Spending on the Rise as AI Drives New Era of Cloud Computing
Cloud spending is surging once again.
Last year, cloud spending slowed somewhat due to “enterprises continuing to be cautious in their spending in this uncertain time,” according to Amazon CEO Andy Jassy, whose cloud arm, Amazon Web Services (AWS), continues to dominate the cloud market some 18 years after its initial launch in 2006.
After significant cost-cutting and expenditure pauses last year, many large customers have resumed their cloud computing investments this year, leading to a cloud spending boom that has been a boon to AWS and its hyperscaler peers, like Microsoft and Google Cloud.
AWS saw a 17% growth in the first quarter of 2024, outpacing the 15% growth initially forecast by Wall Street analysts. It is also a milestone for AWS, as it copped its first-ever USD $100 billion annual run-rate. Similarly, Microsoft’s Azure and Google Cloud posted impressive growth rates of 31% and 28%, respectively, in the first four months of the year.
It is a remarkable turn of events given how the Big Three of AWS, Microsoft, and Google experienced revenue deceleration around the same time last year, driven largely by continuing economic headwinds and uncertainties in the tech sector in general.
The downtrend, though, appears to have been short-lived. Shortly after seeing their cloud revenue dip in the first quarter of 2023, cloud hyperscalers began rebounding in the succeeding months, with the International Data Corporation (IDC) reporting a 7.9% year-over-year increase in the second quarter of 2023 to USD $24.6 billion. A key driver of this bounce-back appears to be Artificial Intelligence (AI), which has been taking the enterprise world by storm.
“Cloud infrastructure spending is shifting towards robust configurations geared towards more complex workloads and new AI initiatives. Despite the steep decline in system unit demand for the first half of the year, the spending outlook for 2023 remains positive with growth centred on the expectation that higher ASPs will remain for the rest of the year,” remarked Juan Pablo Seminara, Research Director at IDC’s Worldwide Enterprise Infrastructure Tracker, discussing IDC’s bullish outlook for the cloud starting last year.
Amazon is recognising these tectonic shifts caused by AI, which is why the company, according to its CFO Brian Olsavsky, “is investing upfront to build out its AI offerings to meet customer demand.”
Satya Nadella, CEO at Microsoft, highlighted the increasing number of Azure AI customers and the corresponding rise in average spending, noting how over 65% of Fortune 500 companies are now utilising Azure OpenAI Service. AI services, according to Nadella, have contributed an additional 7 percentage points to Azure’s growth, up from 6 points in the previous quarter.
Google’s parent company, Alphabet, is also reaping the benefits of the AI boom, with CEO Sundar Pichai reporting that nearly 90% of generative AI unicorns and more than 60% of funded AI startups are leveraging Google Cloud. This adoption rate only underscores the cloud industry’s position at the forefront of AI integration.
Analysts like Gil Luria from D.A. Davidson & Co. observe that AI is not only contributing to growth but also accelerating overall cloud spending.
“Looking across AWS, Microsoft Azure, and Google Cloud, it is clear that two things are happening simultaneously—AI is contributing to growth, but also the rest of cloud spending is accelerating,” Luria observed.
Rishi Jaluria from RBC Capital Markets echoed this sentiment, stating, “There is an inevitable and continuous migration of workloads to the cloud and consolidation of IT spending going towards large platforms, including the hyperscalers.”
The cloud computing market, already valued at approximately USD $270 billion, is booming, becoming a veritable cash cow for industry leaders such as Amazon, Microsoft, and Alphabet. It will only grow side-by-side with AI as enterprises continue to see it as a difference-maker in the world of business.
