As growth in sales of cloud services slow down, Amazon is being hurt the most by the situation. Dan Gallagher reports for The Wall Street Journal:
The tech slowdown is finally hitting the cloud. The largest player might be paying the biggest price.
Amazon AMZN -1.86%decrease; red down pointing triangle.com, Microsoft Corp. MSFT 0.68%increase; green up pointing triangle and Google all reported disappointing news for their respective cloud services businesses in their December quarter reports. For Amazon and Google-parent Alphabet Inc., GOOG -7.49%decrease; red down pointing triangle revenue growth for those segments came in below Wall Street’s forecasts. Growth for Microsoft’s Azure service was in line with targets, but still showed a notable deceleration of 15 percentage points from the same period the previous year. Amazon and Microsoft—the largest players in the category—also flagged deceleration during their respective conference calls while warning of further slowdowns in the current quarter.
That shouldn’t come as a major surprise. Demand for cloud-computing services was growing rapidly even before the pandemic as corporations moved away from legacy on-premise software. Covid-19 juiced that growth even more as companies suddenly found they needed to operate remotely. But the inevitable cooling of that demand has also run headlong into a global economic slowdown, forcing businesses to scale back their spending. Some industries are getting hit harder than others; in Amazon’s earnings call Thursday, Chief Financial Officer Brian Olsavsky called out reduced mortgage volume and cryptocurrency trading as factors affecting usage of the company’s AWS cloud service in the recent quarter.
Amazon has been on top of the public cloud business since before most people even knew what it was. The company first announced the launch of “Web Services” in 2002—straight from the carnage of the dot-com meltdown. It began reporting financial results for the segment, renamed AWS in 2015, when the business was generating more than $5 billion in revenue annually. That has since grown to a little over $80 billion, making AWS larger than any stand-alone corporate software company except Microsoft.
But that great size, plus Amazon’s dependency on AWS for the bulk of its operating profit, make the e-commerce giant more exposed to the ill effects of the slowdown. Mr. Olsavsky noted that AWS’s revenue growth slowed to the midteens in January after hitting a record low 20% year-over-year in the fourth quarter. That is below the mid-20% growth range Microsoft projected for its smaller Azure cloud service in the March quarter. And while AWS is still larger than Microsoft’s Azure and much larger than Google’s Cloud Platform, the latter two have the far more profitable legacy businesses to fall back on. AWS generated $22.8 billion in operating profits for Amazon in 2022—a year in which the company’s larger retail business lost nearly $12 billion.
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