The continued growth of cloud computing has reached a watershed, as cost-conscious customers and economic pressures combine to dampen one of Big Tech’s biggest growth markets.
“There is tremendous pressure from customers to cut costs,” said Barry Briggs, a former Microsoft executive and now an analyst at the independent research firm Directions on Microsoft.
After seeing cloud bills rise as they move a larger portion of their computing to platforms managed by companies such as Amazon, Microsoft and Google, he added, many customers are savvy about how to cut costs from cloud spending.
Amazon and Microsoft both pointed to their customers’ efforts to “optimize” their cloud spending for slowing cloud growth in the most recent quarter.
Revenue on Microsoft’s Azure cloud platform rose 42 percent before the effect of foreign currency movements, a point below expectations, while sales of Amazon Web Services grew 27 percent, the slowest quarterly growth rate since Amazon began to exclude cloud sales from overall revenue.
The pressure on growth comes as many large companies face rising bills as more computing moves to the cloud. A chief technology officer at one major bank complained that the biggest cloud companies have not moved quickly enough to reduce fixed costs for things like storage and computing as business volumes grow, despite greater efficiencies from operating at scale.
The companies are trying to counter the lack of growth, saying they are working with customers to get more value from their services, and this will pay off in the long run.
“At this particular time, I think we’re going to maximize long-term customer loyalty,” Microsoft chief executive Satya Nadella told analysts after the company’s latest earnings.
But the results surprised Wall Street and pointed to an unexpected slowdown in the hot cloud market, which most experts believe is still in its infancy.
Companies are trying to turn retrenchment into an advantage, offsetting the pressure to spend by asking customers to buy more services or sign up for longer-term deals.
Amazon says one way to help customers save money is by moving computing workloads to its own chips, which could boost its efforts to become a vertically integrated technology company. It has designed its own high-performance processor, called Graviton, as well as an accelerator to speed up machine learning calculations, called Trainium, putting it in direct competition with established chip companies such as Intel and Nvidia.
AWS also offers discounts to customers who channel more of their cloud business into their data centers, which can undercut smaller competitors.
“They want you to commit to spending a lot of money and growing on their platform, and not consider other cloud providers,” said Corey Quinn, of The Duckbill Group, a consulting firm for companies looking to reduce their cloud bills.
“They like to throw around terms like ‘all in’ on a given cloud or ‘preferred cloud provider’ – which opens up deeper discounts, but you agree to be a reference for them and not a reference for anyone else,” he said. Quinn.
“Customers who commit to AWS on a larger, long-term commitment tend to enjoy the best economics,” said Elizabeth Baker, AWS vice president of global deal strategy and programs. “We don’t let our customers know where to run their workloads or their vendor choice is a factor in our pricing.”
Microsoft, meanwhile, links previously disparate cloud services such as Azure, Microsoft 365 and Dynamics more closely to “entrench more [itself] to the customer,” Briggs said.
According to analysts, cloud companies are also offering deals to lock in customers for longer. By committing to using resources in one of the clouds for several years, customers can expect to shave 70 to 80 percent off their payments, Briggs said. “You can generate quite a large savings,” he said.
Customers are finding they can gain “negotiating leverage” through cloud companies by planning better and committing to purchase services up to five years in advance, said Michael Silver, an analyst at Gartner.
Despite renewed pressure from customers to make cloud spending more efficient, most experts say there are signs that competition in the cloud industry is getting tougher.
Companies face high switching costs if they try to move their computing to a different cloud player, said Silver. “And if you switch, you’re locked into a new provider and end up having the same problems they had,” he said.