Any discussion on cloud must necessarily include Alphabet’s Google (GOOG, Financial). Why? Because they are one of the pioneers of cloud, initially using their entire capacity for their own needs, but over time maturing into a provider of cloud services such as infrastructure, software and so on.
But Google is not one of the those companies that moves fast. Take Oracle (ORCL, Financial), for example. Despite shying away from the cloud for several years, they’ve realized that their legacy businesses are just not made for the future. Now, they’re trying desperately to grow their cloud revenues in an attempt to compensate for declines in software and hardware income.
Google could have easily taken the lead in cloud when they were already using it to serve their products.
Today, Google is trying to push into the cloud through sheer muscle power, but it is late to the race. Can they now move fast enough to catch up to the top three cloud providers, Amazon (AMZN, Financial), Microsoft (MSFT, Financial) and IBM (IBM, Financial)? The real question is, will they?
Let’s look at a few aspects of their cloud business.
Google’s Cloud Market Share
It’s almost as if nobody recognizes that Google is very late to the cloud party. Yes, they are one of the biggest users of cloud in the world, but as a provider they’re still far behind the rest of the tech pack.
Gartner, for example, puts them in the category of cloud “visionaries”, as you can see from their famous cloud quadrants from two consecutive years.
But here’s the story as far as market share is concerned:
- Amazon Web Services, 31%
- Microsoft, 9%t
- IBM Cloud and SoftLayer, 7%
- Google, 4%
- Salesforce, 4%
As you can see, they’re still far behind the top three - and that’s just in the infrastructure-as-a-service segment. Microsoft is well ahead of them in the software-as-a-service space, with Office 365 against Google Apps. IBM is far advanced in the analytics-as-a-service arena and, as we just saw, AWS is the leader in the cloud infrastructure space.
This is not something you’d expect to see in a tech major with nearly $500 billion in market capitalization and a global presence.
Unfortunately, that’s just the beginning of their troubles.
Data Center Footprint
The one thing that you need in order to serve customers as an infrastructure-as-a-service provider is, obviously, infrastructure. Google has plenty of server farms around the world but, being a company that wants to archive all of the world’s available digital information, their own data center needs are an ever-growing entity.
Therefore, the possibility of having excess capacity that can be offloaded to another business line is very low - even if that business has a tremendous growth trajectory.
So, unless they have capacity to handle, there will be a very small chance for them to challenge the leaders who are running away with the market.
Google announced in March they would invest in 12 new data centers/regions to support their cloud business.
Look at it from the point of view of a cloud customer, the value of cloud comes from economy, convenience, scalability, speed and reach. The speed and reach parts are where data centers figure heavily.
As of now, Google is still way behind the competition in terms of available infrastructure that they can “rent” out to other businesses.
Their current footprint is a total of 15 data centers, with the majority of them being in the United States. Of the 15, Google only considers eight of them to be cloud data centers.
In comparison, Microsoft has 100 data centers to provide support for Azure Cloud. IBM has more than 45, with the most recent one going operational in Johannesburg, South Africa. Amazon has 33 of what it calls “availability zones."
With Google now squarely in the cloud game, I expect them to ramp up their data center footprint over the next few years. For now, however, they’re behind the curve while their competitors are fighting each other to increase their reach, customer base and scale.
All three - Amazon, Microsoft and IBM have been growing their cloud IaaS units at double-digit rates for the past two years and Google still doesn’t have the volume or the scale to compete on an even level.
What Can Google Do?
There is one area that Google has tremendous expertise in, and if they can tap into that then they can easily give the other three a run for their money. I’m talking about artificial intelligence, or AI.
It's a well known secret that Google has been developing advanced neural networks and other AI elements for its own use, and everything resides inside what they call Google DeepMind.
There are already several known applications for DeepMind:
“Google DeepMind, Google’s Artificial Intelligence unit, achieved 40% drop in cooling costs (on data center servers), increasing power efficiency by 15%.”
- 1reddrop
All three of their competitors do have their own solutions for machine learning and are building their own suites of products that can exploit artificial intelligence capabilities. Google, on the other hand, has practical experience that might be far more evolved than the competition.
If they can piggyback on that, they will eventually have a robust cloud product that can provide the thrust the company needs to keep pace with the leaders.
This will be the one key product line I will be keeping my eye on with respect to Google cloud. It is the one thing that can totally transform the company - provided they build their datacenters fast enough.
They cannot afford to be slow here and, in my opinion, the faster Google finds alternate revenue streams, instead of increasingly spending more to maintain their search advertising business, the better it will be for the company and its investors. And I believe cloud and artificial intelligence can make that happen if they play their cards right.
Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.
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