Microsoft Earnings Report Can't Disguise Amazon Cloud Size

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When it comes to cloud services, only a handful are building the data centers and critical mass of services that are likely to make them a long term provider. Google, Microsoft and Amazon appear to be doing so, each in different ways.

Disbelieve reports that say with its latest quarterly report, Amazon Web Services is "plateauing" or "languishing." Many should be so fortunate as to languish in the way Amazon is. Microsoft in turn appears to be transitioning parts of its traditional business into the cloud but it's made it intentionally more difficult to tell how fast or how far it's falling behind Amazon.

For example, in its second quarter 2017 results, reported Jan. 26, Microsoft Chief Financial Officer Amy Hood said the Microsoft Azure cloud grew at a rate of 97% in the quarter. But nowhere is a revenue figure with a dollar sign attached to that 97%. The previous quarter it grew by 102%, another market-leading increase, if you can believe the figures, a task that would be made easier if Microsoft broke out Azure infrastructure and platform as a service revenues as a separate item. But if it did that, we'd have a rough yardstick with which to compare Azure and Amazon.

Instead they are buried in the reporting on the Intelligent Cloud division, a term that crept into Microsoft's quarterly reporting in the first quarter of last year. The Intelligent Cloud unit includes Azure infrastructure and platform as a service, Enterprise Services (which may not occur in the cloud), and other server revenues, such as Windows Server and System Server. The unit had revenues of $25 billion in fiscal 2016, which ended June 30. But Morgan Stanley's Keith Weiss says Azure generated $1.6 billion of the $25 billlion total, according to Barron's Tiernan Ray, TechTrader columnist.

Want to learn more about who's competing where? See Private Cloud In Retreat, Public Cloud To The Fore: Report.

The Intelligent Cloud unit "is crammed with older products, rebranded by Microsoft as 'cloud,' such as Windows Server," Ray wrote Jan. 30.

Granted Windows Server powers the hardware that makes up the Azure cloud, but it powers even more legacy systems in enterprise data centers, with more revenues in all likelihood coming from there. By that standard, the business unit could also be called the Intelligent Enterprise or even the Aging Enterprise division.

Amazon, the parent company, on the other hand, has been making its AWS cloud revenue reporting more straight forward since it introduced a separate line for AWS at the start of 2015. It's had no need to artificially inflate its revenues since then; they've been doing that so on their own, like a float in the Macy's Thanksgiving Day parade.

AWS blew past a $10 billion benchmark with fourth quarter revenue growing 47% to $12.2 billion. Admittedly, that's a drop-off from the 69% growth in the same quarter of 2015, but it's harder to sustain such high rates as the base revenue gets so big. Nevertheless, the profit margin remains 25%, compared to Amazon's own North American ecommerce unit where the profit margin is 2.5%.

Microsoft will feed the notion through its reporting practices that it's overtaking AWS for as long as it can, and through headlines in house-friendly publications: Cloud Continues To Rain Money. That from Penton's Supersite Windows here.

This report even suggested that Microsoft might even be falling further behind as its customers' responses in a survey dropped from 38% of the total users to 28% over the course of 2016.

In fact, it now might be able to put a little more flesh on its bones by adding customers to a large cloud infrastructure that it has built out. With the new President Trump administration, Microsoft might even bring home some of its $123 billion in cash that's stashed overseas and invest further in the cloud. But it may also have wished it had so sooner, given the way AWS is building on its strengths.

Alphabet's Google includes its cloud operations in its "Other" set of products. It's hard to say how the Google Cloud, consisting of App Engine and Compute Engine, is doing in such a big group. But Google revenues improved last year at a 22% clip, with $2.9 billion in capital expense going into data centers, among other things, such as the new $600 million facility in Eemshaven, the Netherlands.

In July last year, Wired writer Klint Finley said the Google Cloud Platform was starting to pay off, but it cloaks its revenue in the Other category on its revenue sheet, which includes Google Apps, Google Play and its hardware ventures. The segment pulled in $2.2 billion or 33% more than the second quarter of the previous year in 2016, but it doesn't say much about how the cloud unit is doing.

CEO Sundar Pichai claimed in a recent Jan. 26 earnings call that, "Our cloud business is on a terrific upswing."

Google jawboning is just as unlikely to close the gap with AWS as Microsoft's report rejiggering. Next quarter, perhaps it would be necessary to look eastward to TenCent or Budai to see how the Chinese are doing when it comes to creating a cloud company that can catch Amazon.