The cloud-computing market maintained its momentum in the third quarter, driven by a cross-industry digital migration that accelerated during the pandemic and appears unlikely to end any time soon.
All of the major cloud players in the U.S. reported year-over-year revenue growth for their respective cloud platforms, with executives in earnings calls touting lucrative commitments struck with new and returning customers who turned to cloud-based solutions to operate efficiently amid many limitations on in-person work and play during the COVID-19 pandemic.
Even as public health restrictions loosen around the world, industry analysts say many organizational operations have permanently transitioned toward the cloud. While cloud market growth is easy to find as more employers embrace remote and hybrid work models, cloud providers are competing fiercely against each other, with many beginning to turn more attention to industry-specific verticals to stand out.
The new normal
"This new normal of the hybrid work model is likely to continue due to ongoing pandemic concerns and employee preferences," said Jean Atelsek, an analyst in the cloud transformation and digital economics unit at 451 Research. All cloud providers cite the rising trend of remote work as a continuing driver for cloud adoption.
Beyond the remote work transition, Atelsek said cloud companies are developing services to make resource-intensive workloads, particularly machine-learning analytics and high-performance computing jobs, run more efficiently and cheaply.
"This is allowing the companies to unlock ways to lower the learning curve for using their respective products effectively, thus building dependence on their products and addressing an ongoing skills shortage in cloud operations and engineering," Atelsek said.
John Dinsdale, a chief analyst at Synergy Research Group, said the pandemic gave an incremental boost to a market that was already experiencing strong growth and is on a trajectory for more.
"The many benefits of using public cloud services rather than building and using on-premise data centers have become ever-more obvious and are continuing to drive more workloads to the cloud," Dinsdale said. "The cloud market will continue to grow strongly for many years to come."
Wedbush Securities analyst Daniel Ives said the cloud shift is just entering its next stage of growth globally.
"We predict enterprise workloads on the cloud increase from 40% today to 45% by the end of 2021 and 55% by 2022," Ives said. "For CIOs [chief information officers] looking ahead, cloud shifts represent the path over the coming years as we estimate global cloud spending will approach $1 trillion over the next decade."
The Big 3
Cloud market leader Amazon Web Services Inc.'s revenue grew 38.9% year over year to $16.11 billion in the third quarter. The cloud unit accounted for almost 15% of parent Amazon.com Inc.'s total revenue of $110.81 billion.
Microsoft Corp.'s September quarter earnings were also buoyed by its cloud-computing business. The company's intelligent cloud segment, which includes the Azure cloud platform as well as server products, saw revenue grow 30.6% over the prior year to $16.96 billion
Alphabet Inc.'s Google Cloud, which trails behind AWS and Azure at a distant No. 3 in the cloud market, also continued to grow steadily in the third quarter, with revenue up 44.9% year over year to $4.99 billion.
According to new data from Synergy Research Group, Amazon, Microsoft and Google continue to attract more than half of worldwide cloud spending, with third-quarter market shares of 33%, 20% and 10%, respectively.
Dinsdale said the continued success of these companies is based on a range of factors, including the breadth and quality of their services as well as the companies' broad geographic footprints and brand-name recognition in the cloud market. Those factors also make it hard to shake up the current market rankings.
"Simple math makes catching up with AWS an incredibly difficult proposition," Dinsdale said. "While Microsoft's market share is increasing, the incremental quarter-to-quarter revenue increase for AWS is much higher."
However, Wedbush's Ives said Microsoft's strength in the enterprise software market could tip the scales toward its Azure cloud platform as Microsoft rolls out new cloud-based offerings for popular products, such as Office 365.
"Azure's cloud momentum is still in its early days of playing out within the company's massive installed base and the Office 365 transition for both consumer and enterprise is providing growth tailwinds over the next few years," Ives said.
Opportunities for smaller players
Despite the dominant position of the top three cloud providers, analysts believe there is enough untapped demand in the cloud market for other competitors to generate meaningful revenue.
According to Synergy Research Group, the next 10 largest cloud providers after Amazon, Microsoft and Google saw 22% year-on-year growth in combined cloud revenue in the third quarter. The group includes International Business Machines Corp., which ranks as the fourth-largest U.S. cloud provider with a 4% market share. IBM's cloud and cognitive segment, which reported 2.5% year-over-year revenue growth to $5.69 billion, has consistently been a bright spot in the company's earnings during the pandemic.
To stay afloat in the increasingly competitive industry, smaller cloud players need well-targeted strategies, Dinsdale said.
"Clearly there are challenges with the big three companies lurking in the background, so the name of the game is not competing with them head-on," Dinsdale said. "If they [smaller cloud providers] are smart about targeting the right applications and customer groups, the cloud can provide a broad and exciting range of growth opportunities."
One way for cloud players to stand out is to invest in so-called "industry clouds," or pre-built, secure cloud offerings that are compliant with regulations in verticals such as financial services, healthcare, retail and manufacturing. While the larger companies are increasingly expanding in this space, a focused approach to a specific industry can create an opportunity for smaller competitors to build a loyal customer base.
"Industry clouds are becoming a big driver as businesses in these sectors seek to take advantage of cloud capabilities without having to deal with the nitty-gritty complexity of cloud operations," said 451's Atelsek.