Industry Voices—Raynovich: The cloud is swallowing everything

cloud
The cloud is eating everything and that includes a wide range of applications across consumer applications, such as Facebook and Instagram, to enterprise applications such as unified communications and IoT. (Microsoft)

It's increasingly looking like the public cloud infrastructure is swallowing large swaths of communications applications and infrastructure. With the public cloud providers growing faster and approaching capital spending (capex) levels that rival, and in some cases surpass, the largest telecommunications providers, there's no reason to think this trend won't continue. 

In other words: The cloud's eating everything. And that includes a wide range of applications ranging from consumer applications such as Facebook and Instagram to enterprise applications such as unified communications, enterprise business suites, security, and Internet of Things (IoT).

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An analysis by Futuriom of historical capex spending in the last three years puts this mind-boggling growth on full display, with leading public cloud infrastructure players such as Amazon, Facebook, and Microsoft growing revenues and capex at an annual pace typically in excess of 30%. To compare, the revenue growth and capex growth of major service providers such as AT&T, Vodafone, or Verizon remains in the single digits—if that—and appears to be trending toward flattish. In some cases, in fact, revenues at some major service providers including AT&T may actually shrink in 2020, based on sequential Q1 results. 

Meanwhile the cloud providers spend as much, if not more on capital spending, and seem to be getting more bang for their buck. Just as an example, Amazon is spending about $24 billion on capex—while it runs arguably the world's largest IT infrastructure—and AT&T spends about the same. 

It could be a vicious cycle for service providers. If you can't attract new applications and services to grow revenue, it's hard to invest in capex. And if you can't invest in capex, you won't grow new services and applications. As the monster rise of Amazon has shown, capex and infrastructure investments are the lifeblood of the cloud. The trend is likely to accelerate. As 5G comes online and public cloud providers such as Microsoft and Amazon have shown a keen interest in hosting more of the 5G edge infrastructure, the cloud is eating everything—including communications services. 

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Digging into cloud numbers

Our Cloud Tracker follows the leading public companies supplying cloud infrastructure services. We carefully analyzed the size and scope of major players and came up with a list of eight market leaders we believe is representative of cloudscale trends. These included Alibaba (NYSE: BABA) Alphabet (Nasdaq: GOOGL) Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Equinix (Nasdaq: EQIX), Facebook (Nasdaq: FB), IBM (NYSE: IBM), and Microsoft (Nasdaq: MSFT).

A couple of important public vendors, such as Oracle (NYSE: ORCL) and VMware (NYSE: VMW), have reporting cycles that prevent accurate comparisons across traditional calendar quarters and years. We follow the spending patterns of these companies, but the data was difficult to include in our analysis because of the different reporting cycles. 

A closer look reveals a few interesting trends: 

• For major cloud providers, revenues are growing.

• Public cloud capex is steadily increasing.

• Cash flow from operations of the major cloud providers has generally improved, in some instances dramatically.

• Public cloud providers are increasingly taking control of their own infrastructure buildouts, not ceding expansion to telcos. 

In other words, the cloud eats everything. 

Facebook leads spending boom

When you drill down into specific companies there are some very interesting findings. For example, Facebook led in nearly all metrics over the past three years. Its capex spending boomed 124% from 2017 to 2019, while revenues increased 74%. The next closest in scale was Google, with 46% revenue growth and 79% capex growth over the three-year period. Microsoft clocked in with a respectable 31% revenue growth and 56% increase in capex. Not bad for a company with annual revenue of $125 billion (2019). 

Colocation and cloud are growing in sync, to build out the footprint of the cloud and get services closer to customers. It’s no surprise that Alphabet, Amazon, Equinix, and Microsoft increased capex by double digits over the three-year period, given the growth of cloud services for enterprise use during that time. And Facebook’s dominance in consumer cloud clearly factored in its soaring investments in infrastructure. 

 

The trend does not show any signs of slowing down, even during a recession. In fact, it's clear that the work from home (WFH) trend will likely provide a boon to cloud services—especially those involving enterprise communications. For most public cloud providers we track, revenues in the first quarter of 2020 rose. While large-scale enterprise projects stalled, the rise in remote work rose high enough to maintain the upward trend, as noted in the table below. Of course, there's still much more to play out in 2020—so we'll be tracking the forthcoming Q2 numbers closely. 

It's clear to me that we've reached a critical point in the evolution of both consumer and enterprises services hosted on cloud infrastructure. The cloud players are now in the dominant position to deliver services going forward. And the coming wave of 5G and edge infrastructure is likely to accelerate that trend.

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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