Amazon Web Services versus Microsoft Azure, Goog…

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ENTERPRISE

The cloud wars explained:

Amazon is dominating, but
Microsoft and Google are striking
back
Matt Weinberger 14h 21,700
Amazon CEO Jeff Bezos speaks at a news conference in front
of a graphic showing the rise in sales of Kindle books during
the launch of Amazon's new tablets in New York, September
28, 2011. REUTERS/Shannon Stapleton

The cloud computing market is dominated by

some familiar names.

Amazon's cloud service is its most profitable unit.

Microsoft has pegged its future to its cloud
computing businesses, leading to a very
enthusiastic response from Wall Street. Google,
too, is betting big on cloud computing as
something that could be bigger than its
advertising business.

What exactly are these companies selling? Who's

buying it? And why is one company that wasn't
even in enterprise technology a decade ago -
Amazon - beating the pants off everyone else?

Here's the state of play in the cloud game.

Why everybody's going to the cloud

The most important concept in cloud computing
is "hyperscale."

To support their own websites and services,

Amazon, Microsoft, and Google have all built a
ton of computing infrastructure. Their data
centers are vastly bigger - and way more efficient
- than those operated by or could be built by most
other companies.

For years now, these giants have rented out some

of their computing capacity to developers and
companies around the world. A developer or a
company can swipe a credit card and get access to
fundamentally unlimited computing power.

By tapping into the power of these cloud

computing systems, companies can serve many
more customers for much less expense with much
less downtime and much greater performance
than they could through their own data centers.
And as an additional benefit, they don't have to
worry about maintaining their own servers.

All the major cloud computing players offer the

same basic set of services:

Infrastructure as a Service, or "IaaS,"

which is the most basic layer of cloud
computing. It provides customers with virtual
servers and storage.
Platform as a Service, or "PaaS," which
is the set of tools and services that make it
easier for developers to build applications
without worrying about which servers they're
running on.
(There's a third layer called "Software as a
Service," or SaaS, which refers to applications
that run in the cloud like Microsoft's Office 365,
Google's G Suite and Salesforce's products for
sales and marketing. While these products are
powered by the cloud, they're generally note what
people mean when talking about "cloud
computing.")

The basic game plan for all the cloud-computing

vendors is to make their services indispensable to
both independent software developers and big
companies. Customers might dip their toes in the
water of cloud computing with a single app - but
as their businesses grow, the cloud service
vendors are betting that their cloud usage will
also.

Amazon points to something it calls the "virtuous

cycle" that has helped drive the cloud industry.
The more customers a cloud platform provider
signs up, the more servers it can afford to add.
The more servers is has, the better it can take
advantage of economies of scale and offer
customers lower prices for more robust features,
including ones likely to appeal to enterprises. The
lower the prices and the better the products, the
more customers the provider will likely attract -
and the more new customers will switch over to
the cloud.
Amazon got there first, which is why it's
so far ahead
Amazon Web Services sits at the top of the cloud
computing mountain. Since its origins as a Jeff
Bezos-approved experiment in 2006, it's grown
into a mammoth business that generated more
than $12 billion in revenue last year.

"AWS invented this market," said Dave Bartoletti,

a principal analyst at Forrester Research. "They
had a five-year head start before anyone else got
their act together."

When AWS first launched, it only offered a basic

set of infrastructure services. Customers could get
access to virtual servers through a service
Amazon called the Elastic Compute Cloud, or
EC2. They could also use AWS for file storage,
through Amazon Simple Storage Service or S3.

At first, AWS was primarily used by smaller

developers as a cheap way to test things or run
simple websites. Over time, many of those
experimental apps and simple sites grew into
popular, widely used services. Even as they did,
the companies behind them, including Netflix,
Airbnb, and Slack, kept AWS at the core of their
offerings.
Amazon Web Services CEO Andy Jassy Amazon

This trend kicked off Amazon's own virtuous

cycle. With the revenue brought in by early
customers, Amazon was able to invest in more
enterprise features and higher-performance
services. That helped it attract ever more popular
and sophisticated apps and sites.
"There's no question that Amazon is still the
preferred platform for developers," said Ed
Anderson, an analyst who covers cloud services at
research firm Gartner.

These days AWS counts among its customers big

companies and organizations like Comcast, Hess,
and even the Central Intelligence Agency, each of
which use it for at least some of their computing
infrastructure.

Amazon's years-long lead on the competition is a

major factor in its success. Because Amazon's
virtuous cycle has been running longer than
anyone else's, the company has been able to
develop and offer a broader set of features and a
larger scale than many of its rivals.

