While revenue was up for the large U.S. hyperscale cloud providers, capex took a slight hit year over year in the first quarter, according to a report issued today by 650 Group.
The hyperscale cloud market revenue in the U.S. grew 27% year over year in the first quarter, according to the report. While data center capex spending was down year over year for Apple, Google and Microsoft, Amazon's and Facebook's capex grew. It was just the second time in eight years that the capex dropped year over year.
"There's been a lot of concern out there because capex is slowing," said Alan Weckel, founding analyst for 650 Group in an interview with FierceTelecom. "The commodity pricing declined a lot while cloud providers in particular have increased their utilization. So there should be a sort of slow down in capex. It's not, at this point, alarming to the system vendors. It's more a natural thing that's occurring in the market, again due to those commodity price declines and increased utilization."
The alarm over less capex spending by the U.S. hyperscale providers was partially fueled by Arista's earnings report earlier this month, in which the cloud vendor lowered its second-quarter guidance this year due to less spending by Microsoft.
"Microsoft put out some press releases about that, and has been talking about it publicly," Weckel said. "But that's something that was happening anyway across the board. It's not like it's suddenly happened this quarter, and wasn't happening in the past. The commodity decrease is universal, but so is the increased utilization."
Weckel continued, "If you can get a few points of utilization increase across your installed base of over a million servers, then that's something where you don't need to build as many data centers or you can slow down how quickly you build data centers because you're getting the increased utilization across your entire installed base and not just new deployments. Microsoft has talked about it and it has been the highlight this quarter in terms of vendor earnings, but it's something Amazon, Google, and others have been doing as well for years."
In addition to Arista, companies impacted by the slower capex spend by the U.S. hyperscalers included Intel, Micron and Samsung, as well as companies below the system vendor space, according to Weckel.
Weckel said another factor in declining data center capex spending was that the large U.S. cloud providers were working through their collective inventories. Additionally, not all of the cloud providers are growing their capex the same way. The rest of the year will be a mixed bag in terms of capex, according to Weckel.
One area of impact will be an upcoming federal government cloud services contract. The Pentagon is planning to move all of its data to a highly secured cloud as part of its Star Wars' themed JEDI (Joint Enterprise Defense Infrastructure) project. Microsoft and Amazon Web Services are still in the running for the U.S. Department of Defense's $10 billion JEDI contract, which the Pentagon will announce sometime in July.
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Driven largely by Microsoft and Amazon, Weckel said that infrastructure-as-a-service (IaaS) made up a large part of the overall cloud revenues.
"I would say the difference between this report and the last couple reports is that the infrastructure-as-a service revenue and the infrastructure-as-a-service capex are becoming a larger part of the mix," Weckel said. "Folks like Amazon with AWS and Microsoft with Azure are gaining share in the cloud space. So they're outpacing the growth of companies like Salesforce or a ServiceNow, and they're outpacing the growth of the search and social companies like Facebook and Google. So, what has changed since any of the reports last year to this year is infrastructure-as-a-service is becoming a larger part of the cloud."