Can Google Cloud Really Catch Up With The Cloud Leaders?

  • Google Cloud has been scoring major wins this year, nabbing key customers and making cloud acquisitions.
  • The cloud is increasingly becoming a bigger part of Google though it still trails the cloud leaders.
  • How likely is Google Cloud to catch up with AWS and Azure?

Alphabet Inc's-C (NSDQ:GOOG) Google cloud has for a long time lived in relative obscurity. Google Cloud results do not even feature on the company's quarterly earnings report the way AWS does for Amazon (NSDQ:AMZN) and Azure for Microsoft (NSDQ:MSFT). This appears somewhat ironic considering that Google owns one of the largest computer and server networks on the planet to handle tasks such as Google Search, YouTube, and Gmail. Further, the Google Cloud Platform is actually cheaper than offerings by the two market leaders.

Google Cloud is, however, now coming more and more into the spotlight. Google Cloud has been scoring some major wins this year, including signing up subscription streaming music leader Spotify to its platform, and Apple (NSDQ:AAPL) moving some of its iCloud services to Google Cloud.

Getting serious with the cloud

Google has been getting serious about leveraging its cloud platform as one of its next major growth drivers. One of the reasons why enterprise customers have in the past not been using Google Cloud as much as they do AWS and Azure is because Google Cloud is not very well understood, and also because the network of applications that run on top of the cloud are not as diverse as on those by competitors. But Google Cloud has some clear differentiators including machine learning and has recently been making concerted efforts to improve its customer service level for its cloud services. In fact, Spotify said the biggest reason why it migrated most of its user accounts from AWS to Google Cloud is due to the latter's deep-level customer service and superior data tools.

But just how big is Google's cloud? It's hard to get an exact figure for Google Cloud revenues because Google buckets together its cloud revenue in the ''Other Revenue'' section, a wide category consisting of at least seven other revenue segments. Synergy Research ranked Google Cloud #4 in public cloud infrastructure about three quarters ago, with roughly one-eighth of AWS market share. Synergy's latest cloud report lumps together cloud market share by Microsoft, Google, and IBM (NYSE:IBM), and is not very useful in gauging Google's position in the rapidly expanding market.

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AWS finished the second quarter with revenue of $2.9B after growing 58% Y/Y. From the Synergy report, Google Cloud has roughly one-eighth of AWS's market share, which would put its quarterly revenue at around $363M. But Synergy says that Google Cloud and Azure grew more than 100%, the only large public cloud vendors to grow in triple digits, so Google Cloud quarterly revenue appears to be growing fast. Google notched up $21.5B in revenue during the last quarter after posting growth of 21%. So the company's cloud probably contributes under 2% to its top line. Cloud revenues for Amazon and Microsoft sit at around 10% of overall revenue, so Google has some catching up to do.

On the growth front, Google appears to be taking Oracle's (NYSE:ORCL)  approach to the cloud that involves acquiring cloud companies then folding them up into its operations. Google has acquired cloud platform Orbitera, a cloud marketplace designed for independent software vendors, IT channel organizations, and service providers. Orbitera helps businesses buy and sell software in a scalable and streamlined environment. Google will use Orbitera in its cloud platform.

From Google's announcement:

Looking to the future, we're committed to maintaining Orbitera's neutrality as a platform supporting multi-cloud commerce. We look forward to helping the modern enterprise thrive in a multi-cloud world."

Catching up with the cloud leaders

Recent comments by Google during its earnings call have indicated that the company will continue to invest heavily in its cloud to try and bridge the large gap between itself and the cloud leaders. In terms of geographic buildout, the company plans to add not less than 10 new large data centers in the U.S. and elsewhere over the next few months.

But how likely is Google to catch up with AWS and Azure? Not very likely if a recent Morgan Stanley survey of 100 Chief Information Officers (CIOs) (75 from USA and 25 from Europe) is any indication. The survey found that Microsoft Azure IaaS could actually overtake AWS by 2019, with Google Cloud IaaS coming in a distant third.

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Source: Geek Wire via Morgan Stanley

I personally believe Google Cloud could do better than that. After all, the cloud is now growing in triple digits as businesses continue opening up to its capabilities. And, I think the MS survey used a rather small sample that might not be truly representative.

Google has been pretty late to the cloud, and might be forced to continue playing catch up for years. But investors need not worry. While a company like Microsoft has staked its entire future on the cloud, Google's DNA remains search ads--and the business is doing great. Google's growth is accelerating--21% revenue growth last quarter vs. 11% a year ago--thanks mainly to its growing strength in mobile advertising. That's an impressive feat for a company of Google's size. With Google's core ad business generating new growth runways, it might not matter much whether the company's cloud platform catches up with the leaders or not.

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