The UK Competition & Markets Authority (CMA) is conducting a cloud service market investigation, favoring Google over Amazon and both over Microsoft (January 28, 2025 ai fray article). In particular, Google and Amazon accuse Microsoft of designing software licensing terms in ways that distort cloud competition.
What’s new: It’s earnings season, and all three “hyperscalers” reported their results a few days ago. Investors had higher expectations, but there is fierce competition in that market. When discussing their results and future plans, both Google and Amazon expressed strong optimism for the growth prospects of their cloud business units.
Direct impact & wider ramifications: Some of what Amazon’s and Google’s executives told investors this week suggests that competitive dynamics in the cloud service sector are strong. In particular, there are no signs of Google and Amazon being unable to compete with Microsoft for new customers due to licensing terms for legacy software. It appears that regulators could easily find industry segments in which there are greater opportunities to spur competition and bring down costs.
If the CMA’s hypothesis was correct and unfair competition was distorting the cloud market, Microsoft’s competitors would not only be complaining to competition regulators but also be warning their investors. Much to the contrary, Amazon CEO Andy Jassy told investors this week that “it’s hard to overstate how optimistic [they] are” about Amazon Web Services (AWS). And the CEO of Google parent Alphabet, Sundar Pichai, said the following about new customer acquisition on an earnings call:
“In 2024, the number of first-time commitments [to the Google Cloud Platform (GCP)] more than doubled, compared to 2023. We also deepened customer relationships — last year, we closed several strategic deals over $1 billion, and the number of deals over $250 million doubled from the prior year.”
So what was it that had investors concerned? Year-in-year, fourth quarter GCP revenues (now $12 billion) were 30% greater, versus a growth rate of 35% in the previous quarter. However, Google’s cloud business has had similar temporary slowdowns while still growing fast if one looks at longer periods than individual quarters. The 30% growth rate in 4Q2024 was still higher than in any quarter of 2023 (between 22% and 28% at the time).
What’s growing faster than sales is Google’s cloud profitability: more than $2 billion in 4Q2024 versus $864 million in 4Q2023. The operating margin grew at a similar rate from 9.4% to 17.5%). On an annual basis it almost tripled from 2023 (5%) to 2024 (14%).
AI is a major driver of Google’s cloud business growth: customers “consume more than eight times the compute capacity for training and inferencing compared to 18 months ago,” said Mr. Pichai, who also emphasized Google’s deep vertical integration:
“We have a unique advantage because we develop every component of our technology stack, including hardware, compilers, models and products. This approach allows us to drive efficiencies at every level, from training and serving, to developer productivity.” (emphasis added)
It is difficult to understand why the CMA decided to let Google off the hook while going after less integrated competitors. Google also enjoys enormous platform power:
“Our products and platforms put AI into the hands of billions of people around the world. We have seven products and platforms with over 2 billion users, and all are using [Google’s AI service] Gemini.”
Amazon Web Services (AWS)
Amazon announced investments of approximately $100 billion in its AWS cloud business, which CEO Andy Jassy said they would not make unless they saw “significant signals of demand” (February 7, 2025 Investor’s Business Daily article).
All that is really holding back Amazon is capacity constraints:
“It is hard to complain when you have a multibillion-dollar annualized revenue run rate business in AI, like we do, and it’s growing triple-digit percentage year over year. It’s hard to complain. However, it is true that we could be growing faster, if not for some of the constraints on capacity.”
Investors may have expected more, but AWS’s growth rate has been increasing. The unit brought in about $107.6 billion in revenue in 2024, up 18.5% from $90.8 billion in 2023. That is an increase over the 13.3% growth rate in AWS revenue the previous year. And operating income is growing even faster:
On an annual basis, AWS operating income is 39.8 billion, up about 60% from $24.6 billion in 2023.
Not only is Amazon growing its business with existing customers, especially thanks to AI-related demand, but it also signed notable new customers: Intuit, PayPal, Norwegian Cruise Line Holdings, Northrop Grumman, the Guardian Life Insurance Company of America, Reddit, Japan Airlines and Asana. Some of those companies are probably also major users of legacy enterprise software, yet chose AWS for the cloud.
Amazon’s CEO sees his company in its worldwide market leadership position for the foreseeable future:
“I spent a fair bit of time thinking several years out. And while it may be hard for some to fathom a world where virtually every app has generative AI infused in it … this is the world we’re thinking about all the time. And we continue to believe that this world will mostly be built on top of the cloud with the largest portion of it on AWS.”
He regards Amazon’s AI chips as a major competitive advantage over at least some other cloud providers:
“Building outstanding performance chips that deliver leading price performance has become a core strength of AWS’s—starting with our Nitro and Graviton chips in our core business and now extending to Trainium and AI—and something unique to AWS relative to other competing cloud providers.”
Looking at Amazon’s and Google’s words and numbers, there is every indication that the cloud market is competitive. Prices are deflationary, except that usage volumes increase when customers make use of AI. And different players have different strategic advantages. Some companies and their proxies are screaming for regulatory intervention, but the market is not.