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Breaking Analysis: Gearing up for Cloud 2020


>> From the silicon angle media office in Boston Massachusetts, it's the Cube Now here's your host, Dave Vellante

>> Hello everyone and welcome to this week's episode of wiki buns cube insights, powered by ETR In this breaking analysis, I plan to look deeper into the cloud market and specifically the business results and the momentum of the big three US cloud players Now, Google last week opened up a bit and they not only broke out YouTube's revenues but also its cloud business And quite a bit more detailed now like Microsoft the numbers are still somewhat opaque and hard to compare with AWS numbers which I find much cleaner

Nonetheless by squinting through the data, we're able to better understand the momentum that these three companies have in cloud and of course the ETR spending data, gives us an added data-driven dimension that is really insightful and helpful Today we're focusing on, the big three in cloud Amazon's AWS, Google's cloud platform GCP and Microsoft Azure Now to meet the other US players are not hyper scalars and they're really not even in the discussion other than is an extension of their existing business

As an example, it would take IBM and Oracle between four and six years to spend as much on capex as Google spends, in four months Now coming back to the big three Each of these companies is coming at the opportunity with a different perspective But Amazon and Microsoft, have been on a collision course for quite some time now Google of course aspires to get into that conversation

Amazon in my opinion is the gold standard in cloud and I specifically refer to infrastructure as a service They created the market and have earned the right to define the sector Competitors like Microsoft are smart to differentiate and I'm going to discuss that But first, let's take a listen as to how Amazon's CEO Andy Jassy Amazon web services CEO Andy Jassy, thinks about the goals of the AWS business Roll the clip please

>> A high-level are top-down aggressive goals that we want every single customer who uses our platform to have an outstanding customer experience And we want that outstanding customer experience in part is that their operational performance and their security are outstanding But also that it allows them to build projects and initiatives that change their customer experience and allow them to be a sustainable successful business over a long period of time and then, we also really want to be the technology infrastructure platform under all the applications of people build >> So, what's interesting to me here is how Jesse thinks about the AWS platform It's a platform, to build applications

It's not a SaaS, it's not a platform which AWS can use to sell its software packages, it's a place to build apps Any application, any workload, any place in the world So when I say AWS has clean numbers, it's because they have a clean business Infrastructure is what they do, period That's what they report in their numbers and it's clean

Now compare that with Microsoft Microsoft is doing incredibly well in the cloud and will come back to that, but Microsoft is taking a much different approach to the market They report cloud revenue but it comprises public, private and hybrid It includes SQL Server, Windows Server, Visual Studio, System Center, GateHub and Azure And also support services and consulting

But the key here is they defined cloud to their advantage which is smart trying to differentiate with a multi cloud any cloud, any edge, story Think Microsoft Azure stack slash Microsoft Ark etc Now Google as we know is coming at this as a late comer They admit they're a challenger Their starting point is G suite

Their cloud focus is infrastructure and analytics So, with that as some background let's take a look at the wiki bond estimates for I as revenue in 2019 What we have here is our estimates of AWS Azure and GCPs is IaaS and PaaS revenue, for 2018 and 2019 We've tried to strip out everything else so we can make an apples-to-apples comparison with Amazon So let's start with Amazon

The street is concerned about the growth rate of AWS It grew 35% last quarter, which admittedly is slowing down But it did just under 10 billion Think about that AWS will probably hit a 50 billion dollar run rate this year 50 billion and it's growing in the double digits

AWS is going to be larger than Oracle this year and Cisco is next in its sights it's like Drew Brees knocking down records in the NFL Microsoft is very strong but remember, these are estimates They report as your growth, but they don't really give us a dollar figure We have to infer that from other data

So the narrative on Microsoft is they're catching up to AWS and in one-dimension that's true because they're growing faster than AWS But AWS in 2019 grew by an amount almost equal to Asher's entire business in 2018 Now Google is hard to peg The only thing we know is Google said it's cloud business was 9 billion in 2019, up from 58 billion in 18 and 4 billion in 17

So we're seeing an accelerating growth rate That they said is largely attributable to GCP and they told us that GCP is growing significantly faster than their overall business Which remember includes, G suite, cloud business that is Okay So that's the picture

Now, I want to take a minute to talk about the profitability of the cloud On the Microsoft earnings call, Heather Bellini of Goldman Sachs, she was effusive she's an analyst exclaiming how impressed she was with the fact that Microsoft has been consistently increasing its cloud gross margins each quarter I think was up five points in the last quarter And on the Google call, Heather again was praising Google CEO Sundar Pichai on gross margin guidance for GCP Which Sundar didn't answer

As well, Andy Jassy said in the Q blast reinvent that the cloud was higher margin than retail but it's scale, it's a relatively low margin business As compared to software I would like to comment on all this First I think Jesse is sandbagging AWS is a great margin business in my opinion

AWS has operating margins consistently in the mid 20s like 26% last quarter Now, Bellini on the earnings call, was pressing on gross margins which in my opinion are even more impressive Here's why This is a chart I drew a long long time ago It's a very basic view of the economics of the different sectors of the technology business

