Cloud Infrastructure Spending Growing, But More Slowly

May 10, 2023 Timothy Prickett Morgan

When you look at financials, you need to think quarterly year on year to get a sense of growth over the annual and often seasonal business cycles that drive the economy. And then you also need to think sequentially so you can see when something that is growing on its own momentum, as cloud computing has been doing for the better part of a decade, shifts to a more seasonal flow.

With the latest market figures released from hyperscaler and cloud watcher Synergy Research, whose chief analyst and managing director is John Dinsdale, dices and slices the public view of his massive cloud spending dataset in many different ways so he doesn’t give too much information away and can make a living. Which we understand and respect, needing to make a living from the words that come from our fingertips and the thoughts that get synthesized in our brains as well.

In the first quarter ended in March, Dinsdale reckons that worldwide sales of cloud infrastructure services – which includes infrastructure and platform services as well as hosted private cloud services but which does not include software as a service or related areas – came to $63.7 billion, up 20 percent quarter on quarter from Q1 2022. For the trailing twelve months, cloud infrastructure services drove a total of $237 billion, which is a substantial portion of the IT hardware, software, and services market but which still does not dominate IT spending by any measure.

Be careful reading this chart below:

This chart is not showing quarterly cloud revenues for the past six straight quarters, but quarterly cloud revenues for the past six first quarters. These are very different things, of course, but our eyes are accustomed to seeing a series of stacked bars as consecutive through a year, not one quarter in each year.

Because Dinsdale knows we need to know, cloud infrastructure spending grew 4 percent sequentially from Q4 2022, when the world spent $61.3 billion for cloudy stuff.

As you can see, Amazon Web Services has the dominant market share, and as Dinsdale points out, it is on the low end of its traditional 32 percent to 34 percent market share. So another point we would make here is that it may feel like AWS owns the cloud, but it only has one third of the market and does not seem to be able to break out of that one-third share. Microsoft came in at a 23 percent share, and Google came in at 10 percent share.

It has been a long slog for Google in the cloud, and its eponymous cloud is apparently finally profitable after the company stretched out the useful life – and therefore the depreciation schedule – for its datacenter servers, their storage, and the switches that lash them together. Switches will now be in the field for five years and servers and storage for four years, which is an extra year for all of the gear compared to last year. IBM i shops are probably laughing at how often the hyperscalers and clouds have swapped out machinery – Google used to do it every three years – but the hyperscalers and cloud builders have thousands of megawatts of juice they have to pay for, and at $1 to $2 per watt per year, that adds up pretty darned fast. Both Google and Microsoft have gained a point of market share in the past year.

IBM Cloud is in the next 20 companies category, along with the Chinese hyperscalers and clouds – Alibaba, Baidu, Tencent, ByteDance (home of Tik Tok), and JD.com (akin to Amazon in China, just like Alibaba). Oracle is in there, too, and as a group, these tier two cloud players are growing faster than the market overall and faster than both Microsoft (by a little) and Google (by a lot). The others, and there are many others, have grown only at 9 percent in Q1 2023, to what looks like about $5.7 billion to our ruler measuring the chart.

The top three players accounted for 65 percent of the cloud infrastructure market, or about $41.4 billion in sales in Q1 2023. For one thing, this shows that this cloud racket is a capital intensive business where scale matters and that will therefore tend to be dominated by the biggest players. But the other 35 percent of the market pulled in $22.3 billion in revenues, too, which shows that there are dozens and dozens of companies that are finding niches and serving them to make up that slice of the cloud market.

“Among the tier two cloud providers, those with the highest year-on-year growth rates include Oracle, Snowflake, MongoDB, Huawei and the three main Chinese telcos,” Dinsdale wrote in a statement accompanying the figures. “Economic pressures are crimping cloud spending in some quarters, but the foundational benefits of cloud adoption continue to drive the market to ever-higher levels. The large Chinese cloud market has also returned to growth, though it is the telcos who are benefitting more than the traditional main internet companies. And, as the US dollar pulls back from its recent historic highs, that now provides some tailwinds for cloud growth metrics in the EMEA and APAC regions, which together account for over half of the world market.”

The cloud market growth is slowing, at least during the Q1s for the past five years, as you can see from eyeballing the chart above. The growth rate was 20 percent in Q1 2023, but around 33 percent in Q1 2022, around 40 percent in Q1 2021, and around 34 percent in Q1 2020. The coronavirus pandemic is over and things are returning to a kind of normal, and at the same time we may be pushing up against the limits of large numbers that eventually range in all players in all markets. Nothing can grow faster than gross domestic product forever. All gravy trains run to the end of the line eventually.

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