IBM Fires First Shot in 2016 Cloud Wars

International Business Machines Corp. (NYSE: IBM) had the misfortune of releasing disappointing earnings in the middle of a market free fall. Its sharp 5% fall was one of four stocks that sank the Dow, posting the largest losses of the Dow 30. There was, however, one big bright spot in IBM’s otherwise lackluster earnings release. Its cloud computing segment is really taking off.

Put it this way: If IBM had spun off its cloud segment and it reported separately, the stock would have been way up in the midst of Wednesday’s carnage. Strategic imperatives for the data giant include cloud, analytics, mobile, social and security, which together grew 26% to $29 billion in sales, or 35% of total revenue. Isolating cloud revenue out of that, that alone is up 57% to $10.2 billion, adjusting for currency shifts.

The other three major cloud players do not match IBM’s market share, but all are growing. These are Inc.’s (NASDAQ: AMZN) Amazon Web Services, Microsoft Corp.’s (NASDAQ: MSFT) Azure and Alphabet Inc.’s (NASDAQ: GOOGL) Google for Work. While more exact numbers are available for Amazon and Microsoft, we’ll have to wait for Google’s first report as Alphabet on February 1 for a fuller picture.

Amazon Web Services

As of its latest report, sales for Amazon’s Web Services segment were up an impressive 78% to a quarterly total of $2.1 billion. That total accounts for 8.2% of total quarterly revenues, which is up from 5.7% last year. AWS includes computing, storage, database and other miscellaneous service offerings.

We shouldn’t expect Amazon to quickly overtake IBM, Amazon being primarily a retail company and IBM specializing in data services, where cloud computing is a natural fit with its expertise. However, AWS growth rates are still quite phenomenal. Whether this says more about the quality of Amazon’s cloud services or the exploding demand in the industry in general is the real question.

Azure’s Intelligent Cloud

Microsoft’s Azure also grew last quarter, with sales of $5.9 billion (see page 29) and more than double that in unearned revenues. However, growth looks to be tapering off somewhat. The Intelligent Cloud represented 29% of revenues last quarter, up from 23.6% this time last year, but it only grew by 7.6% and $422 million absolutely. If Microsoft’s revenues weren’t shrinking as a whole, Intelligent Cloud wouldn’t be growing relatively by much at all, but it still is the only segment growing for the company. The question here is if Microsoft’s tapering growth is a signal for the industry or just a Microsoft-specific issue. Judging by the AWS and IBM growth numbers, it looks Microsoft-specific, but we’ll find out more over the next few quarters.

Google for Work

Alphabet is, as of now, the least transparent of the four in terms of how much it is earning from cloud computing services. What we do know is that the segment that includes cloud revenues, Google for Work, saw an 11% increase in sales to $1.9 billion, but ticked down 0.2% in terms of percentage of total revenue. It is possible that Google’s recent restructuring into Alphabet will help the company hone its focus on the industry, but given that Alphabet is primarily a search company, the tepid growth numbers here are not immediately surprising.

For now, it looks like IBM is leading the way in cloud computing while Microsoft is plateauing, Amazon is the growth wild card and Alphabet is the unknown.