Google Cloud Is No Longer On The Sidelines

  • Google acqui-hired Diane Greene to compete with Amazon Web Services.
  • Greene's BeBop Technologies was building platform tools. Google Cloud needs application revenue.
  • For those playing the cloud, Amazon is a better play.

For many years Alphabet Inc-C (NASDAQ:GOOG) treated its Google Cloud as a sideline. It was an interesting business to have, which Google, Microsoft and others chased. It was incremental revenue, but no one had to worry about losing their job if things did not go well.

Thanks to new Chief Financial Officer Ruth Porat, that has changed. By creating Alphabet as a holding company, and putting Sundar Pichai under the main Google business unit, Porat set the stage for evaluating the cloud’s performance, and giving shareholders the kind of visibility into that to spur action.

Pichai’s first big move to meet the challenge facing his leadership is to hire Diane Greene, a co-founder of Vmware (NYSE:VMW), to head the cloud effort. It’s an “acqui-hire” – he got her by buying her start-up, Bebop Technologies.

Bebop’s business was a system for building cloud applications. That put it in the cloud platform space, one that VMware has itself occupied with its open source Cloud Foundry product. The trouble is that’s not where the big profits are in cloud right now. They’re in applications, like those offered by Salesforce (NYSE:CRM), software that actually solves real-world business problems.

Google’s offerings in that arena – a sort of Microsoft (NASDAQ:MSFT) Office competitor called Google Apps for Work -- have been weak. This impacts more than just the cloud business. It also weakens its Chromebook business, which depends on Google cloud applications to create value.

Greene is supposed to fix that, but she starts from a position of weakness. SRG Research says that the cloud infrastructure business of Amazon (NASDAQ:AMZN) is now bigger than its four nearest competitors combined – not just Google, but IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT) and Salesforce.Com as well.

IBM and Microsoft have covered up this weakness by applying software application and service fees to their cloud revenue estimates, making them appear bigger than they are. Porat’s visibility means Greene will not have that option.

But Google is still a good place for Greene to land. Already, the floor is littered with companies that tried, and failed, to compete with Amazon in the space. These include HEWLETT PKD ENT (NYSE:HPE), which hired open source guru Marten Mickos and then let him go within 8 months and is now killing its Helion cloud. It includes the world’s largest phone companies, like AT&T (NYSE:T),  Verizon (NYSE:VZ) and CenturyLink (NYSE:CTL), all of whom advertise their own cloud efforts extensively, but don’t register in terms of market share.  It also includes Rackspace Hosting (NYSE:RAX), which has managed a profit by slowing its growth.

The problem for all of Amazon’s competitors, and the advantage for Amazon is simple. Price sells cloud, scale drops price, and price plus scale creates lock-in. The Application Program Interface (API) for AWS is now protected by law, making it a proprietary standard, and Amazon has the capital structure in place to out-spend anyone else in the space, thanks to its own use of AWS for its store and Prime media efforts.

Right now, 90% of Google’s revenue still comes from advertising on the main search engine, and Google stock hit another all-time high on Friday. So few investors are thinking about the risks Greene fails. Instead they’re focusing on the ample cash flow Alphabet will have to stay in the cloud game, no matter what Greene does.

Analysts may try to spin this latest move as strong for Google, but it’s really more proof, if proof was needed, that Amazon remains the best stock play in the cloud. What investors in Alphabet need to understand is that she might indeed fail.

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