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Google cloud growth slows as Microsoft's rises, but it's all eyes on AI for 2024

Stuart Lauchlan Profile picture for user slauchlan October 25, 2023
Summary:
Google disappointed Wall Street, but the growth is still there, while Microsoft's cloudy alliance with Oracle is delivering migrations.

Pichai Nadella
Pichai and Nadella

A tale of two cloud services firms as Google parent Alphabet fell short on cloud revenue expectations for its latest quarter, while Microsoft saw its cloud arm beat forecasts. 

Overall, Alphabet posted total quarterly revenues of $76.69 billion, up 11% year-on-year, with profits coming in at $19.9 billion. But while Google’s cloud business reported a third consecutive operating profit - $266 million - and revenue of $8.41 billion, growth slowed to 22%, the lowest figure for the past 11 quarters and down from 28% last quarter. 

CFO Ruth Porat stated on the post-results analyst call that the reduced growth rate reflected “the impact of customer optimization efforts”:

The revenue growth does reflect healthy customer adoption across the portfolio, and that's infrastructure, data analytics, security…GCP [Google Cloud Platform] growth in the third quarter was above the growth rate for cloud overall, and we feel really good about the work that they're doing there. 

Alphabet CEO Sundar Pichai agreed that: 

On cloud, maybe what I would say is, overall, we had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing, and so that was a factor.

But he added that more than 60% of the world's 1,000 largest companies are Google Cloud customers:

Customers are choosing Google Cloud because we are the only large cloud provider with a unified platform to analyze structured and unstructured data. In Workspace, thousands of companies and more than a million trusted testers have used Duet AI. They are writing and refining content in Gmail and Docs, creating original images from text within slides, organizing data in Sheets and more. These innovations enable us to provide new services and grow our base of 10 million paying customers, including enterprises like Grupo Boticario, Unilever and Warner Music.

Meanwhile Microsoft turned in total revenues of $56.5 billion, up 13% year-on-year, with profits of $22.3 billion, up 27%. Sales from the Intelligent Cloud business were up 19% from the year-ago quarter to $24.3 billion. 

During the quarter, Microsoft announced its expanded alliance with Oracle to run the latter’s OCI database services in the former’s Azure data centers. CEO Satya Nadella said this has driven growth: 

Once we announced that the Oracle databases are going to be available on Azure, we saw a bunch of unlock from new customers who have significant Oracle estates that have not yet moved to the cloud because they needed to rendezvous with the rest of the app estate in one single cloud. And so we're excited about that. So in some sense, even the financial services sector, for example, is a good place where there's a lot of Oracle that still needs to move to the cloud.

He added: 

We continue to see more cloud migrations with Azure Arc. We're meeting customers where they are, helping them run apps across on-prem edge and multi-cloud environments. We now have 21,000 Arc customers up 140% year-over-year. We are the only other cloud provider to run Oracle's database services, making it simpler for customers to migrate their on-prem Oracle databases to our cloud. 

Customers like PepsiCo and Vodafone will have access to a seamless fully integrated experience for deploying, managing, and using Oracle database instances on Azure. And we are the cloud of choice for customers' SAP workloads too. Companies like Brother Industries, Hanes, ZEISS, and ZF Group all run SAP on Azure.

Here’s the AI stuff…

Away from cloud, both vendors upped the ante in their AI pitches. For Alphabet, Pichai talked up enhancements to the firm’s Bard offering: 

It's a direct interface to a conversational LLM, and we think of it as an early experiment and complementary experience to Google Search. Bard can now integrate with Google apps and services, showing relevant information from Workspace, Maps, YouTube, and Google Flights and Hotels. We've also improved the Google it feature. It provides other sources to help people evaluate Bard's responses and explore information across the web.

Earlier this month, we announced Assistant with Bard, a personal assistant powered by generative AI. It combines Bard's generative and reasoning capabilities with Assistant's personalized help. You can interact with it through text, voice, or images, and in the coming months, you'll be able to opt in on Android and iOS mobile devices. Our collaborative tools in Workspace and YouTube are also part of how we boost creativity and productivity, and they are seeing great initial traction.

Pichai also looked ahead to what to expect to come in 2024 as the firm builds the next generation to its Vertex Machine Learning platform, Gemini: 

We are just really laying the foundation of what I think of as the next generation series of models we'll be launching throughout 2024. The pace of innovation is extraordinarily impressive to see. We are creating it from the ground-up to be multi-modal, a highly efficient tool [with] API integrations and more importantly, laying the platform to enable future innovations as well. 

We are developing Gemini in a way that it is going to be available at various sizes and capabilities, and we'll be using it immediately across all our products internally as well as bringing it out to both developers and cloud customers through Vertex. So I view it as a journey and each generation is going to be better than the other, and we are definitely investing and the early results are very promising. 

Meanwhile Nadella made a series of boasts about Microsoft’s AI footprint, arguing that the firm has AI services deployed in more regions than any other cloud provider: 

Azure AI provides access to best-in-class frontier models from OpenAI and open-source models, including our own, as well as from Meta and Hugging Face, which customers can use to build their own AI apps while meeting specific cost latency, and performance needs. Because of our overall differentiation, more than 18,000 organizations now use Azure OpenAI services, including new to Azure customers. And we are expanding our reach with digital-first companies with OpenAI APIs as leading AI start-ups use OpenAI to power their AI solutions, therefore, making them Azure customers as well.

My take

Growth rates may have slowed - temporarily - at Google, but those are still impressive numbers, as are those reported by Microsoft. That said, it’s a sign of the times that on the analyst call, most attention for both companies fell on their AI strategies. It’s clear what the main battleground talking point will be in 2024. 

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