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Big Tech under pressure from cost-conscious cloud customers

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The runaway growth of cloud computing has reached a watershed, as increasingly cost-conscious customers and economic pressure combine to dampen one of Big Tech’s hottest growth markets.

“There is enormous pressure from customers to reduce their costs,” said Barry Briggs, a former Microsoft executive and now an analyst at independent research firm Directions on Microsoft.

After seeing their cloud bills skyrocket as they move more of their computing to platforms run by companies like Amazon, Microsoft and Google, he added, many customers are getting smarter in figuring out how to lower the cost of their cloud spending.

Both Amazon and Microsoft have pointed to efforts by customers to “optimize” their cloud spending for a surprising drop in cloud growth in the last quarter.

Revenue for Microsoft’s Azure cloud platform grew 42% before the effects of foreign currency movements, one point below expectations, while Amazon Web Services sales grew 27%, the slowest quarterly growth rate since the Amazon has started to separate cloud sales from overall revenue.

The pressure on growth comes as many large companies face skyrocketing bills as they move more of their computing to the cloud. The chief technology officer of a large bank complained that the biggest cloud companies had not moved fast enough to reduce fixed costs for things like storage and compute as business volume soared, despite the greater efficiencies brought about by operating on a large scale. scale.

Companies tried to show courage to the growth deficit by saying they were working with customers to help them get more value from their services and that it would pay off in the long run.

“In this particular period, I think we’re going to optimize for long-term customer loyalty,” Microsoft Chief Executive Satya Nadella told analysts after his company’s latest results.

But the result surprised Wall Street and pointed to an unexpected slowdown in the warm cloud market, which most experts believe is still in its infancy.

Companies are trying to use the reduction to their advantage, offsetting the pressure on spending by getting customers to buy more of their services or sign long-term agreements.

Amazon said one way it could help customers save money was to offload their computing workloads onto its own chips, something that could boost its efforts to become a vertically integrated technology company. It already designs its own high-performance processors, called Graviton, as well as accelerators to speed up machine learning calculations, called Trainium, putting it in direct competition with established chip companies like Intel and Nvidia.

AWS is also offering discounts for customers who funnel more of their cloud business to their data centers, potentially crowding out smaller competitors.

“They want you to commit to spending a lot of money and growing on their platform, not considering other cloud providers,” said Corey Quinn of The Duckbill Group, a consulting firm for companies looking to reduce cloud bills. a cloud.

“They love to use terms like ‘all in’ on a certain cloud or ‘preferred cloud provider’ – that opens up a bigger discount, but in return you agree to be a referral for them and not be a referral for someone else,” he said. Quinn.

“Customers who lean towards AWS for larger, longer-term commitments tend to enjoy better economics,” said Elizabeth Baker, vice president of global business strategy and programs at AWS. “We don’t tell customers where to run their workloads, nor does their choice of vendors take into account our pricing.”

Microsoft, meanwhile, is linking previously disparate cloud services such as Azure, Microsoft 365 and Dynamics more closely to “further entrench [itself] on the customer,” said Briggs.

According to analysts, cloud companies are also offering deals to lock customers in longer. By committing to using resources in one of the clouds for several years, customers can expect to cut 70% to 80% of their payments, Briggs said. “This can result in quite substantial savings,” he said.

Customers are finding they can gain “dealing leverage” over cloud companies by planning better and committing to purchase services up to five years in advance, said Michael Silver, an analyst at Gartner.

Despite new pressures from customers to make their cloud spending more efficient, however, most experts said there was little sign of competition in the cloud industry becoming more severe.

Companies face high switching costs if they try to move their computing to a different cloud player, Silver said. “And then when you switch, you’re stuck with a new provider, and eventually you have the same issue with them,” he added.