State of the Cloud: Gen AI Giveth, Taketh AwayState of the Cloud: Gen AI Giveth, Taketh Away

With all three hyperscalers’ latest earnings announced, we now have a more clear picture of the state of the cloud at the end of 2024.

Namely, that state comes down to this: Amazon Web Services, Microsoft Azure and Google Cloud all report ever-more demand for generative AI services, but each cloud computing provider is struggling with capacity constraints. For Microsoft and Google Cloud, it’s about having enough data centers to accommodate the gen AI clamor. For AWS, it’s about not having the chips, servers or power to maintain pace with the speed of gen AI development.

In addition − at least for Microsoft − challenges remain in getting channel partners to sell more gen AI.

Rather than rehashing all the latest earnings figures, we look at why cloud computing revenue faltered in the last three months of 2024, rounding out a year that created total market size of $330 billion, according to Synergy Research Group.

State of the Cloud: Microsoft Trying to Get Partners to Sell More Gen AI

Even though revenue from Microsoft’s Intelligent Cloud segment, which houses the Azure platform, missed Wall Street’s projections, it still rose 19%, reaching $25.5 billion. Executives said more commitments from OpenAI accounted for much that growth, but said generative AI capacity and lagging channel partner sales of the buzzy technology are weighing things down.

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Indeed, like its peers, Azure is shelling out billions of dollars for data center and other infrastructure to accommodate gen AI capacity. Yet, in what should pique Channel Futures’ readers interest, Microsoft cited “challenges” in spurring partners to sell more gen AI.

“[T]he challenges were in what we call the scale motions,” Amy Hood, executive vice president and chief executive officer, told analysts during Microsoft’s Jan. 29 earnings call, according to a transcript from The Motley Fool. “[P]rimarily, these are customers we reach through partners and through more indirect methods of selling.”

The “art form there,” she added, is getting customers to implement AI workloads while also continuing with their cloud computing migrations and “other fundamentals.”

“We … took our sales motions in the summer and really changed to try to balance those two,” she explained, referring to the channel program changes Microsoft made last summer to emphasize AI sales.

Those efforts apparently have yet to meet Microsoft’s hopes.

“[Y]ou … learn with your customers and with your partners on sort of getting that balance right between where to put our investments, where to put the marketing dollars, and importantly, where to put people in terms of coverage and being able to help customers make those transitions,” Hood said. “And I think we are going to make some adjustments to make sure we are in balance because when you make those changes in the summer, by the time it works its way through the system, you can see the impacts on whether you have that balance right. And so, the teams are working through that.”

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When it comes to how well channel partners are selling gen AI on Azure platforms, Microsoft execs are “making adjustments,” she told analysts.

State of the Cloud: Google Cloud Needs More Gen AI Capacity, Partners Aiding Revenue

Google Cloud, too, saw its revenue increase in the latest quarter — by 30%, in fact, from the year-ago quarter, to $12 billion.

Those ramped-up sales came from overall Google Cloud Platform growth, along with AI infrastructure and services, said Anat Ashkenazi, chief financial officer, on a Feb. 5 earnings call with analysts.

At the same time, Google Cloud partners pitched in a significant amount of revenue, said Sundar Pichai, Alphabet CEO. 

Google's Sundar Pichai

“Our partners are further accelerating our growth with customers purchasing billions of dollars of solutions through our cloud marketplace,” he told analysts.

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That’s all positive but it wasn’t enough to assuage Wall Street, which registered its disappointment throughout the week; investors had expected better results from Google Cloud parent company Alphabet. A key reason why boils down to Google Cloud, like its peers, not having the infrastructure needed to keep up with gen AI demand. That could have a ripple effect throughout the year, Ashkenazi warned.

“[I]n cloud, given that revenues are correlated with the timing of deployment of new capacity, we could see variability in cloud revenue growth rates depending on when new capacity comes online during 2025,” she said.

Holger Mueller, vice president and principal analyst for Constellation Research, said that leaves Google Cloud in a slight quandary. Despite all of Google Cloud’s investment and Alphabet executives’ projections for higher first-quarter 2025 earnings per share, Google Cloud has its work cut out for it.

“[T]he question for Q1 will be: How can Thomas Kurian and team get the Google Cloud growth back to expectations?” Mueller wrote in a Feb. 4 blog. “Google Cloud capacity limitations were cited as core reason for the slowdown. The first half will be critical to see how well Google Cloud can help carry Alphabet into high teens − maybe even low 20s − revenue growth.”

State of the Cloud: AWS Dealing with Constraints, But All Eyes on AI

Finally, the same as its two main rivals, AWS got grief from Wall Street this week after parent company Amazon reported slower-than-forecast growth within the world’s largest public cloud computing provider. Like Azure, AWS recorded 19% more revenue in its latest quarter, which just missed investors’ estimates.

But Andy Jassy, president and CEO of Amazon, and former head of AWS, doesn’t appear worried.

Amazon's Andy Jassy

“AWS is a reasonably large business by most standards, and though we expect growth will be lumpy over the next few years as enterprise adoption cycles, capacity considerations and technology advancements impact timing, it's hard to overstate how optimistic we are about what lies ahead for AWS' customers and business,” Jassy told analysts on Feb. 6. “I spent a fair bit of time thinking several years out. And while it may be hard for some to fathom a world where virtually every app has generative AI infused in it … this is the world we're thinking about all the time. And we continue to believe that this world will mostly be built on top of the cloud with the largest portion of it on AWS.”

Reaching that point, though, will require overcoming the industry-wide issue of supply around hardware and capacity.

“It is true that we could be growing faster, if not for some of the constraints on capacity,” Jassy said, adding that the bottlenecks are coming from third-party chip suppliers and global power limitations.

He predicted those bottlenecks will ease up in the second half of this year. Indeed, Amazon is banking on AWS continuing to contribute ever-higher numbers to overall earnings, and mostly through AI on cloud. (Right now, AWS adds 15% to Amazon’s overall figures.)

“AI represents, for sure, the biggest opportunity since cloud and probably the biggest technology shift and opportunity in business since the Internet,” Jassy told analysts.

Even so, Wall Street wasn’t pleased this week, just as it wasn’t with AWS’ peers. But one analyst, Nicholas Jones of Citizens JMP, said the investment banking firm remains “encouraged by Amazon's commentary around return on capital expenditure over the medium to long term as the company continues to position itself to capture traditional cloud migration and AI budgets.”

Assessing the State of the Cloud with Gen AI in Perspective

Despite the cloud providers’ capacity issues, gen AI fueled the financial increases they did show in 2024 — and that doesn’t look likely to change.

“Q4 cloud revenues grew by well over $6 billion from the previous quarter, giving a full-year total market size of $330 billion,” said John Dinsdale, a chief analyst at Synergy Research Group. “The 2024 annual growth rate came in a full four percentage points higher than the 2023 growth rate, which is a testament both to the impact of gen AI and the strength of the underlying cloud market.” 

Synergy's John Dinsdale

Over the last two years, gen AI has driven half of the cloud computing market’s growth, Synergy said. That stems from three main areas: gen AI platforms, GPU services and enhancements to various cloud offerings.

“Our assessment is that since ChatGPT was launched, gen AI has been responsible for at least half of the increase in cloud service revenues,” Dinsdale said. “That has come from either newly launched gen AI/GPU services or from AI-driven improvements to existing cloud services.”

The latest numbers indicate that AWS still retains its cloud computing crown with 30% market share, Azure coming in second with 21% and Google Cloud remaining in third place with 12%, Synergy said. Each of the hyperscalers plans to spend billions of dollars this year alone on infrastructure and capacity upgrades to accommodate AI.