What Microsoft suggested last month was confirmed by Amazon Web Services (AWS) and Google this week: revenue growth rates at the major cloud providers are slowing down.
The good news first. As with Microsoft Azure, which saw revenue grow by more than 30% in the fourth quarter of 2022, AWS and Google both posted revenue increases this week for the final quarter of 2022 that look pretty good on paper. AWS cloud revenue reached $21.4 billion, representing a 20% year-over-year hike for the long-time cloud market leader, while Google Cloud brought in a little over $7.3 billion for the same period, representing a 32% rise in revenue.
But both companies missed consensus estimates for their quarters–AWS fell short of the expected $21.8 billion revenue mark, while Google Cloud finished under the anticipated $7.4 billion for the quarter. AWS posted an operating income for the quarter of about $5.2 billion, slightly under the $5.3 billion registered for the fourth quarter of 2021, and Google admitted a $480 million operating loss that was far better than the $890 million operating income loss it reported for the final quarter of 2021. Google did not break out cloud revenue among its results for the full year of 2022, while Amazon said AWS revenue for the full year was up 29% to $80.1 billion.
It is now clear that the big three cloud providers are starting to come down from the extraordinary revenue heights reached during the Covid-19 pandemic and at the same time are bending from the economic pressures currently facing almost every other industry.
On Google parent Alphabet’s fourth quarter earnings call this week, CFO Ruth Porat cited the factors leading to decelerating cloud revenue growth: “First, we faced very tough comps [comparisons] given the outsized recovery in 2021 from the impact of the pandemic; second, foreign exchange headwinds grew throughout the year; and third, we were operating against the backdrop of a more challenging economic climate that also impacted many of our customers and which remains ongoing.”
Amazon cited similar changes in enterprise demand that are affecting its cloud business, and it is clear that neither company is certain how long the ongoing deceleration could last. Amazon CEO Andy Jassy said that cloud revenue so far during the first quarter is tracking at “mid-teens” revenue growth.
Jassy added “If it's good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that. And it's one of the advantages that we've talked about since we launched AWS in 2006 of the cloud, which is that when it turns out you have a lot more demand than you anticipated, you can seamlessly scale up. But if it turns out that you don't need as much demand as you had, you can give it back to us and stop paying for it. And that elasticity is very unusual.”
Both companies indicated that the fundamentals of the cloud market, which Jassy noted still only accounts for only 5-10% of all IT spending, with the rest still on-premises, remain strong.
“With Google Cloud, we remain excited about the long term market opportunity and trajectory of the market,” Porat said. “Enterprises and governments are increasingly turning to us for their digital transformation across verticals and geographies.”
Jassy concluded, “Stepping back, our new customer pipeline remains healthy and robust, and there are many customers continuing to put plans in place to migrate to the cloud and commit to AWS over the long term… We're going to help our customers find a way to spend less money. We are not focused on trying to optimize in any one quarter or any one year; we're trying to build a set of relationships in business that outlast all of us.”