Editor's corner—Don't sweat the declining revenue growth rates for AWS and Azure

Despite declining revenue growth rates for both Amazon Web Services and Microsoft Azure, there's no cause for concern. (Pixabay)

So what gives with the declining revenue growth rates for both Amazon Web Services and Microsoft Azure during the recent round of earnings? No need to worry, both are still virtually printing money for their parent companies.

On a Thursday earnings call, Amazon reported that its cloud division revenue increased 35% in the third quarter, which was down from 37% in the previous quarter, and its lowest growth rate in five years.

RELATED: Microsoft clocks another solid earnings quarter, but Azure's growth rate continues to slide

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On Wednesday, Microsoft said in its earnings call that Microsoft Azure's revenue growth rate had grown by 59%, but that was down from the 64% posted in the prior quarter and a decline from the growth rate of 76% a year ago.

So are the declining growth rates for both a cause for concern? To quote Mad's Alfred E. Neuman: "What, me worry?"

"I’ve seen some comments expressing worries over the gradual reduction in annual growth rates but this is not a real concern," said John Dinsdale, a chief analyst and research director at Synergy Research Group, in an email Thursday night. 

"It is a truism that as great scale is achieved, then growth rates will decline. The sequential growth in cloud service spending was around $1.5 billion in 3Q, in line with the growth seen in the first two quarters of the year," he added. "Projecting ahead to the end of the year, total 2019 market size will actually be a little higher than we’d forecast. Did someone say the market is weakening? Oh, I don’t think so. The cloud market is in rude good health."

Dinsdale said the cloud market continues to grow at an impressive run rate. The total market size in the third quarter was just a little shy of $25 billion, "meaning that in October the annual revenue run rate has already blown through the $100 billion mark," according to Dinsdale.

RELATED: Hyperscale data center count passes the 500 milestone in 3Q - report

As further prove that the cloud market still seems to be headed to "infinity and beyond," (to quote Buzz Lightyear) a recent Synergy Research Group report said the number of hyperscale data centers hit a new high-water mark in the third quarter of this year.

The number of hyperscale data centers increased to 504 at the end of 3Q, which tripled the total from the beginning of 2013. The total number of data centers increased by 55 over the last four quarters, which marked a bigger increase than was seen in the previous four quarters, according to Synergy Research Group (SRG).

Colocation and data center providers can't seem to build enough new facilities and fiber routes to quench the bandwidth thirst of Amazon Web Services (AWS), Microsoft Azure and Google Cloud Project.

While Microsoft doesn't break out specific revenue amounts for Azure like Amazon does with AWS, Microsoft said its "Intelligent Cloud" business revenue increased 27% to $10.8 billion, with revenue from server products and cloud services increasing 30%.

AWS finished the third-quarter with $9 billion in revenue, which was a bit short of analysts polled by FactSet that had projected $9.1 billion. AWS is still shouldering the bulk of Amazon's quarterly profits, and its 35% revenue growth rate easily exceeded Amazon's revenue growth of 24%.

In the third quarter, AWS operating income was up 9% from the same quarter a year ago to $2.26 billion. Its operating income grew 9%, which was its slowest growth in years.

While the numbers for AWS and Microsoft are gaudy—other cloud providers, such as Google, have yet to report their earnings—the costs of doing business are high. But Dinsdale said the revenue growth rates were still strong.

"The second key thing to note is that both Amazon and Microsoft turned in some very strong 3Q numbers," Dinsdale said. "Relative to 1Q and 2Q, both will nudge up their share of the worldwide market – Amazon moving to around 33.5% share and Microsoft to around 16.5%.

"It is also notable that both have increased their capex relative to 2018, driven by continued aggressive build out of their data center footprints."

RELATED: Due to his son's work at IBM, Pentagon's Esper recuses himself from JEDI contract review

Lastly, to amend a phrase from Spiderman: "With great market share comes great responsibility" for both AWS and Azure. Both are eagerly awaiting the U.S. Department of Defense's review of the $10 billion JEDI (Joint Enterprise Defense Infrastructure) cloud computing contract. After a convoluted process, Microsoft and Amazon emerged as the front-runners for the JEDI contract due to the depth of their cloud technologies and higher government security clearances. — Mike

Editor's Corners are opinion columns written by a member of the Fierce editorial team. They are edited for balance and accuracy.

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