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Amazon's cloud dominance set to face mounting competition from rival tech firms

As the enterprise cloud services market continues to grow, U.S. technology companies are seeking to differentiate themselves from market leader Amazon Web Services Inc. and steal share in the process.

The Amazon.com Inc. cloud unit's closest competitor is Microsoft Corp., which reported $11.87 billion in revenue from its intelligence cloud segment in the most recently ended quarter. While AWS reported a smaller revenue figure, at $9.95 billion, Microsoft's cloud-related segment includes its server products and enterprise services as well as its primary cloud product Azure. Amazon reported 34% year-over-year growth in its cloud-related revenue, while Microsoft reported 26.6%.

Analysts agree that Amazon holds the most market share for pure cloud services, though Microsoft under CEO Satya Nadella has been pushing to catch up. Differences in the two companies' approaches to the cloud help to explain Microsoft's recent momentum in eroding Amazon's market lead, industry analysts said.

The open-source difference

Notably, Microsoft has a history of working with partners on open-source software and has multiple cloud partnerships with both hardware vendors and software competitors. Microsoft and Dell Technologies Inc. offer a hybrid cloud infrastructure that combines both companies' cloud technologies, while Microsoft and Oracle Corp. offer each others' enterprise applications on their respective cloud platforms as part of a partnership agreement.

"Microsoft has a huge user base for its software inside the enterprise and is experienced in running cloud applications at tremendous scale," said Jean Atelsek, an analyst at 451 Research, a unit of S&P Global Market Intelligence. "Its willingness to embrace and contribute to open source development has convinced customers that they will have other options if the company doesn't continue to deliver a superior customer experience."

While both Amazon and Microsoft offer hybrid-cloud products, or cloud services that allow for data processing within a company's premises, Atelsek noted that Amazon's hybrid cloud operates on closed systems that either run on proprietary equipment or licensed software, making it difficult to operate with other clouds.

"Some enterprises are wary of lock-in, fearing that they will be beholden to a single company to store their data and run critical parts of their business and thus be susceptible to price increases and other shenanigans," Atelsek said. This may have contributed to the U.S. Department of Defense's decision to award a $10 billion cloud contract to Microsoft over Amazon and other cloud providers, she added.

"I have heard that certain government agencies, including parts of the DoD, will not use a technology that is strictly under the auspices of a commercial vendor," Atelsek said. "So Microsoft's openness and willingness to 'reach across the aisle' to other cloud vendors and open source technologies might have had an impact."

Amazon is challenging the DoD contract award in federal court, alleging that the Trump administration may have improperly interfered with the bid process for political purposes.

Michael Goodman, director of digital media strategies at Strategy Analytics, said many companies and organizations are moving toward a multicloud strategy to spread IT operations across multiple platforms instead of one cloud provider.

"There are real benefits to Azure's hybrid cloud operations, the main one being security," Goodman said. "Having all data under one company's umbrella can work out for some companies, but when it comes to organizations with sensitive troves of data, they would much rather have multiple options available in case of a potential breach or technical difficulty."

The battle for No. 3

As Amazon and Microsoft jockey for position at the top of the cloud market, Google LLC and other U.S. tech companies are redirecting resources toward the cloud as well. Alphabet Inc.'s Google broke out revenue for its Google Cloud for the first time in its fourth-quarter 2019 financials, reporting $2.61 billion in revenue from its cloud services. Under its previous reporting structure Alphabet included Google Cloud alongside other nonadvertising services in an "other" category. For the quarter ended in December 2019, that "other" segment, including cloud services, reported revenue of $7.87 billion, up 21.5% year over year.

Although Google Cloud currently occupies a distant third place in the cloud race behind Amazon and Microsoft, it has been steadily gaining momentum in recent quarters. During the company's earnings conference call for the December 2019 quarter, Alphabet CEO Sundar Pichai said that Google Cloud ended 2019 at a more than $10 billion run rate, which several analysts pointed to as a key indicator of the segment's growth potential.

However, Google is taking a different approach from its competitors when it comes to claiming a piece of the burgeoning cloud market. Speaking at a Goldman Sachs conference in February, Google Cloud CEO Thomas Kurian said the company plans to stand out by offering products more targeted toward five specific industries: retail, healthcare, financial services, media and entertainment, and manufacturing.

Another rising competitor in the cloud race is IBM, particularly following its acquisition of open-source software firm Red Hat in July 2019. IBM's cloud and cognitive software segment reported revenue growth of 9% year over year to $7.24 billion in the December 2019 quarter. Red Hat's revenue contribution alone amounted to just over $1 billion of that total.

451 analyst Atelsek said the recent appointments of cloud executive Arvind Krishna as IBM's new CEO and Red Hat CEO James Whitehurst as president will further reaffirm IBM's focus to transition into a cloud-services provider from a hardware company.

"All of the big hardware vendors are making moves to cozy up to cloud, either with acquisitions or through partnerships," Atelsek said. "If anything is impeding the market at this point it's the complexity that has arisen thanks to the multitude of services and providers. Plenty of businesses are feeding on the confusion around cloud and how to leverage proprietary data, but the benefits — in terms of cost, management, automation and efficiency – are too compelling to ignore."

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