Source: titanium media author: Yang Li

The public cloud market has been filled with pessimism recently. As the major cloud factories disclosed the latest financial quarter business data, cloud sales growth slowed, net profit fell, and so on, which directly or indirectly affected the sharp decline in technology stock prices, as well as layoffs and salary cuts as the main means of cost-cutting measures.

However, a careful study of the trend of cloud manufacturers over the past three years reveals that behind this so-called pessimistic attitude, they are also facing the collective pain of the transition of the cloud market.

In the era of cloud computing, computing has become a social resource, which can be used at the same time on a large scale and reduce the access cost of users. In this process, users really feel this change, but the difference is that after the completion of this set of hydro-coal power, the value-added services of cloud manufacturers have not kept up with the pace of customer demand (such as the richness and depth of upper applications). The value obtained by customers lags behind and even makes the cooperation between the two sides fall into a zero-sum dilemma.

According to the preliminary calculation of titanium media App, Amazon cloud revenue CAGR (average annual compound growth rate) was 31.64% in 2019-2022, and Microsoft Corp smart cloud revenue CAGR (average annual compound growth rate) was 2019-2022.24.5%In 2019-22, Alphabet Inc-CL C Cloud's revenue CAGR (average annual compound growth rate) was 43.38%.

Being able to maintain a good annual compound growth rate represents the possibility for enterprises to achieve scale growth in a certain cycle, which is more challenging than before 2019. Relatively speaking, Alphabet Inc-CL C Cloud, which has a smaller market volume, has maintained a stronger reverse adjustment ability in the past four years.

By analyzing the overseas and Chinese cloud markets, this article tries to point to a common question: how does the cloud market activate the next phase of growth?

Cloud vendors collectively slow down rapidly

First of all, titanium media App compared the latest quarterly results released by Alphabet, the parent company of Microsoft Corp, Amazon.Com Inc and Alphabet Inc-CL C, up to December 2022. As Alphabet Inc-CL C's parent company, Alphabet, first disclosed the cloud computing business of 2019 Q4 and the whole year in February 2020, this is used as a complete starting point to analyze the cloud business sectors of the three technology companies.

Titanium media App combed the data and found that revenue from Amazon's cloud business showed clear signs of slowing down over the past four years. In the fourth quarter of 2022, Amazon.Com Inc Cloud's revenue reached US $21.38 billion, an increase of 20% over the same period last year, making it the lowest growth rate in Amazon Cloud's history, while this figure reached 45% in 2018. Operating profit of US $5.2 billion, operating profit margin fell to 24%, narrowing for four consecutive quarters.

In Microsoft Corp's results for the second quarter of fiscal 2023, Microsoft Corp's smart cloud business unit (including smart cloud products Azure, server and cloud services Windows Server, SQL Server, and enterprise services) had overall revenue of $21.51 billion, up 18% from a year earlier. Of this total, revenue from servers and cloud services increased 20% year-on-year, down 9% compared with the same period last year; revenue from Azure and other cloud services increased 31% year-on-year, down 15% from the same period last year.

At present, intelligent cloud is one of Microsoft Corp's fastest growing businesses. Since the financial year 2016, when Microsoft Corp changed the financial reporting structure, the performance of the intelligent cloud service department began to attract outside attention. In fiscal year Q4 in 2019, smart cloud services surpassed more personal computing businesses where the core business Windows is located for the first time, with revenue of $11.4 billion for smart cloud services, compared with $5.9 billion for Q1 in fiscal 2016. Specific to Azure cloud growth, from fiscal year 2022 to now, its year-on-year growth rate (50%, 46%, 46%, 40%, 35%, 31%) continues to slow and hit a new low.

Google Cloud, which includes cloud infrastructure revenues from G Suite, Enterprise GMail/Docs/Drive/Hangouts and Alphabet Inc-CL C, achieved $7.32 billion in revenue in the quarter, with revenue growth falling from 38 per cent in the previous quarter to 32 per cent in the current quarter. This is also the slowest growth rate of Alphabet Inc-CL C's cloud business since the data were disclosed. However, Alphabet Inc-CL C Cloud has reduced its losses, to $480 million from $890 million in the same period last year.

On the whole, compared with the rapid development of cloud business in the early years, the slowdown in cloud business revenue growth of the three major overseas cloud manufacturers is an inevitable problem when they progress to a certain stage, and analysts generally expect it to continue to slow in the third quarter of this year. In terms of revenue growth and profits (supported by operating profit margins and loss data), the big three cloud manufacturers still need to actively adjust their development health due to historic inflation and Fed interest rate hikes.

