Shifts in Cloud Market Share: Key Trends and Insights

The growing competition among cloud giants

The cloud market is poised to be one of the most compelling investment opportunities of the next decade, with a projected CAGR of 15% by 2030. The rapid rise of AI will further accelerate its growth. Numerous companies stand to benefit:

• Cloud providers, which will be the primary focus of this article.

• Data center suppliers, from chip manufacturers like Nvidia and AMD to equipment makers such as Schneider, Arista, and Vertiv.

• Data center REITs capitalizing on the infrastructure boom.

• Energy providers supporting the massive power demands of cloud operations.

• Software companies like Adobe and Salesforce, which are enhancing their offerings through cloud integration.

At the core of this industry are the cloud providers, where an intense competition is unfolding. Let’s dive deeper into the dynamics at play.

"Please note that the cloud provider market encompasses Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and hosted private cloud services.

A concentrated market

The cloud market is dominated by seven major players: Amazon, Microsoft, Alphabet, Alibaba, Salesforce, IBM, and Oracle. Together, these companies hold over 75% of the market share, which continues to expand each quarter. The “winner takes all” dynamic is particularly pronounced in this sector. The remaining 25% is occupied by smaller players like China Telecom and Huawei.

In 2023, the cloud market generated $270 billion in revenue. With a projected CAGR of 15%, the market is expected to exceed $700 billion by 2030, though factors such as experience curve effects and competitive pricing pressures may affect this forecast.

Three companies command more than 10% of the market each:

• Amazon, the leader with AWS, holds a 31% market share.

• Microsoft, the fastest-growing player with Azure, commands approximately 24%.

• Alphabet, the challenger with Google Cloud, has around 12% market share.

Despite maintaining robust double-digit growth, Amazon is experiencing a slight decline in market share, largely due to gains by Microsoft and Alphabet. The top three leaders alone account for two-thirds of the global market.

Source: Synergy Research Group

Zoom on the 3 leaders

1. Alphabet

Quaterly revenue in $M

Alphabet presents an interesting case. As the smallest player among the three major cloud providers, it holds the least market share. However, since Alphabet reports cloud revenue separately, we can track its operating margin.

The growth in both market share and revenue has enabled Alphabet's cloud division to achieve profitability, reaching breakeven in early 2023. Since then, its operating margin has consistently improved, currently standing at 11%. With the continued expansion of the cloud market, this margin is expected to keep rising.

For Alphabet, Google Cloud is one of the main diversification streams.

2. Microsoft

Microsoft does not disclose detailed revenue figures or operating margins by division. The only available metric is year-over-year growth. However, estimates can be made through deduction. For instance, Azure's quarterly revenue was approximately $19 billion by the end of 2023.

For Microsoft, Azure is the main growth driver. To better highlight and follow Azure’s performance, Microsoft announced cloud metric change.

3. Amazon

Quaterly revenue in $B

Despite having the slowest growth among its peers, Amazon continues to achieve solid growth and maintain strong profitability. A key question arises: can Amazon sustain its current level of profitability if it starts to lose significant market share, or will its sheer scale help offset the impact of shrinking market share?

For years, AWS has been a way to increase profitability for Amazon, using its dominant position and cash generation for growth in cloud and other activities.

4. Growth comparison

AWS, despite its significant lead, is experiencing the slowest growth among the top cloud players, and its market share is gradually declining.

Meanwhile, both Azure and Google Cloud are achieving similar growth rates. However, Azure's scale - being 2.5 times larger than Google Cloud - makes its growth even more remarkable. Microsoft's advantage can be attributed to synergies with its other divisions, such as “Productivity and Business Processes”, which provide a competitive edge in the cloud market.

Outlook

Several factors should be considered when predicting the future of the cloud market:

• If current trends persist, Azure is projected to match AWS in size within the next 18 months. While unexpected developments are always possible, this outcome seems increasingly likely.

• Alibaba, with only 6% cloud growth, is expected to continue losing market share. However, other players, such as Oracle, are gaining ground. Oracle recently reported a 21% year-over-year increase in cloud revenue, with IaaS up 45% YoY. Though Oracle is still a relatively small player in the cloud space, these figures suggest potential for future growth, and the stock market appears to reflect confidence in this scenario.

• The rise of local cloud providers driven by data privacy concerns may also continue. Under the Patriot Act, the U.S. government can access data stored within the U.S. or held by companies operating there. This raises concerns for non-U.S. companies and governments handling sensitive data. However, the share of the market affected by these concerns remains relatively small.

• Energy consumption may become a critical factor in the future of cloud services. Data centers require vast amounts of energy, and energy constraints could limit their expansion. On the other hand, advancements in more energy-efficient technologies, such as new chips, may help offset this demand.

• As cloud services benefit from the experience curve, prices are likely to drop significantly. If growth begins to slow, a potential price war could ensue. At that point, it will be crucial to assess the strength of the moats and the pricing power of the major cloud providers.

Conclusion

As the world undergoes increasing digitalization and more applications and software migrate to the cloud, the cloud market is expected to maintain strong momentum in the coming years.

Currently, the three major cloud providers remain unmatched, and fierce competition is underway. Microsoft is leading at the moment, though the tech industry is known for rapid shifts in trends. The rise of AI could provide a significant growth boost. However, with rising CAPEX, FCF may come under pressure in the near term, though profitability remains strong for now.

If you are curious, here are my articles about Microsoft and Alphabet.