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In the public cloud market, a sense of pessimism has recently set in as major cloud providers report a slowdown in sales growth and falling net profits. This has had a direct or indirect impact on the stock prices of tech companies, leading to cost-cutting measures such as layoffs and salary reductions. However, a closer examination of cloud providers’ performance over the past three years suggests that beneath this so-called pessimistic sentiment, the cloud market undergoing a period of transition.

In the era of cloud computing, computing has become a resource that can be used by many simultaneously on a large scale and reduces the cost of user acquisition. However, value-added services of cloud providers have not kept pace with customer demand, causing a lag in customer value and putting the cooperation between both parties in a zero-sum dilemma.

From 2019 to 2022, Amazon Cloud's revenue compound annual growth rate (CAGR) was 31.64%, Microsoft Intelligent Cloud's was 24.5%, and Google Cloud's was 43.38%. A decent CAGR represents the possibility of achieving scale growth for enterprises within a certain period, and the difficulty of achieving this is more challenging than before 2019. Relatively speaking, Google Cloud, with a smaller market size, has maintained a stronger ability to adjust in the opposite direction over the past four years.

Both the overseas and Chinese cloud markets are trying to find ways to generate growth in the next stage in the cloud market.

Cloud Providers Experience Steep Slowdown in Growth

The latest quarterly earnings reports of major cloud providers provide an insight into the current state of the cloud market. Amazon, Microsoft, and Alphabet's Google  reported a slowdown in the growth of cloud revenues over the past four years.

Amazon's cloud business posted a 20% year-on-year increase in revenues in Q4 2022, the lowest historical growth,  compared to 45% in 2018. Its operating profit margin also fell for the fourth consecutive quarter to 24%.

Similarly, Microsoft's Cloud business segment saw a slowdown in growth, with Azure and other cloud service revenue growing 31% year-on-year, a 15-percentage-point decrease from the same period last year. While Intelligent Cloud remains one of Microsoft's fastest-growing businesses, Azure's growth rate has been slowing continuously since FY 2022, hitting a new low of 31% year-on-year.

Google Cloud's revenue growth also slowed to 32% in Q4, the slowest growth rate since it disclosed data. However, the company was able to reduce its losses from US$890 million in the same period last year to US$480 million.

Analysts expect the slowdown to continue in the third quarter of this year. To maintain revenue growth and profitability, the three major cloud providers must proactively adjust their development health, considering the high inflation and the Fed's interest rate hikes.

Despite the slowdown in revenue growth, maintaining a decent CAGR represents the possibility of achieving scale growth for enterprises within a certain period, which is more challenging than before 2019.

The cloud market is undergoing a period of transformation, and finding and creating growth in the next stage remains a common problem for both overseas and Chinese cloud markets.

Customers Cut Expenses and Optimize Cloud Cost Expenditure

The cloud market is experiencing a slowdown in growth due to customers cutti
ng expenses and optimizing their use of cloud resources, according to multiple professionals. To maximize capital, customers are reducing expenses, which will then be invested in new business scenarios or used to reinforce advantageous scenarios. Despite businesses moving to the cloud, cost reduction and efficiency improvement are not always guaranteed. The cost-effectiveness of renting cloud servers versus purchasing physical machines for a private cloud depends on the resource utilization rate. Higher resource utilization rates equate to higher cost-effectiveness, and cloud costs can only be diluted under these conditions.

In the current environment of growing market uncertainty, enterprises are primarily focused on integration. Large companies, including Meta, are adjusting their IT operating costs, including the portion occupied by servers and other resources, to save funds for new projects. Due to runaway inflation and concerns about a looming economic recession, corporate customers hope to optimize their existing digital applications to save funds.

Microsoft and Amazon Cloud are helping customers control cloud costs by extending the life of cloud server components and optimizing cloud costs with appropriate tools and strategies. Google Cloud is also extending the life cycle of some of its servers and network equipment to reduce depreciation costs and improve profitability in future quarters. However, a recent IDC report cautions that delaying server replacement beyond the optimal deadline, which is currently believed to be four years or shorter, may rapidly increase cumulative operating costs and security risks.

ETR's latest survey data shows that customers are using several strategies to optimize cloud costs, including integrating redundant suppliers, reducing cloud resource usage, reducing consumer-driven services and tool-supported workloads, and optimizing SaaS subscription models. The fintech and telecommunications industries are particularly focused on reducing cloud resource usage.

As customers seek to optimize their use of cloud resources within limited budgets, they will operate their existing business applications more efficiently and be more cautious about adding new cloud products. The phenomenon of companies moving back to local data centers or one or more private clouds may even occur, as large enterprises obtain hardware, software, and services at a relatively high cost-effectiveness, ultimately putting their information systems back into local data centers or other private clouds.

Amazon's annual report submitted to the U.S. Securities and Exchange Commission shows that customer purchasing confidence is declining in the long run. This trend may be attributed to factors such as risingmortgage loan rates leading to a reduction in the business volume of the credit departments of banks, a collapse of cryptocurrency causing a decrease in trading volume, and a decrease in advertising spending reducing the use of cloud resources.

New Strategies for the Cloud Era

Despite declining purchasing confidence among customers and a slowdown in supplier sales orders, market reports suggest that the global cloud market is still a lucrative area for growth. According to Canalys and Synergy Research Group, spending on cloud infrastructure services grew significantly in 2022, with the SaaS market expected to generate the highest revenue in 2023.

