Report: Capex models shift in Q1 for cloud providers due to COVID-19

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The U.S. hyperscale market revenue grew 20% year-over-year in the first quarter of 2020, according to 650 Group's research. (Getty Images)

With a large number of first quarter earnings reports now in the books, the telecom industry is taking a look at the impact of the coronavirus pandemic.

According to a report by 650 Group, the hyperscale cloud providers scrambled to stay ahead of the millions of employees working from home due to the COVID-19 crisis as the U.S. hyperscale market revenue grew 20% year over year in the first quarter. Capex for date center equipment in Q1 grew unevenly.

“Q1 cloud results diverged from normal seasonality as the world rapidly shifted to work-from-home and remote forms of social and society interaction,” said Alan Weckel, founding analyst for 650 Group, in a statement. “Cloud-based companies became increasingly important to society as social norms changed rapidly during Q1. 

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"For businesses, the use of cloud services becomes even more important in all verticals.  As we look towards the second half of 2020, companies that better use cloud resources to do business will emerge in a stronger position.”

In an email to FierceTelecom, Weckel said search and social companies needed to expand to support the additional content generated and watched, especially video, during the COVID-19 pandemic. Weckel said that infrastructure-as-a-service (IaaS) companies built as much as they could in Q1, but were supply-constrained.

In addition, software-as-a-service (SaaS) providers had to add capacity for additional work-from-home employees on their platforms as well as additional peering with telco service providers over the last mile versus connecting to enterprises directly.

Oveall, surge capacity in the first quarter had a wide range between search and social companies such as Facebook and Google and IaaS companies like Amazon and Microsoft.

Overall, revenue growth for U.S. hyperscalers in the first quarter was the slowest it has been in a decade, and the majority of the cloud providers, including Google Cloud, Microsoft Azure, lowered their capex projections for the remainder of the year.

U.S cloud hyperscale providers are running their servers and networks more efficiently when compared to 2019, which allowed them to scale capacity at a faster rate than data center build outs, according to 650 Group's Cloud Report.

"It’s a mixture of better hardware accelerators with offload of the CPU and software," Weckel said when asked how the cloud providers are running their networks more efficiently this year. "AWS is the most advanced and well known with Annapurna, but everyone else has made strides. 

"On the software side, hyperscalers are running the telemetry and analytic data through AI/ML to run at a higher utilization without impacting performance."

RELATED: Data center capex for U.S. hyperscalers grows 10% in Q3 - report

Capital equipment expenditures in the first quarter were hamstrung by supply chain constraints due to COVID-19, and 650 Group expects that to continue into the second quarter of this year.

As the coronavirus ebbs and flows across the U.S., along with some states loosening their stay-at-home policies, the telecommunications industry as a whole is attempting to get a handle on what the "new normal" will be going forward. On that note, Weckel had a few thoughts on what changes could take place.

"The next phase would be better user experiences for each employee. For example, adding capacity for more and higher quality video and faster connections to service providers," he said. "Also, the current 'surge' would become the new normal, so additional capacity growth would be needed in the second half of the year versus repurposing resources as employees head back to the office."

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