Microsoft’s Cloud Services Outperform Amazon and Google

Microsoft Corp. is currently leading the way in the competition to recover from a two-year decline in cloud computing expenditure, surpassing its main competitors, Amazon.com Inc. and Google.

Revenue at Microsoft’s Azure cloud business grew 29% in the September quarter, faster than analysts estimated, driven in part by business customers’ interest in new artificial intelligence products. In its own report earlier this week for the same period, Google parent Alphabet Inc. struck a more subdued tone, saying cloud customers were still in cost-cutting mode. And on Thursday, Amazon.com Inc.’s cloud revenue picture was mixed: sales were slightly lower than forecast and operating profit exceeded analysts’ forecasts. Microsoft — which is No. 2 in the market behind Amazon but ahead of Google — said it was taking cloud market share from rivals, but did not say which ones.

After investing during the pandemic, companies spent much of 2022 and 2023 doing what the biggest software companies euphemistically called “optimization” — making better use of stuff they’re already paying for and looking for places where they can save. That has meant the biggest cloud providers are competing to win big contracts in a more challenging environment, prompting them to look for ways to attract businesses, including by offering the latest AI-powered products that promise to boost efficiency.

“The world is being driven by workloads accelerating to the cloud,” said Stefan Slowinski, an analyst at BNP Paribas’ Exane. “CEOs are making this decision based on courage, and right now they’re still cautious.”

The renewed interest in developing and using artificial intelligence applications has almost certainly influenced recent decisions by companies about which cloud partner to sign up with. Microsoft offers ways to work with multiple AI tools and has gained notoriety in the growing space thanks to its partnership with OpenAI, which makes the popular ChatGPT program for content creation. That alliance helped spur new customer growth, Microsoft said — a service called Azure OpenAI, which lets Microsoft’s cloud customers use the startup’s technology for their own applications, attracted more than 18,000 customers out of 11,000. Microsoft has also invested $13 billion in OpenAI and acts as its cloud service provider, so the company’s growing need for computing power also benefits Microsoft.

Amazon, on the other hand, is trying to attract customers with a menu of different options and a partnership with artificial intelligence developer Anthropic, which makes the Claude chatbot. Google, owned by Alphabet Inc., says it is a popular choice among large corporations and artificial intelligence companies alike. CEO Sundar Pichai said in a conference call that more than 60% of the world’s top 1,000 companies are Google cloud customers, as well as “more than half of all funded generative AI startups.”

Amazon CEO Andy Jassy told analysts on the e-commerce giant’s conference call Thursday that generative artificial intelligence represents an opportunity worth “tens of billions” of dollars for Amazon Web Services, the company’s cloud unit that he led in his previous role. AWS’s revenue growth was 12 percent, roughly the same pace as in the previous quarter. However, operating profit was about $1.3 billion better than analysts’ expectations, pushing the cloud unit’s operating profit margin — which usually makes up all of a company’s profit — to its highest level since the first quarter of 2022.

Brian Olsavsky, Amazon’s chief financial officer, said on a conference call with reporters that some companies are still working on “optimization” but the pace “has started to slow down.” Some companies made new commitments to AWS or are continuing previously suspended projects, he said. Later in a call with analysts, the company said several new contracts with customers were signed late in the third quarter and won’t show up as revenue until the current period. The comments helped lift Amazon shares in late trading Thursday.

At Microsoft, the 29 percent increase in sales of Azure cloud services exceeded the 26 percent increase in the previous quarter, which lifted the company’s stock in New York trading the next day. CFO Amy Hood said that while “optimization trends” were similar to the previous quarter, consumption — a measure of the amount of Azure services used — was better than expected, and the company saw an increase in the number of contracts worth more than $10 million. for both Azure and Office cloud services.

Google’s cloud unit, which includes both infrastructure services from AWS and Azure and adds results from productivity software, grew 22% in the quarter from a year earlier. It is a slowdown from the previous quarter’s growth. Unit sales were $8.4 billion, missing Wall Street’s forecast of $8.6 billion. The result was also weaker than estimated. Alphabet’s director Ruth Porat said in an interview that the belt-tightening of some customers has affected the unit’s sales. Shares fell 9.5% the next day, the biggest drop since March 2020.

“Cloud computing is much more than advertising, and Google faces stiff competition,” said Max Willens of Insider Intelligence. “While its traction among AI companies may bear fruit in the long term, it currently does not help Google Cloud enough to satisfy investors.”