Canalys
As a result, AWS has become a kind of standard
in cloud computing. Companies turn to AWS
almost by default, in much the same way a
previous generation of IT managers used to say
that "nobody ever got fired for buying IBM."

About a year ago, Andy Jassy, AWS' CEO said he

thought his unit could be the biggest single part
of Amazon. Meanwhile, Gartner once estimated
that AWS offered as much computing capacity as
the next 14 players in the market combined,
though that figure is now out of date.

Microsoft pulled off an epic pivot

One would think that in the famously competitive
tech industry, the giants would have raced to
compete with Amazon.

But no. Microsoft had been playing with cloud

concepts since the mid-2000s, but it didn't
introduce Azure, its formal AWS competitor,
until 2010 - or about four years after Amazon's
cloud service launched.

Microsoft and other enterprise-software giants

initially treated the cloud as a novelty or a fad.
Only later did they see it as a threat. Microsoft
eventually recognized that if customers moved to
AWS, they wouldn't have as much need for
products like Windows Server and SQL Server,
which were popular, multibillion-dollar software
offerings that were used in most companies' data
centers.

Microsoft cloud boss Scott Guthrie. Microsoft

Microsoft has since turned its weakness into a

strength. Cloud computing is now one of the
biggest factors driving Microsoft's revenue
growth, and Wall Street is eating it up.

When Azure first launched, it was called

"Windows Azure." It provided a platform-as-a-
service (PaaS) layer, helping developers build
their apps more easily. Since then, Microsoft has
expanded its Azure offerings to include the lower
level infrastructure services that originally made
Amazon so popular.

As the head of Microsoft's infrastructure

business, Satya Nadella led Azure through this
transition and was awarded the CEO position in
2014 partly because of his success. Microsoft has
since made Azure a top priority. To help promote
it, the company has been emphasizing how tightly
Azure integrates with Windows Server and its
other enterprise products that many of its biggest
customers are still using.

Mike Nudelman/Business Insider/Statista

Microsoft has a new product line called "Azure

Stack" that lets companies install a version of
Azure in their own data centers. In many ways,
it's the culmination of the software giant's vision
for how Azure can work together with what its
customers already own.

"[Azure Stack] is a potential game-changer,"

Anderson said.

Still, Microsoft's key advantage isn't necessarily

in technology, but rather in its enterprise know-
how and established customer base. Lots of
Microsoft's biggest customers have contracts with
the company that give them steep discounts on its
software. Microsoft has been using those
agreements to give customers big incentives to try
Azure.

Microsoft has also worked to make Azure more

attractive to software developers. Under Nadella,
the company has swallowed its pride and begun
to support in Azure technologies it previously
tried to crush. Most notably that includes the
Linux operating system - a bit of software that
developers absolutely love, but that ex-Microsoft
CEO Steve Ballmer once called "a cancer" and
"communism," because it's available for free.

That newfound openness to open-source code

like Linux has won Microsoft a lot of appreciation
from programmers. At last count, Linux
accounted for about a third of all Azure usage,
according to Microsoft.
One of the data centers from which Microsoft Azure runs.
Microsoft

Despite its remarkable turnaround in the cloud,

Microsoft is still lagging behind Amazon,
although it's hard to say by how much, because
the company doesn't break out its Azure revenue
numbers specifically.

Microsoft recently announced that its cloud

computing business as a whole - including not
just Azure, but Office 365 and its other cloud
services - is now pulling in revenue at an $18.9
billion annualized pace. You can't compare that
number directly with AWS' revenue, because
Amazon doesn't offer anything comparable to
Office 365, which remains a huge business for
Microsoft.

Regardless of how the two businesses compare,

it's clear that Microsoft has momentum. In its
latest earnings report, Microsoft said its revenue
from Azure in its more recent quarter was almost
double what it posted in the year-ago period. By
all accounts, Azure is growing fast, presenting
Amazon with a worthy rival.

"Microsoft has really caught up in many, many

ways to AWS," Bartoletti said. "Microsoft is
nipping at their heels."

Way back in 2015, Microsoft CEO Satya Nadella

called the cloud game a "Seattle race" between
Amazon and Microsoft, with most others
irrelevant. So far, that's mostly borne out,
although one huge company is trying to make it a
three-way contest.

The resurgence of Google

Google is in a funny place when it comes to the
cloud.

