This automatically-generated transcript is taken from the IT Pro Podcast episode ‘Weathering the cloud slowdown'. We apologise for any errors.
Rory
Hi, I’m Rory Bathgate.
Jane
And I'm Jane McCallion.
Rory
And you're listening to the IT Pro Podcast, where today we’re talking about the cloud slowdown.
Jane
The COVID-19 pandemic saw companies across the world scrambling to put in place cloud services that would help prop up their business during the shift to remote working. However, in recent months news has been building of a “cloud slowdown”, with some of the biggest vendors reporting a drop in the growth of their cloud sales.
Rory
In the third quarter of 2022, AWS reported the slowest growth in its history, while Google’s growth was down almost 10% on the previous year and Microsoft is also anticipating a decline in Azure revenues in its next earnings report.
Jane
Joining us to discuss what's behind the cloud slowdown. And if it's even happening is Russ Kelly. IT pros cloud specialist and staff writer Ross, thanks for joining us. Good to join you, too. So Russ, first of all, what is this cloud slowdown? What are we talking about? Exactly.
Ross
So obviously, we experienced rapid growth in the cloud computing space over the last several years. This was particularly rapid since the onset of the Coronavirus pandemic in 2020. This was fueled largely by the shift online and the shift to remote operations by organisations, across a range of industries the world over. It's no surprise to anyone that over the last several months, we've seen a significant economic slowdown in particularly challenging conditions for the global tech industry. And for a global industry more broadly speaking as well. This has been rather acute in the cloud space in over the last four, or five, six months in you would say. As you mentioned at the beginning, major providers such as AWS, Google Cloud, Microsoft Azure, they've all experienced rapid growth over the last really the last 13 years, with AWS logging significant revenue growth consistently from about 2014 onwards. We've seen that slow over the last two quarters in 2022. This has largely been down to you know, strained economic conditions, inflation, rising costs, and a degree of hesitancy among businesses who are now looking to curtail their cloud spending, so to speak. Perhaps not so much curtail spending broadly speaking, but at the very least optimise and reassess how they're spending on cloud and how they're leveraging cloud to unlock tangible benefits for their business.
Jane
So I think it's probably worth you know, when we're talking about a slowdown what we mean is, it's not that they're not growing, it's not that they don't still have significant margins. When we look at the figures here, we're still talking about 25%, growth, 22% profit, that kind of thing. And it's that it is not growing as quickly as it had been prior to, when did this start? From what I've seen it was sort of last autumn?
Ross
Yeah. So from the autumn period onward, we have seen slowing growth, slowing revenue growth, on the surface of things. You know like you said in some companies, AWS, Microsoft, Google, they've still recorded, you know, around 30%, growth. Google Cloud reported a 38% revenue growth in the third quarter of last year. But, you know, when you compare this to previous years, particularly 2021 for example, it does pale in comparison. So there is a slowdown there. Google Cloud reported a 58% revenue growth in the first quarter of 2021. Now that was at the height of the pandemic, when you compare that to now we're talking about a 20% drop in in revenue growth in that space. I think that highlights the fact that, yes, cloud is still growing at these companies. It's still a major revenue driver for Google, for AWS, for Microsoft. But this is... what is changing, I should say, is how businesses are spending and how they're reassessing their relationship with these hyperscalers with a lot of cloud providers.
Rory
So you've just mentioned spending, and you talked about it a bit in your kind of overview of the situation, but is this decline in growth primarily down to companies reducing their spending, kind of as recession starts to bite?
Ross
Yeah, so a piece of research from the Uptime Institute earlier this month, spoke in depth at out there saying slowdown. And a major part of this is that there's been a spending shift and how businesses are in how they're essentially how they're spending on cloud. And there's obviously, many factors to this high energy costs, combined with inflation, the cost of living crisis and obviously, a rather perilous sort of economic situation at the moment that's making organisations more cautious about spending money, it's not to say that they aren't still investing and that they aren't still spending on Cloud, because, you know, this is business critical to so many businesses across a range of industries now, but they are reassessing how they're spending. So that could be postponing, for example, postponing projects. They're deprioritising certain projects due to rising costs, skill shortages also plays a role in this. But global uncertainty, more broadly speaking, is making a lot of them hesitant and rather skittish about investing during a period where some businesses don't know how much runway they have. Some businesses just simply don't have the capacity to spend on cloud in the way that they might want to. And we're starting to see a little bit of a shift, or a little bit of a divide emerge here with regards to, I suppose, businesses that are maintaining that hesitancy and businesses that are viewing this as an opportunity to double down on spending.
