The impact of generative AI made itself felt on Alphabet and Microsoft’s earnings, reported late Tuesday, with Sundar Pichai emphasising that “we see AI as a foundational platform shift” and Satya Nadella saying Microsoft was “rapidly infusing AI across every layer of the tech stack.
(AI showed up 75 times on Alphabet’s earnings call; 60 on Microsoft’s. Google touted a seven-fold quarterly increase in projects running on its Vertex AI platform, whilst Microsoft said it was redefining “our role in business applications” with partners adding “Copilots” as a “process transformation layer on top of existing CRM systems like Salesforce.”)
Pichai said that Alphabet’s third quarter results demonstrated “momentum” in cloud with third quarter revenues of $8.4 billion, up 22%, noting that 60% of the world’s largest 1,000 companies were customers. But Wall Street had expected more like $8.6 billion in cloud computing revenues, and while Google’s cloud business continues to grow, the rate of growth has been declining steadily since early 2021.
Later in the earnings call Pichai also noted that customers are trying to be more savvy about their cloud spending. “We have definitely started seeing customers looking to optimize spending. We leaned into it to help customers given some of the challenges they were facing,” he said.
CFO Ruth Porat added that despite this, growth opportunities including those driven by AI demand meant customers could “expect elevated levels of investment in our technical infrastructure” in future quarters.
Microsoft’s quarterly results also published yesterday meanwhile showed that its cloud business passed $31.8 billion in revenue for the quarter – up 24%, with Microsoft CEO Satya Nadella claiming Azure had taken market share from rivals. (AWS’s earnings later this week will shed a more light on that claim.)
Microsoft made a big early investment in OpenAI and is positioning its AI investments as a seam that runs through, or on top of, nearly every part of its offerings, whether that’s Bing Chat or GitHub Copilot or Security Copilot integrated with Microsoft 365 Defender.
Google meanwhile claimed that AI is helping it rethink its search business, with AI “helping advertisers find as many people as possible in their ideal audience for the lowest possible price. Early tests are delivering 54% more reach at 42% lower cost” claimed Alphabet’s Chief Business Officer Philipp Schindler on the earnings call.
AWS, Microsoft and Google account for around 65% of cloud spending according to analysts Canalys – its data from August had AWS with 30% of the market, Microsoft on 24% and Google on nine percent.
But the momentum behind the big tech companies in the next few years is likely to depend on a combination of cloud computing and AI platform delivery. Enterprise customers are intrigued by the potential of AI and large language models in particular, and most of those are delivered as a cloud service. (Google claims that “more than half of all funded Generative AI startups are Google Cloud customers.”)
Cloud infrastructure spending meanwhile is shifting towards robust configurations geared towards more complex workloads and new AI initiatives, said analysts IDC last month, amid growing demand.
There are plenty of differences between Google and Microsoft of course; cloud accounts for a much smaller part of Google’s (largely ad-driven) business than it does for Microsoft, although Microsoft’s faster growth even from a bigger base seems to suggest that focusing on AI is generating momentum – its capabilities are also about to hit a much larger use base, with Microsoft 365 Copilot GA on November 1
As Nadella pointed out on the call: “We have seen complete new project starts, which are AI projects. And as you know, AI projects are not just about AI meters. They have lots of other cloud meters as well.”
That means provision of AI services is rapidly becoming a source of competitive differentiation for cloud providers. Telling the right story about how AI can make their customers more effective is definitely now part of the cloud strategy; the extent to which one of the hyperscalers can start to dominate here could yet shake up cloud rankings.