- Alphabet has scored a big win by signing up Spotify to its cloud platform from AWS.
- Spotify says that Google Cloud's superior data stack capabilities and deep-level customer service influenced its decision.
- The cloud could become a significant growth driver for Alphabet in 3 years.
When it comes to the leading cloud players, investors are accustomed to hearing a lot about Amazon (NASDAQ:AMZN) AWS and Microsoft’s Microsoft (NASDAQ:MSFT) Azure, but not so much about Alphabet Inc-C (NASDAQ:GOOG) Google Cloud. Maybe this is to be expected, given that Google cloud is ranked well behind the cloud leaders. But now Alphabet has one-upped Amazon by stealing one of its key cloud customers: subscription music streaming leader, Spotify. Spotify has announced that it’s migrating its infrastructure to Google Cloud, a true case of David trouncing Goliath.
Spotify has traditionally relied heavily on its in-house servers to store its millions of user accounts and playlists, but it says that an inflection point has been reached where network services, storage, and compute abilities by cloud vendors are as high performance, high quality, and low cost as traditional approaches which makes moving to the cloud a no-brainer for the company. Spotify has traditionally employed something of a hybrid cloud approach by using AWS’ S3 storage service to store music tracks and its own CloudFront CDN service to deliver app and software updates to its customers. Spotify now says it has already moved 250k of its 20M user accounts to the Google Cloud Platform and will only be using AWS for some peripheral services.
It’s important to take note of the reasons Spotify gave for choosing Alphabet’s cloud over AWS, and price is not one of them. Spotify’s VP of infrastructure Nicholas Harteau said:
“If this was a question of finding the cheapest cloud provider, it probably wouldn’t be Amazon, Microsoft or Google,”
Spotify says that Google Cloud’s superior data tools and deep-level customer service were what influenced the company’s decision:
“Amazon does some things really well around identity and access management and security,” but Alphabet offers data tools that Spotify finds more intriguing, “Google has been a thought leader in the data space for quite some time, and those tools are much more important to what we are trying to do than breadth of product is.”
Google’s data stack capabilities are already well known so no real surprises here. It’s Spotify’s reason #2 that caught many by surprise:
“Amazon is a company with customer service in its DNA,” the VP said. “You don’t really think that about Google.” Spotify says that it completely underestimated Alphabet’s customer service capabilities. Alphabet offered more direct interactions on an engineer-to-engineer level that exceeded Spotify’s expectations. “It doesn’t feel like there is a layer of sales and sales engineering in between. That was the differentiator for us.”
Alphabet Is Serious About Leveraging Google Cloud As One Of Its Key Growth Drivers
Google was not known to talk much about its cloud the way Amazon and Microsoft do. Google, used to report cloud revenues under the ‘‘Other Revenues’’ section and now Alphabet reports its cloud revenues under ‘‘Google,’’ a wide category that contains Search, Google Maps, YouTube, ads, Chromecast, Nexus, Chromebooks, Android, Google Play, and commerce.
The cloud barely used to receive a passing mention under Google. But during the company’s last earnings call as a single company, Alphabet hinted strongly that the cloud would become one of it next growth drivers after search.
“Cloud is also a growing area where we see great opportunity, and we’re building a fantastic service that we’ll keep investing in,"
But how big is Alphabet’s Google Cloud? According to a report by Synergy Research, Google held 4% of the cloud infrastructure services market (IaaS, PaaS, Private and Hybrid combined) in Q4 2015. Synergy pegged the market’s worth at $23B in 2015 after growing a robust 52% Y/Y.
It's implied that Google Cloud’s share of the market is ~$920M. Alphabet finished 2015 with revenue of $97,966M, which implies that the cloud contributed less than 1% to its top line. In contrast, the cloud contributes close to 10% to Microsoft’s top line and ~8% to Amazon’s revenue. This is perfectly understandable since Google was quite late to the cloud party. But with Alphabet fully committed to investing in its cloud platform and adding important differentiators that are helping it win new business such as the Spotify deal, the cloud is likely to start contributing significantly to Alphabet’s top line in about 3 years.
Google Cloud grew a blistering 108% during the last quarter, making it Google’s fastest-growing revenue segment. The Spotify deal underlines Alphabet’s commitment to making the cloud one of its key growth drivers alongside YouTube and Google Play.