Jane
Yeah, the idea of spending your way out of the recession isn't a new one. And I know some people are sort of considering the IT department as being the place where you do put any investment that you're going to use to try and bolster your business as we come out, or go into in the case of the UK, of a recession?
Ross
Yeah, absolutely. I mean, a recent discussion with John-David Lovelock at Gartner highlighted this. I believe we covered this in a news capacity, there is a divide or a gap emerging in terms of those organisations that are looking to double down on IT spending, double down on cloud spending. A part of this, you know, falls back to what we saw at the back of the, the tail end of the last recession. A lot of growth in cloud, a lot of the rapid growth and shift to cloud that we saw in the previous decade was after that 2008-2009 recession, where businesses started to migrate en masse to the cloud, started to invest heavily. That obviously created a somewhat of a chain reaction that helped propel so many of these providers to those high levels of growth over that decade, and into the last couple of months. So now there is an element here of "do we sit back weather the storm? Or do we invest? And do we spend our way out of a recession?" There are obviously benefits on both sides. And that will differ depending on the business itself, some businesses are probably more willing to be conservative in this regard, see how things pan out over the next six months. Others will likely continue to spend, perhaps even up their spending over this period. A part of that is that some CIOs will view this as an opportunity to invest and strike while the iron is hot, while their competitors might not be. And then when we come out of this economic disruption at the other side, they will be all the better for it.
Jane
I suppose that's going to, I don't want to get too into the weeds of business because we are the IT Pro podcast here, but presumably on a case by case business with organisations who are considering where to put their money, if your organisation is highly dependent on online commerce, so you're some kind of retailer whether that's large or small, whatever, then investing in IT is going to make an awful lot of sense. Investing perhaps in new cloud projects is going to make an awful lot more sense than if you are a company that has an IT department, everybody does or at least some kind of external contractor, but that IT isn't necessarily core to your business. Is that kind of a fair analysis would you say?
Ross
Yeah, yeah I would say so. Absolutely. I mean this again, this is on a business to business basis. You know, some organisations will have their own priorities and they will deviate from other businesses based on their sort of areas and the sectors that they work in. I think looking at the IT function and IT spending, you know recent analysis from Gartner, for example, said that IT spending is set to increase by around 2.4% over the next year to around $4.5 trillion dollars. So it's worth noting, though, that that's down from what their previous expectations on the year would be, I believe it was around 5.1% increase in IT spending that Gartner predicted. So that does show that there is a drop there, there are organisations that are continuing this hesitancy, but we will still continue to see an increase in cloud spending over the next year. Organisations know that this is a business critical function, they can't afford to not invest in this area of their business. And if they do neglect this area, then there's going to be serious problems for them when they emerge on the other side.
Jane
So I kinda want to come back to a couple of ideas Ross, that we've got. So this the idea of, not contraction in the cloud market because that's not what's happening, but a slowdown. And, you know, the growth that happened during COVID. Is this just a course correction? Is this just, you know, had COVID not happened is this the path that actually cloud growth probably would have followed anyway, and that those sort of like 50% growth figures in 2020-21, they were an aberration, and this is where we should be now anyway?
Ross
I think it's not so much that they are an aberration, we have seen significant revenue growth and cloud consistently over the last 10 years, give or take a few periods here and there where the markets were rather shaky. 2020-22, has been an unprecedented period. Obviously, these organisations capitalised on the circumstances at the time. Now we're starting to see a bit of a plateau, perhaps, that's not to say that things are gonna start going downhill because I mean, when you look at Microsoft's recent earnings report device sales were down fairly significantly but their Azure product offerings, Microsoft's cloud offerings, were still a key revenue driver for these organisations. So if anything, we might start to see cloud being an even bigger driver, or an even more critical revenue driver for these companies in the next year or so.
Rory
So prior to the pandemic, people were already considering whether public cloud was really right for them, as it can be quite expensive. Is that part of the issue here?
Ross
Partly, yes. I mean, private cloud versus public cloud has been a lingering discussion for many years now. And it probably will continue to across 2023. Private cloud, obviously, has generally been viewed as something that offers greater control for businesses, enables them to lower costs compared to public cloud, for example. I think what this again falls back to is how businesses are reassessing their spending. This will differ on an organisation-by-organisation basis, but businesses are increasingly looking for ways to maximise the impact of their spending. This is not anything new, but we will likely see this continue across the year.