Customers cut expenses and optimize cloud cost spending

In the face of the fact that the collective rapid growth of cloud manufacturers is slowing down, titanium media App learned from a number of professionals that the slowdown in the cloud market is mainly due to customers starting to reduce expenditure and optimize the use of cloud resources, but the reduced expenditure will still be invested in new business scenarios or used to solidify an advantage scenario, which is the performance of capital for profit.

For customers, business cloud is not exactly equivalent to reducing cost and increasing efficiency. Whether to rent a cloud server or purchase a physical machine to build a private cloud, its performance-to-price ratio does not lie in whether it is "on the cloud", but in the "resource utilization". Generally speaking, the higher the resource utilization or the utilization of the CVM, the higher the performance-to-price ratio, and the cloud cost can be diluted in a real sense.

At present, for those enterprises that have experienced digital practice, the primary task is "integration". Under the overall trend of increased market uncertainty, many enterprises, including large companies, have begun to adjust the operating costs of IT, including servers and other resources. Meta, for example, has announced a $4 billion cut in data center costs.

"due to concerns about inflation and recession in the general environment, large enterprise customers want to optimize a large number of existing digital applications to invest the savings in new projects." One analyst said.

Combined with Microsoft Corp Cloud's strategy for some time in the past, it promised to help customers control cloud costs from 2022 and extended the service life of CVM components from 4 years to 6 years in July to help customers reduce expenses. A person close to Amazon Cloud also told titanium media App that using appropriate tools and strategies to help users optimize cloud costs is also an important thing that Amazon Cloud is doing.

Ruth Porat, chief financial officer of Alphabet, said in an earnings call that "the slowdown in cloud growth in the fourth quarter is mainly due to the macroeconomic impact of customers' optimized use of cloud resources." During this period, Google also announced an initiative to extend the life cycle of some of its servers and network equipment to six years to reduce depreciation costs in the coming quarters and improve profitability.

However, the IDC report recently pointed out that "if the company does not upgrade the server in time, and the delay exceeds the best time limit (currently considered to be four years or less), the cumulative operating costs will increase rapidly." This means that delayed replacement of servers may incur new hidden costs, including security risks.

"when optimizing cloud cost spending has become the number one strategy for enterprise customers, CIO are beginning to scrutinize vendor contracts and software spending more closely." ETR found through market research.

According to the latest research data from ETR, we can clearly see that there are several strategies for customers to optimize cloud costs: first, to integrate redundant suppliers across departments / organizations; second, to reduce excessive use of cloud resources; third, to reduce the workload supported by consumption-led services and tools; fourth, to optimize the SaaS subscription model, and so on.

ETR points to a number of factors: rising mortgage rates have led to reduced business in bank credit departments, a collapse of the cryptocurrency has led to reduced transaction volumes, and reduced advertising spending, which have directly reduced the use of cloud resources. In addition, enterprise users are trying to reduce the application frequency of data analysis, and use lower-cost computing examples such as AWS's Graviton and AMD chips, and even pursue more favorable pricing strategies, such as on-demand and spot pricing, reservation of instances or cost optimization of server clusters, and so on.

When enterprise customers want to further optimize the use of cloud resources at limited budget costs, they will want to operate existing business applications in a more efficient way and be more cautious about new cloud products. Even in the cloud, large enterprises will get hardware, software, and services with a higher performance-to-price ratio, and as a result, the information system will be put back on the local data center or one or more other private clouds.

In an annual report filed with the Securities and Exchange Commission, Amazon.Com Inc pointed out that in the long run, customer confidence is declining.

New Strategies in the Cloud era

In contrast to the decline in customer buying confidence and the slowdown in supplier sales orders, more market reports demonstrate that the global cloud market is still a huge value market with growth potential.

According to Canalys cloud services statistics, global spending on cloud infrastructure services increased 23 percent year-on-year to $65.8 billion in the fourth quarter of 2022. For the whole of 2022, total spending on cloud infrastructure services increased from $191.7 billion in 2021 to $247.1 billion, an increase of 29 percent. According to the Synergy Research Group report, global spending on public cloud infrastructure will reach $544 billion in 2022, an increase of 21% year-on-year. According to Statista, the SaaS market has the highest revenue in 2023, expected to reach nearly $254 billion, with 18 per cent year-on-year growth of 18 per cent. The PaaS market is still growing the fastest, growing 35 per cent year-on-year to $158.4 billion, while the IaaS market is expected to reach $113.3 billion, up from $83.7 billion a year ago.