Nobody doubts that Google's cloud service can

offer huge scale and up-to-date technology, since
it runs out of the same data centers that host
Google's search engine, Gmail, YouTube, and all
of Google's other services. The same tech that
helps those sites reach billions of people every
day can help Google Cloud customers run their
apps and services better, faster and for less
money than they could run them on their own
servers.
Google Senior VP Urs Hölzle, one of the primary architects of
Google's cloud infrastructure. Matt Weinberger/Business Insider

Similarly, nobody doubts that Google can

innovate. When hip startup Docker kicked off the
craze over so-called software containers, Google
revealed that it had been already using similar
technology in its data centers. It then released its
Kubernetes technology, which manages software
containers, for free to the community.
Kubernetes has become a smash hit - even
Microsoft now supports it - helping burnish
Google's image as a cloud visionary.

Google App Engine, the very first service in

what's now known as Google Cloud, launched in
2008, only a little while after Amazon launched
AWS. But despite Google's long tenure in the
business and even though its service won over
some early fans, the company long struggled to
find traction with larger, more lucrative business
customers.
To address that problem, Google hired Diane
Greene, the former VMware cofounder and the
so-called "Queen of Silicon Valley," to lead its
cloud efforts. With her experience and executive
leadership, Greene has redoubled Google's push
into the cloud. The company consolidated all of
its cloud products and put her in charge of them
as part of its revitalization effort.

As the search giant rapidly puts in place the

features and technology it needs to take on
Amazon, "Diane Greene has become a rallying
point for Google's strategy," Anderson said.

Google cloud boss Diane Greene Google

But Google isn't trying to offer just another AWS.
Instead, it's worked to give Google Cloud
developers access to some of its most cutting-
edge services, including artificial intelligence and
machine vision, Anderson said. Over time,
Google is making more and more of its internal
technology available to developers, for a price.

"Google is definitely innovating in its own right,"

Anderson said. "They're not just copying what
Amazon is doing."

The company's effort seems to be working.

Google's signed marquee customers like
Nintendo, Home Depot, Coca-Cola, and Spotify.
Google Cloud is still relatively small compared
with Amazon and Microsoft, but its momentum is
picking up. The only question is how long that
momentum will continue.

The fix is in
Amazon may have invented the cloud computing
market and put lots of effort into it since, but the
legacy IT companies haven't been sitting on their
thumbs the whole time.

Oracle, for example, has explicitly taken aim at

Amazon. Larry Ellison, the database giant's
legendary cofounder, has taken any excuse to
slam AWS and promote his company's own
Oracle Cloud. The main claim to fame for Oracle
Cloud is that it's capable of running Oracle
databases lightning-fast.

That business has seen some significant growth.

But Oracle's focus on databases could eventually
be a detriment, considering that Amazon can
offer so many more features and options,
Bartoletti said. What's more, both Amazon and
Microsoft offer services that allow customers to
quickly migrate Oracle databases to their clouds.

"Oracle's stuck in that legacy mindset," Bartoletti

said.

Oracle Executive Chairman Larry Ellison

Kimberly White/Stringer/Getty Images

IBM has invested heavily in technology like IBM

Bluemix, which makes it easier for developers to
build apps in the cloud. The company also offers
Watson, its pioneering artificial intelligence
service, through its cloud.

At the same time, though, the growth of the cloud

industry has seriously damaged IBM's legacy
hardware business, which in turn has dented its
earnings quarter after quarter and cast a shadow
over the company's outlook.

To combat that trend, IBM has been bolstering its

own cloud offerings by offering consulting
services focused on installing and integrating
cloud applications. So while Big Blue likes to talk
up how fast its cloud business is growing, what
it's doing can't be directly compared to the other
players, because its cloud business isn't just
offering cloud computing. And IBM is not really a
strong contender for Amazon's throne, Anderson
said.

Even if IBM isn't a real challenger to the big guys,

there may still be room in the market for smaller
and regional players, Bartoletti said. The startup
DigitalOcean is targeting small developers.
Chinese retail giant Alibaba offers its Alicloud
service in its home country. Just because they're
not as big or well-known as Amazon, Microsoft,
or Google doesn't mean they can't succeed.
IBM CEO Ginny Rometty AP

Still there's clearly not space in the market for

everyone, and there have already been some
shakeouts. GoDaddy just sold off its cloud
computing division. Early cloud provider
Rackspace pivoted to offering support for others'
platforms, and HP and VMware both threw in the
towel entirely. It's expensive to compete with
Amazon.

That's why, if there's one thing that Bartoletti and

Anderson both agree on, it's that Amazon and
Microsoft have the no. 1 and no. 2 slots locked
down for at least the next few years.

"The fight now is for no. 3," Bartoletti said.

In a few years, "Amazon will still be the leader,

and Microsoft will have closed the gap to be a
strong second," added Anderson.

Get the latest Google stock price here.

SEE ALSO: Microsoft finally releases its secret
weapon in the cloud wars with Amazon and Google »

NOW WATCH: Henry Blodget on how to avoid

getting "Amazoned"

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