Revenue growth slowed for cloud-computing giants again in the first quarter. But companies like Microsoft and Google-parent Alphabet are homing in on new services tied to artificial intelligence software and generative AI to re-accelerate sales growth.
The technology giants attribute slowing cloud-computing growth to companies rethinking how to most efficiently utilize cloud services instead of running up big bills.
In the "public" cloud market, customers rent servers and data storage as needed. The cloud giants sell processing power and data storage by the hour, week, month or year.
"There is a clear shift in IT spend, with many customers becoming more and more selective with their (cloud) investments," Susquehanna analyst Mehdi Hosseini said in a note to clients heading into the earnings season. "After a rush to move to the cloud, enterprises are now finding that the cloud is more expensive than anticipated. (And), they often lose control of managing performance for critical applications."
So the tech titans are focused how to drive customers to spend more on cloud services. That's where artificial intelligence software comes in. It could help cloud customers to innovate and develop new products.
"AI-centric workload investments could drive a material increase in cloud consumption," UBS analyst Lloyd Walmsley said in a recent note on Amazon.com, which is also contending with slowing cloud growth.
How Cloud Computing Is Slowing Down
Take a look at the earnings of these cloud giants.
Microsoft on Tuesday said Azure cloud-computing revenue in its fiscal third quarter rose 31% to $14.52 billion, slowing from 46% growth in the year-earlier period. Further, Microsoft forecast cloud growth in a range of 26% to 27% for the June quarter. That's slightly below estimates of 28%.
But Microsoft said its forecast for 26% to 27% Azure cloud growth in the June quarter includes 1% of revenue from new artificial intelligence services. It's also the first time Microsoft has broken out AI revenue in the cloud business.
Microsoft said it had 2,500 customers for its OpenAI Azure cloud service as of the March quarter, up 10 times from the December quarter.
"This is proof that Microsoft is becoming the Intel Inside of AI and that can provide a lot of leverage," MoffettNathanson analyst Sterling Auty said in a recent note.
Microsoft is the biggest investor in startup OpenAI. It launched ChatGPT internet search tools in November. Further, ChatGPT sparked a surge of interest in generative AI technologies. They create text, images, video and computer programming code on their own.
Meanwhile, in the March quarter, Google said its cloud-computing revenue rose 28% to $7.45 billion, slightly missing estimates of $7.46 billion. Google's cloud business posted revenue growth of 44% in the year-earlier period.
First quarter sales for the cloud computing unit, Amazon Web Services, rose 16% to $21.4 billion, slowing from 37% growth in the year-earlier period. Analysts had projected AWS growth of 15% for the March quarter.
On the Amazon earnings call, management said Amazon Web Services is seeing slower growth in April vs. Q1.
AI Battleground In Cloud Computing
AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions. Also, the newest forms of AI generate content.
Evercore ISI analyst Mark Mahaney in a note said generative AI workloads could drive more cloud computing usage in the next 12 to 18 months.
"AI could unlock new potential cloud workflows and help re-accelerate cloud demand," Mahaney said. "AI will start to drive greater revenue to cloud as IT spending on innovation projects resumes and ramps. Cloud customers will look at generative AI to create new customer experiences that result in greater revenue opportunities."
Baird analyst Rob Oliver has a similar view. "The emergence and accelerating adoption of generative AI is creating a new and intense competitive battleground among the leading cloud services platforms," he said in a note.
In addition, generative AI technology is quickly finding applications in marketing, advertising, drug development, legal contracts, video gaming, customer support and digital art.
Microsoft has offered an Azure cloud service using OpenAI's generative AI technology since January. According to a BMO Capital Markets report, Azure customer CarMax utilizes Azure OpenAI to create text summaries for its car research pages.
"In order to grow cloud AI corporate adoption, customers will need to give their data to Microsoft in order to develop AI models," said BMO analyst Keith Bachman in a report.
Amazon's New AI Cloud Service
He added: "We think that more organizations will undertake or expand their AI workloads as a result of advancements in generative AI, though the revenue impact is likely more longer-term for Azure, AWS and GCP than near term."
Further, natural language processing, or NLP, tools train generative AI models by gobbling up internet content. By analyzing the internet data, the NLP tools generate responses to questions. Also, OpenAI is part of a wave of NLP startups. They include AI21 Labs, Anthropic, Cohere, Hugging Face, DeepL and others.
Meanwhile, AWS recently announced a new cloud service that offers access to tools from AI21 Labs, Anthropic and Stability AI. Amazon also offers its own foundational models. Google's cloud computing arm has partnered with Cohere to offer AI services. Google also has its own NLP tools to train AI models.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
