October 27, 2017 / 1:52 AM / 2 months ago

Cloud computing drives massive growth for big U.S. tech firms

SAN FRANCISCO (Reuters) - Amazon.com Inc (AMZN.O), Microsoft Corp (MSFT.O), Alphabet Corp’s (GOOGL.O) Google and Intel Corp (INTC.O) are all putting their chips on the cloud computing business, and it is booming.

All four companies posted stellar quarterly earnings on Thursday, showing the strength of the shift in corporate computing away from company-owned data centers and to the cloud.

Microsoft’s Azure business nearly doubled, with year-over-year growth of 90 percent. The company does not break out revenue figures for Azure, but research firm Canalys estimates it generated $2 billion for Microsoft.

“The move to the cloud was one we felt Microsoft could always benefit from, and they’re showing us that they can,” said Kim Forrest, vice president and senior equity analyst at Fort Pitt Capital Group, a portfolio management firm.

Highlighting the quarter for Microsoft was a deal securing retailer Costco (COST.O) as an Azure customer. That came just two months after the close of Amazon’s acquisition of grocery chain Whole Foods, which has heightened unease among retail and e-commerce companies about working with Amazon, said Ed Anderson, an analyst with Gartner.

Tim Green, analyst with the Motley Fool, said Amazon could find it needs to make changes at some point at Amazon Web services. “Spinning off AWS at some point down the road might become necessary to prevent an exodus of customers,” he said.

Amazon Web Services is still delivering far more revenue than any of its peers. For the quarter, AWS raked in nearly $4.6 billion -- a year-over-year increase of 42 percent. AWS may have missed out on Costco, but the company secured deals with Hulu, Toyota Racing Development, and most notably, General Electric.

Google Cloud Platform landed deals with the likes of department store retailer Kohl’s and payments processor PayPal. Like Microsoft, Alphabet does not break out revenue for Google Cloud Platform, but Canalys estimates the business generated $870 million in the quarter, up 76 percent year-over-year.

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Google Chief Executive Officer Sundar Pichai said Google Cloud Platform is a top-three priority for the company. He said Google plans to continue expanding its cloud sales force.

Canalys estimates the cloud computing market at $14.4 billion for the third quarter of 2017, up 43 percent from a year prior. Amazon holds 31.8 percent of the market, followed by Microsoft at 13.9 percent and Google with 6 percent, according to Canalys’ estimates.

The “cloud market will keep growing faster than most of the traditional information technology segment, as the market is still in the developing stage,” said Daniel Liu, research analyst with Canalys.

    Reflecting the overall growth of the market was the strong performance by Intel, which sells processors and chips to cloud vendors. In July, Intel launched its new Xeon Scalable Processors, which drove 7 percent year-to-year growth for the company’s data center group.

    The big three cloud vendors also benefit from the decision by many enterprises to build their applications using more than one cloud vendor. Retailers Home Depot Inc (HD.N) and Target Corp (TGT.N), for example, told Reuters they use a combination of cloud providers.

    “Our philosophy here is to be cloud agnostic, as much as we can,” said Stephen Holmes, a spokesman for Home Depot, which uses both Azure and Google Cloud Platform.

    Some analysts expect cloud services growth to slow over time as competition increases.

    Amazon, for instance, has said that price cuts and new products with lower costs on average are a core part of its cloud business. Additionally, Amazon Web Services saw usage growth outpacing that of revenue growth, said Amazon Chief Financial Officer Brian Olsavsky.

    “Going forward, cloud services will become more of a commodity, and the prices will quickly compress,” said Adam Sarhan, CEO of 50 Park Investments, an investment advisory service. “For now though, it’s a great business with plenty of room for all to grow.”

    Reporting by Salvador Rodriguez; Additional reporting by Jeffrey Dastin and Paresh Dave; Editing by Leslie Adler; Editing by Jonathan Weber

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