Namely hardware, software and services Now, that each have a different margin profile as we're showing here On the vertical axes, marginal cost that is the incremental cost of producing one additional unit of a product or service On the horizontal axis, is volume And we're showing the Pre-Cloud Era on the left and the Post-Cloud Era on the right-hand side of the chart

And you can see each segment has a different cost and hence different margin profile In Hardware, you have economies at volume but you have to purchase and assemble components and so at some point your marginal cost hit a floor Professional services have a diseconomies of scale Meaning at higher volume, things get more complex and you have more overhead Now that red line is software and everybody loves software because the marginal costs go to zero and your gross margin approaches the cost of distributing the software

Back in the old days, it really came down to the cost of a what our custom distributed a disk or a CD So software gross margins are absolutely huge Now let me call your attention to the green line that we've labeled outsourcing In the pre-cloud era, outsourcing companies could get some economies but it really wasn't game changing But in the post-cloud world the hyper scalars are driving automation

Now I'm exaggerating the margin impact because the cloud players still have to buy hardware and they have other costs But the point is, gross margin and outsourcing IT to a cloud player is far more attractive to the vendor at scale So Heather Bellini, was essentially asking Sachini Adela how is it that you can keep expanding your gross margins each quarter and she was trying to understand, if GCP gross margins were tracking similar to where AWS and Azure were back when they were smaller And I think these curves at least give us some guidance All right, so now let's pivot into the ETR data

This chart shows net score which remember, refers to spending velocity for each of the big three cloud players Over the past nine surveys for cloud computing the cloud computing sector Now three things stand out First is that AWS remains very strong with net scores solidly in the 60% plus range Second, is Azure has sustained a clear momentum lead over AWS, since the July 18 survey

And the third, is look at GCP's uptick It's very notable and quite encouraging for Google Now, let's take another cut on this data and drill into the larger companies, in the ETR data set Look what happens when you isolate on Fortune 500 Two points here, AWS actually retakes the lead over azure, in net score or spending velocity even though Azure remains very strong

Amazon's showing in large accounts is very very impressive Nearly back to early 2018 peak levels at 76% So really strong net scores The second point is GCPs uptrend holds firm and actually increases slightly, in these larger accounts So it appears, that the big brands which perhaps used to shy away from cloud, are now increasingly adopting

Now, one of the things ETR does that I love is these drill downs, where they'll ask specific questions that are both timely and relevant So we want to know, what every salesperson wants to know Why do they buy? And that's what this chart shows It shows data from the ETR drill downs and on the left hand in the green or the y the buys from Microsoft AWS and Google cloud For Microsoft CIOs a compatibility with existing skills and the organization's IT footprint then its feature set etc

Look here's the deal, this is mr softies huge advantage It's just simpler to migrate work to Azure if you're already running Microsoft apps And if Microsoft continues to deliver adequate features it's a no-brainer for many customers For AWS, the pluses are ROI near-term and long-term and I've said many times, best cloud in terms of reliability, uptime, security AWS has the best cloud for infrastructure

And if you're not incurring huge migration cost or if you're not Walmart, why wouldn't you go, with the best cloud? Now GCP comes down to the tech Google has good tech and IT guys They're geeks And geeks love Tech And when it comes to analytics, Google is very very strong as well

Now the right-hand side of this chart shows why this is not in my opinion a winner-take-all game The chart shows the percent of workloads in the cloud today in two years and three years across different survey dates Today it's between 25% and 35% and it's headed upwards to 50% , this is a huge growth opportunity for these companies You know sometimes people say to me that Google doesn't care about the cloud because it's such a small piece of their business or well they can't be number one or number two so they'll exit it I don't buy this for a second

This is a trillion dollar business Google is in it for the long game, and in my opinion, is going to slowly gain share over time All right let's wrap up by looking forward to 2020 and beyond The first thing I want to say is feel good for Google for reporting its cloud revenues but I think Google has to show more in cloud I understand it's a good first step but IT buyers are still going to want to see more transparency

The other point I want to make is we are entering a new era the story of the past isn't going to be the same as this decade Buyers aren't afraid of cloud anymore It has become a mandate The dominant services of the past and compute storage and networking to still be there but they're evolving, to support analytics, with AI and new types of database services And these are becoming platforms for business transformation

Competition is, as we've seen, much more real today Buyers have optionality And that's going to create more innovation SaaS, continues to be a huge factor but more so than ever And hybrid and multi cloud is increasingly real and it's become a challenge for IT buyers so, I expect AWS is going to enter the ring in a bigger way to expand its Tim

Finally developers are no longer tinkerers, they are product creators Now they said, there's a huge market And the big tree can all participate as well as overseas players like, Ali Baba As a customer it's becoming a more and more complicated situation Cloud is not just about experimentation or startups it's increasingly about something that you really need to get right

Where to bet, migration and managing risks all become much more critical On one hand, optionality is a good thing but if you make the wrong bet, it could be costly if you don't have a good exit strategy Now as always, I really appreciate the comments that I get on my LinkedIn post and on Twitter I'm @DVellante So thanks for watching and thanks for your comments and your feedback This is Dave Vellante for the cube insights powered by ETR We'll see you next time (upbeat music)

Source: Youtube

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