Issue # 1 Public Cloud Growth and Cloud Costs
Issue # 1 Public Cloud Growth and Cloud Costs
Hello and Good Morning! Welcome to the first edition of The Digital Atmosphere.
Public cloud providers, especially the Big 3 (AWS, Azure and GCP) have experienced tremendous revenue growth in the last few quarters, and especially so during the pandemic, when there was a mad rush to move any service that can even be provided online to move online. That growth seems to be slowing down now.
Tomasz Tunguz, in one of his earlier newsletter editions provided a nice graph depicting the declining annual revenue growth rates in all major public cloud providers as of Q4 2022. All three providers experienced non-trivial decline in growth rates in the past quarter, as compared to 4 quarters ago: Azure and GCP dipped 16% each (51% to 35% and 54% to 38% respectively), while the growth rate of AWS came down by 12% (39% to 27%).
First things first: the decline is in growth rates, which means that there is still good growth — AWS, which grew the slowest of the three in the last quarter, still grew at 27%! And that number is nothing to balk at. But then again, the growth is slowing down. Why? Let’s dive a little deeper.
Public clouds are a great way to allow you to focus on the core of your application without having to worry about the procurement, installation, management, maintenance and upkeep of the infrastructure. To ease adoption, these providers have made it very easy for anyone to create any type of infrastructure using a few clicks from the cloud management console. Want a barebones VM with your favorite Linux distribution? Yours to access in 5 clicks! How about a managed, highly available SQL instance? At your service in less than 10 clicks! As long as you have a working billing account, infrastructure creation and access is almost zero overhead. And what happens when you give people access to such ability? They create more than what they need. It’s the same thing as a having a higher limit on your credit card — if you know you can spend more, you just might, without worrying too much about if you should.
Which is possibly what has happened in the recent past. A lot more cloud based infrastructure was created than was possibly needed, without developers first trying to optimize what had already been created before. With everyone projecting COVID fuelled growth of online services for a long time to come, there was significant push towards growth (which means different things for different people). And with the availability of easy money, VC and otherwise, spending a lot on cloud costs was not hard to justify, especially if the mandate was to do it quickly.
Things however, have changed now. Everyone is more concerned with profitability than growth, and are cutting costs to get there. Most companies are tightening their belts on all counts, including cloud spend, owing to unfavourable economic climate. For others, who might not be experiencing such pressures themselves, it is a good motivation to reign in their ever-increasing cloud spend.
Which is why a number of tools have come up that analyze your cloud bill and suggest avenues for optimization, without hopefully degrading application performance metrics. Corey has built an entire business around the idea of optimizing AWS costs for their customers! Other larger players are moving at least a part of their infrastructure to on-premises, to make sure that their cloud bills remain in check, among other benefits; example - Flipkart.
The benefits of using the public cloud especially when you are starting out are many. You reduce the overhead of maintaining the infrastructure, and can potentially make do with a relatively small, probably fixed infrastructure budget if you are using something like Linode. However, once the business’ traffic grows beyond a certain point, it becomes financially unsustainable to just keep using that one public cloud you started out with, and other, hybrid cloud strategies which reduce your dependence on your original provider might be a better option.
Which brings us back to my original point about increase in the revenue growth rates of cloud providers. There is little doubt that most new SaaS - type businesses will be created in public clouds. And consolidation in the industry around the big 3 will continue to fuel these provider’s growth. Plus, SaaS businesses running on public clouds that have become successful and have grown past a certain size will look to diversify across providers, which will keep bringing the big 3 more business in the future. But where will these growth rate stabilise? I don’t know, but Tomasz believes it will be between 18-22% in 2023.
Aside: It’s not just the public cloud users who are being pushed towards profitability, it’s also the cloud providers themselves. For example, Google’s Q4 2022 earnings call has a multiple mentions about the Cloud’s path to profitability. Makes sense, given that Google Cloud’s operating loss stood at USD 480 million.