The cloud has always been the main battlefield for the three giants — Microsoft, Amazon, and Google. On Wall Street, this business appears critical to each company's future development.
For Microsoft, Azure has been seen as the standard-bearer of its successful transformation (though I personally disagree).
For Amazon, AWS not only makes more money but also gives the company more tech credibility.
For Google, whether Google Cloud succeeds seems immaterial (given how many Google products have been abandoned), but not doing it would dishonor the "Google" brand.
Now that Microsoft, Amazon, and Google have all reported their latest earnings, what is the true state of the cloud market? Has the three-way split become a foregone conclusion?
Image source: Steam Community
Wei: AWS Leads the Pack
On cloud, Amazon is the most transparent of the three — at least it discloses revenue — effectively showing its hand.
Per Amazon's latest earnings, AWS revenue this quarter was $8.381B, up 37% year over year, a new low for growth rate. Operating income was $2.121B, up 29% year over year; operating margin 25.3%, down 1.6 percentage points year over year.
From a revenue mix perspective, AWS accounted for 13.2% of Amazon's total revenue this quarter but contributed 68.8% of operating income, up 1.7 and 13.8 percentage points year over year, respectively.
Author's estimate
Clearly, Amazon is increasingly dependent on this cash cow, AWS. Therefore the cloud war is existential for Amazon; failure is not an option.
Shu: Azure Holds the Trump Cards
Market-cap leader Microsoft doesn't "show its hand" like Amazon; everyone has to "guess." Each earnings release discloses only Azure's year-over-year growth rate, a bit like holding a pipa half-hidden.
But if you want to know, there is a way. Through a series of simple simultaneous equations we can derive Azure's revenue scale. By our estimate, Microsoft's Azure revenue this quarter was $3.677B, up 64% year over year. Although growth also hit a new low, the year-ago base was sizable and the sequential increment was respectable, so Azure's upward momentum remains intact.
On revenue mix, Azure accounted for 10.9% of Microsoft revenue this quarter, up 3.5 percentage points year over year. Operating profit specifics cannot be derived, but the overall Intelligent Cloud segment (which includes Azure) had an operating margin of only 10%. In terms of revenue and profit importance, Azure is not to Microsoft what AWS is to Amazon.
For Microsoft, I believe Azure is not Nadella's greatest contribution, nor the main reason for Microsoft's return to dominance.
Azure's greatest significance for Microsoft is not how much revenue or profit it brings, but that it injected fresh blood into the company, enabling the Microsoft ecosystem to ascend once more.
Going forward, Azure can empower virtually all of Microsoft's software, especially its two trump cards: Office and Windows.
Wu: Google Cloud Quietly Grows
Google, usually a magnet for attention, is surprisingly low-key on the cloud battlefield, like the "stealthy" Eastern Wu. In media coverage of cloud, third-place Google is often overlooked. But by our estimate, its revenue scale is not as far behind Microsoft Azure as imagined.
Of course that's not our fault; Google discloses precious little about Google Cloud. We were pleasantly surprised when, on this quarter's call, an executive rarely revealed Google Cloud's approximate revenue scale. From an annual revenue run rate of over $8B, we can back out this quarter's Google Cloud revenue of over $2B.
Interestingly, the last time an executive "inadvertently" disclosed cloud annual revenue run rate was in FY2017 Q4 (over $4B). Assuming FY2017 Q4 Google Cloud revenue of $1B and FY2019 Q2 of $2B, the six-quarter CAGR is 12.24%. Using that as the sequential growth rate implies a year-over-year growth of ~58%, between Microsoft and Amazon. On revenue mix, a 5.1% share is barely worth mentioning. Because, as everyone knows, Google is an "advertising company."
But in high tech, how can you leave out Google? Google always delivers stunning black-tech surprises. Google executives still value the cloud business, and Wall Street is uniformly bullish on the new Google Cloud chief.
Google is a magical company; its rock-solid ad business funds its "dreams." Expecting Other Bets (Google Cloud is not part of Other Bets) to deliver large near-term returns is unrealistic, but Google's myriad attempts truly honor the label "technology company."
Conclusion
From the current scoreboard, Amazon AWS leads by a wide margin. But behind the revenue comparison, cloud means something different to each company and cannot be simply quantified.
Author's estimate; Microsoft fiscal year adjusted to calendar alignment
Cloud's future prospects need no elaboration; tech giants are all-in, but the free-for-all is over. A "Three Kingdoms" standoff is likely to persist (giants can more easily expand via acquisitions, e.g., Google's $2.6B cash purchase of Looker).
Side note: Hope Alibaba Cloud and Tencent Cloud one day reach the cloud summit.