The Cloud rains billions on Amazon, Google, Microsoft

Microsoft, which has its own server farms, reported sales and profit that beat estimates. 
Microsoft, which has its own server farms, reported sales and profit that beat estimates. PHOTO: AGENCE FRANCE-PRESSE

SAN FRANCISCO • The future seems to be in the cloud.

Companies delivering computing services via server-laden warehouses have widened the gap between themselves and traditional technology firms which long relied on hardware, software and services, and who are only just warming up to the cloud boom., Google and Microsoft all topped profit estimates last quarter, adding more than US$90 billion (S$126 billion) in market cap in after-hours trading following their earnings reports last Thursday.

The trio shares a reliance on technology that comes from data centres capable of providing a broad range of services at a low cost.

 Contrast that with technology firms, such as IBM, Hewlett-Packard and Oracle, which are suffering from slowing growth or declines as cloud operators shun traditional hardware, software and services.

Google, Microsoft and Amazon get added revenue as they become sellers of computing power to a growing number of other companies on the hunt for low-cost alternatives. Compounding that, the large clouds do not buy as much hardware and software from traditional IT providers and also pull potential customers away by renting them the IT services they would typically buy from IBM, HP, EMC, Oracle and others.

"You are seeing the cloud shift everyone was talking about, and Microsoft and Amazon are benefiting from it," said Mr Sid Parakh, a portfolio manager at Becker Capital Management, which has about US$3 billion under management. "Oracle, IBM, even VMware are reporting very weak numbers and really no momentum in cloud."

Amazon reported sales last Thursday that beat analysts' estimates.

Driving that performance was its Amazon Web Services division, which grew 78 per cent from a year ago with sales of US$2.09 billion.

That helped the company report a profit when analysts had predicted a loss.

Microsoft, which is moving more users of Office and other corporate productivity tools to versions hosted online through its own server farms, reported sales and profit that also beat estimates. 

Revenue in a segment called "intelligent cloud" was US$5.89 billion, exceeding an estimate of US$5.72 billion based on the average of four analyst projections compiled by Bloomberg.

Analysts are not counting Google out. Its parent company Alphabet is selling more ads and keeping spending under control, fuelling better-than-projected sales and profit last quarter, the company said on Thursday.

That enabled it  to  continue  beefing up its cloud division, Google CEO Sundar Pichai said on the earnings call.

At IBM, the future does not look so bright. Shares dropped to a five-year low after the company cut its profit forecast earlier this week.

The company cited a looming global economic slowdown and a strong dollar as factors hurting its overseas business.

Another issue, which the company did not bring up, is that the biggest players in cloud create much of their own equipment and code.

Hewlett-Packard recently partnered Taipei's Foxconn Technology Group to produce low-cost servers to be sold to providers like Google and has announced that it would shut down its own public cloud service by early next year.

Even Oracle, which is known for the stability of its business in tough times, is running into trouble as sales of its new software and hardware fall while it tries to convert customers to the cloud.

There is no end in sight for this trend - or at least, that is what one of the early leaders thinks.

"It just reflects a secular shift," said Google CEO Pichai. "Every business in the world is going to run on cloud eventually."


A version of this article appeared in the print edition of The Straits Times on October 26, 2015, with the headline 'The Cloud rains billions on Amazon, Google, Microsoft'. Subscribe