Jane
So I mean it's difficult, you kind of mentioned the cost of public cloud, and that sometimes private cloud can be more cost effective. We know this, that if it's a long ongoing project then public cloud's possibly not really the best way of doing it. But private cloud isn't free either, you still have to have the skills, you have to have the hardware, it's not a minimal thing. And you also have to have the software to go with it. These things can't all be getting cheaper, you know, part of the whole cost of living thing is inflation. How do they balance that, and what other challenges are there there?
Ross
So yeah, this is a catch-22 for a lot of businesses at the moment. You have a combination of scaling back spending with rising cloud and software prices, so this is obviously creating acute challenges in how businesses approach current digital transformation efforts, future optimisation as they sort of weather this economic turbulence, I suppose you could say. Cloud projects are no different from any other projects, you know, businesses will postpone them, they will deprioritize these due to rising costs. And on a case-by-case basis, organisations will be looking at what they can get the best bang for their buck from. When you also add in the element of skill shortages, then this again creates serious challenges for businesses, especially those on private cloud. Like you said previously, there's a lot underpinning what you can get out of private cloud. If you're dealing with skill shortages and a lack of funding or tightening purse strings, so to speak, then that's going to create even more uncertainty, it's going to create even more disruption in the business. And ultimately, that will likely lead to some form of cash flow issues or revenue problems further down the line.
Rory
So with these considerations around costs, are there likely to be any knock on impacts for customers here, such as increased costs passed on to the customer, will smaller businesses for example have to be paying higher rates?
Ross
So with regard to the impact on consumers and customers, there's not a lot we can say about this at present. Obviously, a lot of organisations have been bearing the brunt of rising energy costs and they've not been, I suppose, passing on the same heightened expenditure, this financial burden to customers. There may be exceptions to that across, you know, across the space, there may be organisations exploring this at present. One of the main things that may affect customers is what we discussed about businesses doubling down or remaining hesitant and, you know, battening down the hatches during this period. Organisations that will double down, based on a conversation with a Gartner analyst earlier this month, are more likely to fine-tune their product offering, they're more likely to be providing a far more robust and mature service offering for consumers in the wake of this. Organisations that don't will likely see their lack of action during this period transferred over to a diminished quality of service, a diminished quality of product.
Jane
So Ross is this, obviously we can kind of only look at the past in terms of results and stuff, and what has happened. Is this likely to be a long-term trend that spending in the cloud is going to slow down, that revenues are going to slow down? Or is it just something that happened when there was greater economic uncertainty globally, towards the end of last year, and as things pick up a bit this year hopefully that things going to be a bit more positive for the hyper scalars?
Ross
So looking at Microsoft as a prime example, their recent earnings showed that, yes, cloud was still a key revenue-driver for them across the board. I think that gives you a solid indication of how these organisations will fare over the next year, they will see a slowing rate of revenue growth in this area just by virtue of the fact that we're seeing an economic slowdown. We're on the cusp of a recession, perhaps in one. But I mean, when you look at previous Gartner research or recent Gartner research software spending, which also applies to cloud, is still expected to increase by around 9.3% across 2023. This highlights a traditional tendency among some businesses to focus heavily on IT spending, on cloud spending, on broader IT spending. And what this really falls back to is whether or not some companies view IT as a solution to problems, or those that see it as an expense. I think something that's worth noting here is that for many CIOs, for many organisations, this current economic environment is an entirely new experience for them, especially over the last several years where there's been a period of rather rapid growth in the cloud space. This is placing particular pressure on organisations to not only optimise how they're using cloud, but consider new approaches. When you see the fact that across 2022 cloud providers all started to increase their prices, this was also the first time that a lot of organisations and CIOs experienced a price increase. So you not only have uncertainty, you not only have economic disruption, but you also have added costs there. Better pricing is something that is really sought after now, and that falls back to I suppose our discussion around public and private cloud and the benefits there. Companies that have traditionally raced towards cloud environments, and closed down their on-prem environments are now reassessing this. My previous discussion with a Gartner analyst revealed that some companies that were doing fairly comprehensive cloud migrations are now looking to perhaps reverse that shift.
Jane
So get out your feather dusters and start dusting off those servers in the broom closet.
Ross
Absolutely.
Rory
Well, Ross, thanks so much for being on the show.
Ross
Great talking to you.
Jane
As always, you can find links to all of the topics we've spoken about today in the show notes and even more on our website at itpro.co.uk.
Rory
You can also follow us on social media, as well as subscribe to our daily newsletter. Don't forget to subscribe to the IT Pro Podcast wherever you find podcasts. And if you're enjoying the show, why not tell a friend or colleague about us?
Jane
We'll be back next week with more from the world of IT, but until then, goodbye.
Rory
Goodbye.