"because when the market uncertainty increases, the enterprise will take the initiative to reshape the business and accelerate the improvement of the customer experience, the business cloud is the direct choice. However, customers will give priority to businesses with small operating capacity in the short term, rather than the need to pay in advance for larger long-term contracts. " A market researcher mentioned.

In fact, cloud vendors are still actively adjusting to meet current challenges and opportunities.

The first is the excavation of the new incremental market, including expanding new customers and increasing R & D investment in the "smart cloud" business.

For Amazon.Com Inc Cloud, its profitability is a very big test due to the decline in corporate spending and the rise in server energy and operating costs. To this end, Amazon Cloud is actively expanding customer channels, and by 2022, new big customers such as NASDAQ, Yahoo, Descartes Lab, etc., have moved some / core business to Amazon Cloud. In addition, Amazon.Com Inc launched a new availability zone in Spain and Switzerland and a second availability zone in India, according to the financial report.

Despite the slowdown in Azure growth, Microsoft Corp CEO Nadella responded that the slowdown would not be permanent. "the spending cuts in the process of business optimization will always be invested in new business scenarios, which are the key to growth."

In reality, Azure's existing contract backlog increased to $189 billion in the fourth quarter of 2022, and its future revenue is expected to remain stable. Azure Arc hybrid cloud solutions, which are said to have served more than 12000 customers, including Citrix, Northern Trust and PayPal Holdings Inc, have nearly doubled from a year ago.

Microsoft Corp also paid more attention to the strategic investment in technology-the deep integration of Azure cloud with ChatGPT, which is represented by OpenAI. Experts believe that "Azure has fundamentally changed the core of cloud computing by combining computing, storage and networking." In the past three or four years, the cloud infrastructure built by Microsoft Corp has changed the heavy model training into a supercomputer with reasoning ability by introducing AI technology into application. "

In 2022, Alphabet Inc-CL C Cloud's differentiated products and sustainable construction in channel ecology have won the endorsement of Siemens Energy, Intel Corp, Qualcomm Inc and other major customers. With the recent popularity of ChatGPT, Google Cloud is sending the same signal: continued investment in artificial intelligence research and application, and the growing use of AI in businesses such as Alphabet Inc-CL C Cloud.

Secondly, the adjustment of organizational structure, relying on compulsory administrative means, overall optimization from the perspective of organizational management, and strengthening the ToB team with complementary capabilities of "sales + products" is one of the important phased measures at present.

Cloud computing major customer market is still a more prominent area of ToB supply and demand, service B side, not only in selling products, but also in educating customers, providing IT and consulting services. Customer success and customer renewal, these are not immediate efforts to see the results, the need for long-term deep ploughing, product research and development, sales market, service operation and other aspects of comprehensive practice.

Google also overhauled its sales leadership earlier this year in an attempt to further improve the profitability of its cloud business, according to The Information.

The move is also particularly evident in Chinese technology companies: after Tsai Yinghua led the global sales business, Ali Yun began a series of adjustments, including the sinking of a large sales force, "the main construction of the industry, the main war of the region", being integrated and making profits to partners. Tencent set up a new government-enterprise business line in 2022 and made more organizational adjustments under the background of further clarity of business objectives, that is, focusing on self-research and optimizing product profits.

The third is the construction of ecological level.

Because Microsoft Corp is essentially a very typical ToB enterprise with super self-research ability, universal products such as Microsoft365 and Dynamics have been formed before the cloud business, and the monthly active users and feature richness of communication tool Teams are also increasing. However, Microsoft Corp Yun has not formed a strong ecology that requires many partners to build together.

Unlike Microsoft Corp, Amazon Cloud does not have a very strong application-level grasp. Although there are some self-developed SaaS tools, they rely more on cloud resource consumption by partners in the ecology, and its revenue source is not dominated by SaaS in the cloud market.

At present, Alphabet Inc-CL C Cloud's main source of business income is PaaS+SaaS products. If we always follow the development idea of taking the product as the core, it will lead to that each product has its own direction and it is difficult to form a joint force, weighing the market trend, customer demand and enterprise advantages, IaaS is not the best path.

From a certain point of view, ToB is not for the purpose of ecology to build products, technology, business system, but to a certain stage of development, it is necessary to activate from the community to promote ecology.

