Azure Cannot Catch AWS

Microsoft isn’t Amazon, nor can it be.

For the hype that Azure gets on Microsoft LinkedIn, there’s one problem: Amazon Web Services’ revenue grew 41% in the first quarter of 2019. The cloud businesses for the two tech giants are growing at nearly the same rate, yet AWS has a market dominating lead in the Cloud.

Oddly, Microsoft keeps hiding Azure revenue numbers, but why? Amazon’s leading position makes it a top cloud pick for many investors but Microsoft has become a resilient competitor. Even Google Cloud is showing signs of real innovation and hype with a bunch of new features.

Microsoft gave out just one revenue-related number for Azure: 73%. That’s the growth rate. However it could be entirely misleading. Microsoft is not being data transparent. Here’s what I mean. Microsoft has failed in 2019 to break out its Azure revenues, preferring instead to obscure Azure results by combining them in the much (much) bigger Office 365 cloud revenue. This is likely a sign that by revenues it’s well behind AWS’s growth numbers.

AWS is pivot for Amazon. Amazon Web Services accounted for a large portion of Amazon’s operating income, though the cloud business brings in a relatively small fraction of sales. While Azure is supposed to be Microsoft’s star in its pivot, where now companies such as Alibaba and Tencent are pivoting as well — it’s not likely to become a threat to AWS any time soon.

Sales at AWS rose to $7.7 billion from $5.44 billion a year earlier. Amazon Web Services reported revenue growth of 41%. Given its market lead, it’s a more impressive adjusted number than the little guidance Microsoft gave for Azure that looks shiny, but doesn’t tell the whole story. Microsoft’s PR on Azure is a sign that it’s not actually eating into AWS’s lead at all.

Azure and the Cloud have resurrected Microsoft. But it’s no Amazon and to claim it can reach AWS levels in the next decade is probably a false statement. The missing data really is the problem for Azure. AWS remains the dominant provider of cloud servers and storage to businesses looking to offload their data center infrastructure. Microsoft, Google and Alibaba are expected to grow, just as Amazon is growing as a digital advertising winner. But this will be a story of many years and it’s unlikely AWS won’t be able to win the biggest clients.

Amazon CFO Brian Olsavsky said AWS now has an annualized run rate of over $30 billion. He highlighted AWS’s customer wins for the quarter, including deals with Volkswagen, Ford, Lyft and Gogo. AWS is a monster of value for enterprises and while Microsoft has an impressively diversified business model with a specialty in cybersecurity and hybrid-cloud options, AWS has deeper features.

Satya Nadella is one of the better CEOs around as we have seen with Microsoft’s rebound. Still AWS as a first mover has an impenetrable lead, to the extent that even calling this a “duopoly” is a bit of a stretch of the imagination.

Revenue projects of the Cloud — Jefferies

Comparing Azure to AWS is a bit like comparing Lyft to Uber — it’s a different scale and business model and product altogether. We know that Azure was growing at 98% a year ago, and that its growth rate keeps going down each quarter. AWS, that’s a far more mature product, is still growing at rates that Azure will find hard to replicate. The main reason for this is Google and Alibaba will likely evolve very quickly in the space.

Microsoft’s “commercial cloud” revenues rose 41% annually to $9.6 billion or 31% of its top line during the first quarter. Those are shiny numbers but should slow down considerably in the early 2020s. Microsoft’s legacy image is still stuck with public cloud software services like Office 365 and Dynamics, which target mainstream end users instead of developers and IT professionals. While that’s both good and bad for Azure, AWS is seen more as an innovator in the Cloud space.

Microsoft and AWS are in the last stages of competing for a $10 billion Department of Defense contract, known as JEDI, after IBM and Oracle were recently ruled out. With Amazon moving its second HQ to Northern Virginia, it’s virtually impossible that it does not win the contract. There’s goes any realistic chance of Azure catching AWS in the years ahead.