 From the SiliconANGLE Media Office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hello everyone and welcome to this week's episode of Wikibon's CUBE Insights, powered by ETR. In this breaking analysis, I plan to look deeper into the cloud market and specifically the business results and the momentum of the big three U.S. cloud players. Now Google last week opened up a bit and they not only broke out YouTube revenues, but also it's cloud business. And quite a bit more detail now, like Microsoft the numbers are still somewhat opaque and hard to compare with AWS numbers, which I find much cleaner. Nonetheless, by squinting through the data, we're able to better understand the momentum that these three companies have in cloud and of course the ETR spending data gives us an added data-driven dimension that is really insightful and helpful. Today we're focusing on the big three in cloud. Amazon's AWS, Google's cloud platform, GCP and Microsoft Azure. Now to me the other U.S. players are not hyperscalers and they're really not even in the discussion, other than as an extension of their existing business. As an example, it would take IBM and Oracle between four and six years to spend as much on CapEx as Google spends in four months. Now coming back to the big three. Each of these companies is coming at the opportunity with a different perspective, but Amazon and Microsoft have been on a collision course for quite some time now. Google of course aspires to get into that conversation. Amazon in my opinion is the gold standard in cloud and I specifically refer to infrastructure as a service. They created the market and have earned the right to define the sector. Competitors like Microsoft are smart to differentiate and I'm going to discuss that. But first, let's take a listen as to how Amazon's CEO Andy Jassy, Amazon Web Services CEO Andy Jassy, thinks about the goals of the AWS business. Roll the clip please. At a high level our top down aggressive goals are that we want every single customer who uses our platform to have an outstanding customer experience. And we want that outstanding customer experience in part is that their operational performance and their security are outstanding, but also that it allows them to build projects and initiatives that change their customer experience and allow them to be a sustainable successful business over a long period of time. And then we also really want to be the technology infrastructure platform under all the applications that people build. So what's interesting to me here is how Jassy thinks about the AWS platform. It's a platform to build applications. It's not a SaaS. It's not a platform which AWS can use to sell its software packages. It's a place to build apps, any application, any workload, any place in the world. So when I say AWS has clean numbers, it's because they have a clean business. Infrastructure is what they do, period. That's what they report in their numbers and it's clean. Now compare that with Microsoft. Microsoft is doing incredibly well in the cloud and we'll come back to that, but Microsoft is taking a much different approach to the market. They report cloud revenue, but it comprises public, private and hybrid. It includes SQL server, Windows server, Visual Studio, System Center, GitHub and Azure. And also support services and consulting. But the key here is they define cloud to their advantage, which is smart. Trying to differentiate with a multi-cloud, any cloud, any edge story. Think Microsoft Azure Stack slash Microsoft Arc, et cetera. Now Google as we know is coming at this as a latecomer. They admit they're a challenger. Their starting point is G Suite. Their cloud focus is infrastructure and analytics. So with that as some background, let's take a look at the Wikibon estimates for IaaS revenue in 2019. What we have here is our estimates of AWS, Azure and GCP's IaaS and PAS revenue for 2018 and 2019. And we've tried to strip out everything else so we can make an apples to apples comparison with Amazon. So let's start with Amazon. The street is concerned about the growth rate of AWS. It grew 35% last quarter, which admittedly is slowing down. But it did just under 10 billion. Think about that. AWS will probably hit a $50 billion run rate this year. 50 billion. And it's growing in the double digits. AWS is going to be larger than Oracle this year. And Cisco is next in its sights. It's like Drew Brees knocking down records in the NFL. Microsoft is very strong, but remember, these are estimates. They report Azure growth, but they don't really give us a dollar figure. We have to infer that from other data. So the narrative on Microsoft is they're catching up to AWS and in one dimension, that's true because they're growing faster than AWS. But AWS in 2019 grew by an amount almost equal to Azure's entire business in 2018. Now, Google is hard to peg. The only thing we know is Google said its cloud business was nine billion in 2019, up from 5.8 billion in 18 and 4 billion in 17. So we're seeing an accelerating growth rate that they said is largely attributable to GCP. And they told us that GCP is growing significantly faster than their overall business, which remember includes G Suite, cloud business that is. Okay, so that's the picture. Now, I want to take a minute to talk about the profitability of the cloud. On the Microsoft earnings call, Heather Bellini of Goldman Sachs, she was effusive. She's an analyst exclaiming how impressed she was with the fact that Microsoft has been consistently increasing its cloud gross margins each quarter. I think it was up five points in the last quarter. And on the Google call, Heather again was pressing Google CEO Sundar Pinshai on gross margin guidance for GCP, which Sundar didn't answer. As well, Andy Jassy said on theCUBE last reinvent that the cloud was higher margin than retail, but at scale, it's a relatively low margin business as compared to software. I would like to comment on all this. First, I think Jassy is sandbagging. AWS is a great margin business in my opinion. AWS has operating margins consistently in the mid 20s, like 26% last quarter. Now, Bellini on the earnings call was pressing on gross margins, which in my opinion are even more impressive. Here's why. This is a chart I drew a long, long time ago. It's a very basic view of the economics of the different sectors of the technology business, namely hardware, software and services. Now they each have a different margin profile as we're showing here. Or the vertical axis is marginal cost. That is the incremental cost of producing one additional unit of a product or service. On