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Cloud computing was a bright spot during the worst quarter in US history

Cloud providers weren't immune from the larger economic pressures that loom over 2020, but they've weathered the storm and are well-positioned for a recovery.

Data center

Assuming you can see past the current state of the U.S. economy, there is one prominent signal that the big cloud vendors still very much believe in the long-term growth potential of the cloud: capital expenditures.

Photo: Manuel Geissinger/Pexels

In what's now been declared the worst economic quarter in modern U.S. history, the worst thing you can say about the performance of the cloud computing giants is that revenue growth slowed a tad.

After Microsoft reported strong but slowing growth for its Azure infrastructure service last week, Amazon and Google weighed in Thursday afternoon with similar earnings results that indicate cloud computing continues to mature, as multiyear contracts become the norm and cloud latecomers start to dip their toes. It has been 14 years since AWS unveiled its first cloud services, and that business is now on a pace to generate $43 billion in revenue a year, Amazon CFO Brian Olsavsky said on the company's earnings call.

Sure, AWS revenue growth slowed to 29% year-over-year, but AWS still generated $10.8 billion in revenue. For its part, Google Cloud reported a 43% jump in revenue during the quarter, which was slower than the 52% revenue growth recorded for that segment during the first quarter.

On the company's conference call, Alphabet CFO Ruth Porat attributed Google Cloud's slower overall growth to a tough comparison against last year, when Google increased prices for G Suite customers. But she also said that revenue from Google Cloud Platform, the most AWS-comparable line item in the overall Google Cloud bucket, increased at a pace "meaningfully above" the overall number.

These are strange times to be doing business, and Amazon's Olsavsky acknowledged that its customers have different feelings about the current situation.

Companies in industries that are disproportionately affected by the pandemic — like travel — are thinking in the short term and are obsessed with reducing any costs associated with doing business this year, while other companies see the cloud as a lifeline. "One of the best ways to save money is to use the cloud," Olsavsky said, which ignores some short-term switching costs but is generally true in the long run.

Assuming you can see past the current state of the U.S. economy, there is one prominent signal that the big cloud vendors still very much believe in the long-term growth potential of the cloud: capital expenditures.

Amazon's investments are a little hard to gauge because the company spends so much on the fulfillment centers required to deliver same-day toilet paper supplies, but it more than doubled investments in property and equipment during the second quarter. A significant portion of that investment is required to maintain service levels for AWS, as well as to plan for future growth.

Google spent far less on capital expenditures in the second quarter of 2020 compared to last year, but Porat said it spent roughly the same amount of money on servers, delaying the expansion of new offices after announcing earlier this week that employees will be allowed to work from home until the middle of 2021. It will also delay the construction of new data centers thanks to improved server utilization efficiency, she said.

Capital expenditures are an imperfect metric for cloud computing competitiveness, but they are also a competitive moat. Simply put, operating a world-class cloud infrastructure service in 2020 is an expensive undertaking, and any money cloud providers can save on building expenditures for open-floor plan offices amid a pandemic can be redirected toward revenue-generating infrastructure.

That means that whatever short-term concerns continue to make the lives of cloud salespeople more challenging, all three of the big U.S. cloud providers continue to look to the future. A sizable amount of workloads remain locked up in old-school data centers, and there's still little incentive for startups to grow their businesses on anything other than cloud services.

 Tom Krazit

Tom Krazit ( @tomkrazit) is Protocol's enterprise editor, covering cloud computing and enterprise technology out of the Pacific Northwest. He has written and edited stories about the technology industry for almost two decades for publications such as IDG, CNET, paidContent, and GeekWire, and served as executive editor of Gigaom and Structure.

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