Cloud providers are actively exploring new market opportunities and expanding their customer channels to address current challenges and capitalize on opportunities. For instance, Amazon Web Services (AWS) is investing heavily in expanding its customer base, with major clients such as Nasdaq and Yahoo migrating their core businesses to AWS. AWS is also expanding its availability zones globally, including launching new zones in Spain, Switzerland, and India.

Meanwhile, Microsoft is focusing on strategic technology investments and integrating Azure cloud with cutting-edge AI technology. Despite Azure's slowing growth, its backlog contract amount grew significantly in the fourth quarter of 2022, indicating stable future revenue. Azure Arc hybrid cloud solution serves more than 12,000 customers, nearly doubling compared to a year ago.

Google Cloud is also making strategic investments in AI research and application fields, earning endorsements from major customers such as Siemens Energy, Intel, and Qualcomm. Google Cloud's continued development in channel ecology and popularity of ChatGPT signal the company's commitment to AI usage in cloud computing.

Cloud computing for corporate customers remains a critical area for supply and demand in the B2B sector. Cloud providers are adopting organizational structure adjustments to optimize sales and product development and strengthen the ToB team's complementary capabilities of "sales + products." For instance, Google Cloud restructured its sales leadership to improve profitability, while Chinese technology companies like Alibaba Cloud and Tencent have implemented a series of adjustments to optimize product profitability and benefit partners.

In summary, cloud providers are proactively reshaping their businesses and accelerating customer experience improvements in response to market uncertainty. By exploring new market opportunities, investing in cutting-edge technology, and optimizing their organizational structures, cloud providers are well-positioned to capitalize on the continued growth and potential of the global cloud market.

The third crucial aspect for cloud providers is the development of their ecosystem. Microsoft, a typical ToB enterprise, has strong self-development capabilities, with widely used products such as Microsoft 365, Dynamics, and Teams. Nevertheless, Microsoft Cloud lacks a robust ecosystem that requires the collaboration of multiple partners. Amazon Cloud has some self-developed SaaS tools, but it primarily relies on partners within the ecosystem to consume its cloud resources. This approach has helped Amazon diversify its revenue sources within the cloud market, rather than relying solely on SaaS.

In contrast, Google Cloud's primary source of revenue is from its PaaS+SaaS products. However, it faces a challenge in maintaining synergy among its various products while following a product-centric development approach. Balancing market trends, customer needs, and enterprise advantages, IaaS is not the optimal path for Google Cloud's development.

Traditionally, ToB companies were not initially designed to build products, technology, and business systems for the ecosystem. However, at a certain stage, these companies must activate the community to promote the ecosystem.

Compared with cloud vendors in China and the United States, the visible gap lies in the vastly different market environments. In China, silos, system integration, and data connectivity have led to low cloud penetration rates for SaaS applications, which represent a massive untapped market.

Going overseas and global competition

Alibaba Cloud recently disclosed its latest financial reports for the third quarter of the 2023 fiscal year, following the release of financial data by the three major cloud service providers for their overseas operations. The company's revenue for the quarter was RMB 26.693 billion and RMB 20.179 billion before and after cross-departmental offsetting, respectively. Meanwhile, the adjusted EBITA profit was RMB 356 million, which represents a year-on-year increase of 166% or a quarter-on-quarter decrease of 18.0%.

For the first three quarters of the 2023 fiscal year (April to December 2022), Alibaba Cloud generated a revenue of RMB 65.135 billion with a total adjusted EBITA profit of RMB 1.037 billion. In the 2022 calendar year, the total adjusted EBITA profit was RMB 1.313 billion. The company achieved its first annual profit of RMB 1.146 billion in the 2022 fiscal year, although it has not been able to maintain a sustained high level of profit margin for at least the past fiscal year.

According to Canalys statistics, the cloud infrastructure service spending in China in Q3 2022 increased by 11% year-on-year, which was significantly slower than the global cloud service market's high growth momentum of 33%. After the release of the Alibaba Cloud financial report, it was evident that the revenue from internet customers decreased by 4% year-on-year. This was mainly due to a top internet customer, ByteDance, gradually ceasing to use Alibaba Cloud's overseas cloud services for its international business. However, the demand growth from other internet customers in the Chinese internet industry partially offset the decline.

In the Chinese cloud market, the pandemic has caused some lag in customer market IT spending, but the Chinese enterprise market with overseas expansion needs is being opened up first. Companies that are going global are competing based on global connectivity and local operations that cater to the needs and comply with regulations of each country. Chinese cloud providers are also actively expanding overseas. Alibaba Cloud recently opened its third data center in Japan, and in the past year, it has added six data centers overseas, establishing 26 regional nodes and 82 availability zones globally.

However, there are still limitations to Alibaba Cloud's coverage in overseas markets compared to China and Southeast Asian countries. For enterprises that truly need global influence, it may be challenging to use Alibaba Cloud's services. Some mainstream observability and security management tools cannot be integrated into Alibaba Cloud, and its operation in the developer community, especially in the North American market, is relatively limited. To compete effectively, Chinese cloud players need to strategize and deepen their presence in the government and enterprise sector or expand overseas.

AWS has been the fastest-growing cloud service provider among the top five for Chinese enterprises or multinational companies using domestic public cloud resources for their businesses. In the first half of 2022, among Chinese enterprises using overseas public cloud resources and whose revenue is accounted for in China, AWS accounted for nearly 3/4 of the market. In 2021, AWS launched its "Global Advantages, Rooted Locally" strategy in China, followed by the "Connect China and the World" initiative in 2022. Microsoft Azure has also expanded its cloud computing capacity in China through its partnership with Century Internet, adding two Azure regions and two data centers in northern and eastern China, which will be put into commercial use in June 2023.

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