However, compared with Chinese and American cloud manufacturers in terms of ecological construction, the gap visible to the naked eye is the completely different market environment between China and the United States. Ecological problems such as chimney, system integration and data connection lead to the low cloud penetration of SaaS applications. SaaS is still a market with great potential but very low proportion in China.

The positive Competition of China's going abroad or from the Perspective of Globalization

After the three major overseas cloud manufacturers released cloud business financial data, BABA also disclosed the latest cloud business financial data in the first quarter.

In the third quarter of fiscal year 2023, Aliyun's revenue before and after cross-division offsetting was 26.693 billion yuan and 20.179 billion yuan respectively, and the adjusted EBITA profit was 356 million yuan, an increase of 166% over the same period last year.Month-on-month growth-18.0%.

Compared with the first two quarters of fiscal year 2023, the revenue in the first quarter was 17.685 billion yuan, and the adjusted EBITA profit was 247 million yuan. In the second quarter, the revenue was 20.757 billion yuan, and the adjusted EBITA profit was434 million yuan。

In other words, Aliyun achieved revenue of 65.135 billion yuan in the first three quarters of fiscal year 2023 (April 2022 to the end of December 2022), totaling 1.037 billion yuan based on adjusted EBITA profits. In 2022 (natural year), the adjusted EBITA profit amounts to 1.313 billion yuan. In fiscal year 2022, Aliyun made an annual profit of 1.146 billion yuan for the first time.

Overall, Aliyun has stabilized the basic profit market, but has not been able to achieve persistently high profit margins for at least the past fiscal year.

Combined with Canalys statistics, the preliminary answer seems to have been given: compared with the high growth momentum of 33% of the global cloud services market, cloud infrastructure spending in Q3 China increased by 11% in 2022 compared with the same period last year, and the growth slowed significantly.

It is worth noting that after the change in Aliyun's financial report, a basic public information is that the income from Internet customers decreased by 4% compared with the same period last year. Mainly from a head of Internet customers (byte jump) gradually stopped its international business to use Aliyun's overseas cloud services, partly offset by the growth of demand from other customers in China's Internet industry.

In the Chinese cloud market, the epidemic repeatedly causes the customer market to lag behind in IT expenditure, but for the Chinese enterprise market that has the demand to go abroad, it is being opened first.

Combined with Amazon Cloud's customers in the Chinese market, Chinese companies with overseas demand (such as offshore games, cross-border e-commerce, etc.) have occupied an important position. Amazon Cloud is the fastest-growing of the top five cloud service providers for Chinese companies or multinational companies that use domestic public cloud resources, with its share of the IaaS+PaaS market increasing from 7.5 per cent to 9 per cent, according to the IDC report. In addition, IDC also gives a set of thought-provoking data:

Amazon Cloud accounted for nearly 3% of the market share of Chinese companies using overseas public cloud resources in China in the first half of 2022.

This is a very oppressive number.

Service offshore enterprises compete with global nodes and localized operational advantages (in line with corporate needs and compliance). In 2021, Amazon Cloud officially launched the "Global advantage, rooted" China strategy, and in 2022 Amazon.Com Inc launched the "connecting China and Foreign countries" initiative to expand the global business layout for Chinese overseas enterprises and meet regional security compliance challenges. With the cooperation of 21Vianet Group Inc, Microsoft Corp Azure has tripled the scale of cloud computing in China and added two Azure regions and two data centers in North and East China at the same time, and will be officially put into commercial use in June 2023.

Chinese cloud manufacturers are also actively going out to sea. Aliyun began operating its third data centre in Japan in December and has added six new data centres overseas in the past year, in Saudi Arabia, Germany, Thailand, South Korea and Japan. 26 regional nodes and 82 availability zones have been established worldwide.

However, analyst Christopher Tozzi pointed out not long ago, "although Aliyun's data centers are operated in many corners of the world, such as North America, Europe and Southeast Asia, Aliyun's coverage in overseas markets is still limited compared with that in China and Southeast Asian countries. For those companies that really need global influence, it will be difficult to use Aliyun's services. "

He also said that some mainstream observability, security management tools can not be integrated into Aliyun, and Ariyun's relatively limited operation of the developer community, especially in the North American market, these are common reasons why enterprises do not use Aliyun.

This means that in the growth space of the cloud market in the future, for Chinese cloud players, whether it is going deep into the government and enterprises or overseas, it is necessary to talk about strategy to fight the war.

Edit / lambor