Big Tech under pressure from cost-conscious cloud customers

Big Tech under pressure from cost-conscious cloud customers

Cloud computing’s skyrocketing growth has reached a turning point, as increasingly cost-conscious customers and economic pressure combine to hold back one of Big Tech’s fastest-growing growth markets.

“There’s tremendous pressure from customers to cut costs,” said Barry Briggs, a former Microsoft executive and now analyst at independent research firm Directions on Microsoft.

After seeing their cloud bills skyrocket as they move more of their computing to platforms run by companies such as Amazon, Microsoft and Google, he added, many customers are becoming smarter to figure out how to reduce the costs of their cloud spend.

Both Amazon and Microsoft pointed to customer efforts to “optimize” their cloud spending for a surprising drop in cloud growth in the last quarter.

Revenue from Microsoft’s Azure cloud platform rose 42% before the effects of foreign currency movements, one point below expectations, while Amazon Web Services sales rose 27%, the rate of slowest quarterly growth since Amazon began separating cloud sales from overall revenue.

The pressure on growth comes as many large enterprises have had to deal with soaring bills as they move more of their computing to the cloud. A major bank’s chief technology officer has complained that the biggest cloud companies haven’t moved quickly enough to reduce fixed costs for things like storage and computing, as the volume of he activity has soared, despite the increased efficiencies resulting from large-scale operation.

Companies tried to put on a brave face in the face of the growth deficit, saying they were working with customers to help them get the most out of their services, and that it would pay off in the longer term.

“In this particular time, I think we’re going to optimize long-term customer loyalty,” Microsoft chief executive Satya Nadella told analysts after his company’s latest results.

But the result surprised Wall Street and highlighted an unexpected slowdown in the hot cloud market, which most experts say is still in its infancy.

Companies are trying to turn the downturn to their advantage, offsetting the pressure on spending by enticing customers to buy more of their services or sign up for longer-term agreements.

Amazon said one way to help its customers save money is to move their computing workloads to its own chips, which could boost its efforts to become a full-fledged, vertically integrated technology company. It is already designing its own high-performance processors, called Graviton, as well as accelerators 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 to its data centers, potentially crowding out smaller competitors.

“They want you to commit to spending big bucks and growing on their platform, and not considering other cloud providers,” said Corey Quinn, of The Duckbill Group, a consulting firm. for companies looking to reduce their cloud bills.

“They love to use terms like ‘all inclusive’ on a given cloud or ‘preferred cloud provider’ – this unlocks a bigger discount, but in return you agree to be a referral to them and not be a benchmark for someone else,” Quinn said.

“Customers who rely on AWS for larger, longer-term engagements tend to have the best economics,” said Elizabeth Baker, vice president of AWS Global Transaction Strategy and Programs. “We don’t tell customers where to run their workloads, and their choice of vendors isn’t factored into our pricing.”

Microsoft, meanwhile, is tying together previously separate cloud services like Azure, Microsoft 365, and Dynamics more tightly to “root more [itself] in the client,” Briggs said.

Analysts say cloud companies are also offering deals to retain customers longer. By committing to using resources in one of the clouds for several years, customers could expect to reduce their payments by 70 to 80 percent, Briggs said. “It can lead to quite substantial savings,” he said.

Customers are finding they can gain “bargaining power” over cloud companies by planning better ahead and committing to purchase services up to five years in advance, said Michael Silver, analyst at Gartner.

Despite new pressures from customers to make their cloud spending more efficient, most experts said there were few signs of worsening competition in the cloud industry.

Companies face high switching costs if they try to move their IT to another cloud player, Silver said. “And then once you switch, you get locked into a new provider and eventually have the same problem with them,” he added.

Similar Posts