Cloud Is A Hot Channel Sale Despite Future Cooling Cloud Revenue Predictions

The earnings results are in from the cloud giants. While each provider posted strong growth in their cloud businesses, industry analysts believe that the hot cloud market could be showing signs of cooling down. But channel partners disagree.

Cloud growth rates will inevitably tail off, given the staggering growth that the market has enjoyed for the past several years, said John Dinsdale, chief analyst and managing director at Synergy Research Group.

"The year-on-year growth rate dropped off a little this quarter, but that is not surprising given the huge scale that the market has now reached … You cannot keep on growing at 100 percent when you reach massive scale," Dinsdale said.

[Related: Google Cloud Platform Vs. AWS: Which Provider Should A Partner Pick?]

Overall, spend on cloud infrastructure services increased by 45 percent in Q3 2018 compared to the same quarter a year ago, which saw a growth rate of 44 percent. Q3 2016 enjoyed a growth rate of 50 percent, according to Synergy Research. The firm estimated Q3 2018 market share numbers for Amazon Web Services (AWS) at 34 percent, Microsoft at 14 percent, IBM and Google tied for 7 percent each, and Alibaba at 4 percent.

The public cloud market is expected to double in revenue to reach $302 billion by 2021. Overall cloud adoption rates are projected to increase from 2016's 58 percent to 85 percent in the year 2019, according to Gartner Research.

For Pythian, a solution provider that partners with AWS, Azure, and Google, cloud revenue keeps climbing. For the provider's own third-quarter, which ended Sept. 30, Pythian generated 34 percent of its overall revenue from cloud. That percentage is up from Q3 2017's 19 percent and Q3 2016's result of 8 percent.

"If anything, things seem to be really heating up," said Paul Vallee, president, and CEO of Ottawa-based Pythian. "I'm seeing a lot of revenue momentum. Our cloud bookings growth in just one quarter -- between Q2 and Q3 2018 -- went up 46 percent."

During its most recent quarter, Pythian, which has a couple hundred cloud customers, booked the most business with Google, followed by AWS, and then Azure.

Even though market leader AWS saw its revenue climb up 46 percent during Q3 2018, it didn't grow as fast as it had in the same quarter a year ago. Overall, the company missed Wall Street's revenue expectations for the quarter.

"This growth rate is going to bounce around," Brian Olsavsky, Amazon's CFO said of AWS's performance in the company’s recent earnings call. A 46-percent year-over-year growth for AWS which resulting in $6.68 billion in revenue for the quarter, is "still very strong," he added.

AWS has been lowering its prices for cloud customers since it its inception -- 67 times to be exact -- which included a few new cost cuts in the last few months.

AWS competitor Google doesn't separately break out its Google Cloud Platform revenues, but its "other revenues" category, which includes cloud services and applications, Google Play, and hardware, increased 29.2 percent from the same year-ago period. The company's overall revenues, which Google said are largely driven by cloud and advertising revenues, grew by 22 percent, showing a year-over-year slowdown and falling short of Wall Street's expectations.

Google CEO Sundar Pichai said the company is investing heavily in machine learning and is committed to open infrastructure, which Google hopes will help to pull in more enterprise cloud customers.

The day after both Amazon and Alphabet, Google's parent company, posted their Q3 results last Thursday, Amazon's stock tumbled as much as 10 percent in premarket trading on Friday and Alphabet's dropped 5.6 percent.

Intel, which experienced a growth rate of 50 percent in its cloud revenue for its Q3 2018, doesn't "expect that it will grow at fifty percent forever,” the company's CEO Bob Swan told investors last Thursday.

Microsoft, on the other hand, saw its Azure revenue surge 76 percent during its first quarter of fiscal 2019, which ended Sept. 30. Microsoft CEO Satya Nadella touted the company's success in cloud for the quarter, explaining that Microsoft introduced 100 new Azure capabilities in Q1 2019.

"Azure is the only hyperscale cloud that extends to the edge across identity, data, application platform, as well as security and management," Nadella said of the company's cloud growth.

Despite analyst predictions, New Signature, a top Microsoft Azure partner, believes that cloud spending is going to continue to be robust for the next 2-3 years because many customers only have moved a small amount of their overall IT environments from on-premises and colocation centers into cloud services. Of the businesses that are using the most cloud services today, many have done so by migrating virtual machines to Infrastructure as a Service (IaaS) platforms and are only just beginning to shift those services up to true Platform as a Service (PaaS) and Software as a Service (SaaS) offerings, said Reed Wiedower, CTO for Washington, D.C.-based New Signature.

Perhaps the biggest factor that could drive more cloud spend is the fact that the organizations that have made the shift are seeing money being freed up, Wiedower said.

"For those reasons, I think we’re going to continue to see dollars plowing into cloud services that help that financial objective, even for early adopter organizations that migrated to SaaS service five years ago," he said.

There's still a huge opportunity for partners that can provide a measurable return on investment for their customers, whether they are converting capital expenditures to operational expenditures, or changing the frequency of investments from a three or five-year investment to a monthly fee, Wiedower said.

"Azure, Microsoft 365 and Dynamics 365 all fall into that bucket," he added.