AMG (Amazon, Microsoft, Google) announced their quarterly financial results over the past couple of weeks. The companies’ cloud financials were, in a word, spectacular.
Looking at AWS, which is a bellwether for the sector, it turned in $17.8 billion in revenue for the quarter, and its growth rate inched up to 40%, which is 1% higher than last quarter, and a full 12% higher than the year ago quarter.
Taken overall (see table below), AMG delivered $34.3 billion in Q4 revenue, with an average growth rate of 43%.
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We have become so inured to the scale and growth rate of AMG that it’s easy to overlook just how astonishing these results are.
The fact is, these are very, very large businesses. AWS pulled in more revenue than IBM, which is number 42 on the Fortune 500 list. Even Google’s cloud business, number three of the big three, is a huge business.
Even more astonishing is their growth rate. An average growth rate of 43% means these huge businesses are going to be, well, even huger in short order. AWS should see around $70 billion in revenue for 2022; if it continues to grow at a similar rate as 2021, it would see 2023 revenues of just over $100 billion, good for 27th place on the Fortune 500. Microsoft and Google’s cloud revenues would place them well up the list as well.
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Can AMG Keep It Up?
One might attribute 2021’s very high growth rates as an exogenous boost due to the COVID pandemic. After all, AMG growth rates were lower in 2019 and early 2020 before the pandemic quickly grew the use of online services, most of which were deployed in one of the big three providers. So with the (fingers crossed) move back to more typical living patterns, perhaps the demand fueling these high growth rates will abate and they will drop back to pre-COVID levels.
Another reason growth rates might drop is the sheer difficulty of continuing such high growth rates. The larger an organization is, the harder it is to grow. While AMG might not need to grow headcount over 40% to support 43% growth, it’s clear that each of them is adding thousands of staff per year. Recruiting, training, and integrating that many new people might impose a limit to AMG growth.
Beyond that, the sheer difficulty of organizing and coordinating so many people, so much technology, and so many business initiatives might prove so difficult as to reduce organization efficiency. This would constrain AMG capability of serving customer demand, even if it still supported 40+% growth opportunities.
Summed up, will the ‘law of large numbers’ catch up with AMG and drop their growth rates to a more pedestrian pace? That would change the nature of these companies – they would still be large and very impressive businesses, but they would come to resemble other commercial behemoths like Toyota or McKesson: impressive but unremarkable as business entities.
AMG Begs to Differ
What is the perspective on potential growth rates from the providers themselves? After all, they should have a good understanding of demand curves.
With the experience of supporting millions of customers onboarding onto their platforms, they have insight about usage patterns and growth rates. They also are able to forecast new customer growth based on sales interactions. And they all have very sophisticated strategy and economics groups that model a range of exogenous factors that might affect customer adoption and growth.
Given all that, what do AMG believe about their future prospects?
In the words of the old classic, they believe their future’s so bright, they gotta wear shades.
How do we know this? We look to see what the investment in their future looks like by examining their capital investment. The past few years have seen significant growth in all three providers’ capital spend, with all three topping $20 billion for 2021, with Amazon putting nearly $60 billion of capital to work last year. That may be a record for a single company’s one year capital investment.
Of course, the year’s investment is not exclusively dedicated to any of the three’s cloud computing services. Each operates significant online properties not related to providing computing services. Amazon also invests in a lot of real estate in the form of fulfillment centers, nearly doubling its total number of centers over the past two years.
Nevertheless, a significant portion of each company’s total capital investment last year was spent on its cloud services. Even if only a third of $20 billion was invested in each company’s cloud services, that still is a huge number, demonstrating confidence that sufficient demand will exist to justify the investment.
In a phrase, AMG believe “if you build it, they will come.”
What This Means for Enterprises
The huge revenue numbers, accelerating growth rates, and confidence in future growth implied by enormous capital investment mean one thing: enterprises are increasingly shifting their application deployment strategies to a cloud-first – or, indeed, a cloud-only – future.
My sense is that many enterprises have reevaluated their previous strategies and shifted from an assumed 80% on-prem and 20% cloud deployment assumption to a 20% on-prem and 80% cloud assumption.
Obviously, this aligns with the large capital investment dollars being spent by AMG.
But from the perspective of enterprises, this shift carries knock-on, or second-order effects.
Managing Massive Migrations
First, enterprises will need to develop plans on how to manage such significant migrations. For every application currently deployed on-prem, they will need to decide where it will live in the future. Given that most enterprises pay scant attention to existing applications in favor of focusing on new or more-frequently updated apps, this will require significant employee and leadership mindshare over the next couple of years.
The Fading Data Center
Second, the pace of AMG growth means that corporate data centers are going to be emptied in favor of using provider infrastructure. Enterprises will need to balance depreciation schedules, new contract signing with one of the big three, and real estate disposal opportunities to decide how quickly to make the redeployment decision. And as with any rapidly-changing market, those who leave it late will get the worst terms, with asset write-offs in the offing.
New Architecture Needed
Third, enterprises will need to develop application architecture plans for what to do with existing apps. Most of them were designed for a world of constrained, static infrastructure, and are ill-suited for transient resources in a world of effectively infinite capacity. Which ones should be dropped with little change into cloud environments, despite suboptimal results, and which ones deserve greater investment to retool them to better integrate with cloud infrastructure?
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Finally, enterprise IT organizations must create a cloud-ready workforce. Many staff members have skills attuned to the traditional practices of old-style applications and infrastructure. In the future 80% of employees will need cloud skills.
I’ve seen how this skill transformation can be implemented, and it requires just as much investment as the applications with which these employees work. Many IT organizations fail to develop the comprehensive plans needed to support a 20% on-prem / 80% cloud future, but failing to do so consigns the organization to years of poor migration execution.