the horizontal axis is volume. And we're showing the pre-cloud era on the left and the post-cloud on the right hand side of the chart. And as you can see, each segment has a different cost and hence different margin profile. In hardware, you have economies at volume, but you have to purchase and assemble components. And so at some point, your marginal cost hit a floor. Professional services have a diseconomies of scale, meaning at higher volume, things get more complex and you have more overhead. Now that red line is software. And everybody loves software because the marginal costs go to zero when your gross margin approaches, you know, the cost of distributing the software. Back in the old days, it really came down to the cost of a, what it cost to distribute a disk or a CD. So software gross margins are absolutely huge. Now, let me call your attention to the green line that we've labeled outsourcing. In the pre-cloud era, outsourcing companies could get some economies, but it really wasn't game changing. But in the post-cloud world, the hyperscalers are driving automation. Now, I'm exaggerating the margin impact because the cloud players still have to buy hardware and they have other costs. But the point is gross margin on outsourcing IT to a cloud player is far more attractive to the vendor at scale. So Heather Bellini was essentially asking Satya Nadella, how is it that you can keep expanding your gross margins each quarter? And she was trying to understand if GCP gross margins were tracking similar to where AWS and Azure were back when they were smaller. And I think these curves at least give us some guidance. All right, so now let's pivot into the ETR data. This chart shows net score, which remember refers to spending velocity for each of the big three cloud players over the past nine surveys for cloud computing, the cloud computing sector. Now, three things stand out. First is that AWS remains very strong with net scores solidly in the 60% plus range. Second is Azure has sustained a clear momentum lead over AWS since the July 18 survey. And the third is look at GCP's uptick. It's very notable and quite encouraging for Google. Now, let's take another cut on this data and drill into the larger companies in the ETR data set. Look what happens when you isolate on Fortune 500. Two points here, AWS actually retakes the lead over Azure in net score or spending velocity, even though Azure remains very strong. Amazon showing in large accounts is very, very impressive. Nearly back to early 2018 peak levels at 76%. So really strong net scores. The second point is GCP's uptrend holds firm and actually increases slightly in these larger accounts. So it appears that the big brands which perhaps used to shy away from cloud are now increasingly adopting. Now, one of the things that ETR does that I love is these drill downs where they'll ask specific questions that are both timely and relevant. So we want to know what every salesperson wants to know. Why do they buy? And that's what this chart shows. It shows data from the ETR drill downs and on the left hand in the green are the why the buys for Microsoft, AWS and Google Cloud. For Microsoft, CIO say compatibility with existing skills and the organization's IT footprint. Then it's feature set, et cetera. Look, here's the deal. This is Mr. Softy's huge advantage. It's just simpler to migrate work to Azure if you're already running Microsoft apps. And if Microsoft continues to deliver adequate features, it's a no brainer for many customers. Now for AWS, the pluses are ROI, near-term and long-term. And I've said many times, best cloud in terms of reliability, uptime, security. AWS has the best cloud for infrastructure. And if you're not incurring huge migration costs or if you're not Walmart, why wouldn't you go with the best cloud? Now, GCP comes down to the tech. Google has good tech and IT guys, they're geeks. They're geeks, love tech. And when it comes to analytics, Google is very, very strong as well. Now, the righty-hand side of this chart shows why this is not, in my opinion, a winner-take-all game. The chart shows the percent of workloads in the cloud today in two years and three years across different survey dates. Today, it's between 25 and 35%. And it's headed upwards of 50%. This is a huge growth opportunity for these companies. You know, sometimes people say to me that Google doesn't care about the cloud because it's such a small piece of their business or they can't be number one or number two, so they'll exit it. I don't buy this for a second. This is a trillion-dollar business. Google is in it for the long game and, in my opinion, is going to slowly gain share over time. All right, let's wrap up by looking forward to 2020 and beyond. The first thing I want to say is, you know, good for Google for reporting its cloud revenues. But I think Google has to show more in cloud. I understand it's a good first step, but IT buyers are still going to want to see more transparency. Now, the other point I want to make is we are entering a new era. The story of the past isn't going to be the same as this decade. Buyers aren't afraid of cloud anymore. It has become a mandate. The dominant services of the past and compute, storage, and networking to still be there, but they're evolving to support analytics with AI and new types of database services. These are becoming platforms for business transformation. Competition is, as we've seen, much more real today. Buyers have optionality and that's going to create more innovation. SaaS continues to be a huge factor, but more so than ever. And hybrid and multi-cloud is increasingly real and it's going to become a challenge for IT buyers. I expect AWS is going to enter the ring in a bigger way to expand its time. Finally, developers are no longer tinkerers. They're product creators. As I said, this is a huge market and the big three can all participate as well as overseas players like Alibaba. As a customer, it's becoming a more and more complicated situation. Cloud is not just about experimentation or startups. It's increasingly about something that you really need to get right. Where to bet? Migration and managing risks all become much more critical. I mean, on the one hand, optionality is a good thing, but if you make the wrong bet, it could be costly if you don't have a good exit strategy. As always, I really appreciate the comments that I get on my LinkedIn posts and on Twitter, I'm at D.Valante. So thanks for watching and thanks for your comments and your feedback. This is Dave Vellante for theCUBE Insights, powered by ETR. We'll see you next time.