 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. The recent leaked court documents last month during the Microsoft Activision hearing require us to revisit our cloud forecasts and market share data. The redacted docs, I should say poorly redacted docs, which have been since removed from public viewing suggest that Microsoft Azure revenue is at least 25% lower than our previous estimates. As a result, we've dramatically reduced our Azure revenue figures, which in turn increase AWS's big four hyperscale cloud market share. Our new estimates show that AWS maintains a greater than 50% share of revenue through 2023. While the change also helps Google cloud, its market share is only modestly affected. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we update our hyperscaler cloud revenue estimates and market share data and explain how the ETR data on cloud should be interpreted in this context. Now the story was well covered in the press. Actually, Google sounded the alarm back in 2022. So what you have here is Google back in December of 2022 saying, hey, actually Microsoft's cloud business is losing money and so we're not alone. And then last month as part of the FTC's attempt to block the Microsoft Activision Deal, Microsoft submitted redacted documents to the court that leaked that its Azure revenue for fiscal 2022 was 34 billion. That's the four periods from June 2021 to June 2022. That's more than $10 billion lower than most analyst estimates, including ours suggested. So how are we to interpret this data? And in the one hand, it helps Microsoft to show data that it has significant competition in the cloud and it doesn't have a monopoly. Further, Microsoft can basically put revenue in whatever bucket it wants. The other thing is no one can seem to get their hands on the poorly redacted documents. I certainly have tried it and so I don't have the exact context. For example, Microsoft claims going to further moneying the waters here. Microsoft claims and other statements to have a $20 billion cybersecurity business. Is any of that revenue counted in Azure? And if so, how much? And if not, why not? So again, to the point, Microsoft can put data anywhere it wants, but this data can't be ignored. It's highly unlikely that Microsoft would produce data in court or submit data in court documents that would not be consistent with how it reports its business internally. So we have to adjust our cloud figures. So we have no choice. Now, before showing you the revised data, let's remind you that only AWS reports its IaaS and PAS data in a reasonably clean manner. Microsoft and Alphabet report Azure growth rates and give hints about their IaaS and PAS businesses, but they don't give us specific revenue figures. And here we show some examples. So take a look at this. In the year ending June 2023, just the most recent quarter, you can see it's, Microsoft gave a, the first time ever to my knowledge, Microsoft Cloud surpassed $110 billion in annual revenue. It always talks about Microsoft Cloud as the superset up 27% in constant currency, with Azure all up accounting for more than 50% of the total for the first time. Okay, so it's saying greater than 55 billion. We're a little higher than that. So that's consistent with, this is our new forecast. The next one, we go to the quarter ending in June 2023, same quarter, Microsoft's hints Azure and other cloud services revenue grew 26% and 27% in constant currency. Okay, so consistent with the overall cloud business. Normally, Azure is growing a little faster. So those are some of the, sort of the way in which Microsoft gives us hints that we have to squint through. Now you look at Alphabet, and go back to 2019, where Google or Alphabet would say things like, the growth rate of GCP was meaningfully higher than that of the cloud overall and GCP's growth rate, you know, accelerated from 2018 to 2019. So they're giving us little hints there, so we can model that out. Now, as I've reported before, the, that statement that meaningfully higher sort of changed over time and went from meaningfully higher to greater than. And in this last quarter, GCP revenue growth remains strong across geographies, industries and products. That being said, we saw continued moderation in the rate of consumption growth as consumers optimized their spend. So let me say this, by the way, I dug deeper, I would catch it up on some earnings transcripts this morning and I dug deeper in and just when we read the whole thing, one of the Wall Street analysts that sort of follows this stuff like we do, asked, well, you didn't say that Google Cloud grew faster than cloud overall, what's the story? And Google or Alphabet CFO said, oh yeah, we didn't do that, we didn't mention that, yeah, it was faster. So okay, how many more points did you give Google Cloud? Maybe a point, that's what we did. All right, so what does all this mean for our previous forecast? Let's take a closer look at what the data says. Here we show on the left hand side of this chart our previous estimates for the big four hyperscalers. The top part is IAS and PAS revenue and the bottom is market share data prior to the leaked documents. And then on the right hand side, we show the same data for our revised estimates. So let's review the meaningful changes. So the first thing is the Azure data has dropped significantly by approximately 25%, even higher in some cases. So normalizing Microsoft's fiscal years into calendar years, so we do that mapping, Azure revenue goes from 55 billion to 40 billion in 2022. As such, its market share in that period drops from around 35% to 28%. Meanwhile, the impact on AWS is significant and meaningful. What you see on the lower left, we had AWS dropping its share to 50% in 2022 and below 50% was our forecast for 2023. The revised estimates indicate that AWS had a 55% share of the big four in 2022 and it holds up in the low 50s, 53.2% in 2023. Now the next point is, well, this all helps Google as well. Google Cloud definitely makes it look better. It's not nearly as significant due to the smaller base Google has. Lastly, the overall market size in our model has been reduced by approximately 10%. So we've revised our big four 2022 revenues down to around 145 billion and we have that growing at 18% to 171 billion in 2023. Now you may be wondering, how could you be so far off? You, Dave and the other analysts, well, as you know, from our standpoint, we've explained this before, we underestimated the impact of our survey data, our ETR partner survey quarterly and asked more than 1700 IT decision makers about their spending in cloud and other sectors. And this chart shows on the vertical axis, shared net score, which is a measure of spending velocity, spending momentum and on the horizontal axis, it shows overlap or presence within the data set. Essentially it's informed by N and in that little insert there, we show all the different, not all the different, but many of the different cloud platforms that ETR tracks showing on the left column where they have that green and the red, that's the net score for the latest July survey and on the right hand column, the N and the N and the net score inform where the plot goes. Now we've underlined it in the upper right. So this is really what's affected our judgment is Microsoft Azure. So when you ask customers, what cloud platform are you using to answer Microsoft Azure? And we think it's because, in fact, we think it's pretty plausible, I talked to ETR this morning, Eric Bradley, that people just assume that they're 365 and their other software states, yeah, that's cloud. So they're calling that cloud. You'll notice in here, about maybe 40% down on the list here, Salesforce, it's got a 41.2% net score with a significant N, 371N. That would be right up in the top, certainly the top five and you can see Salesforce kind of in the middle there right above the sort of Google cloud platform. And so people think Salesforce, they look at that as their cloud. You know, and you know, one has to wonder, you know, how much of that response is 365 connected? So our estimates as to what percent of Microsoft's revenue or infrastructure were simply too high. And we know it's now over 50% based on Microsoft's statement. So the market's getting blurry. The example, other example we would use is Snowflake. You think about Snowflake, it includes its AWS pass along cost in its cost. We think it's why when we ask customers, what is the biggest concern you have about cloud costs? And they said database, not EC2, which is where most of Amazon's revenue or AWS's revenue lives. It was database cost and we think in part that's because companies like Snowflake, Snowflake in particular is bundling in the AWS costs. You know, with their Snowflake cloud costs, Databricks as we've reported does not. So, you know, let's come back to this chart and talk about some of the other players here. You can see Microsoft Azure functions, AWS Lambda, well above that 40% mark. I didn't draw the red line in there, but anything above that 40% mark on the vertical axis is considered highly, highly elevated. You see Cloudflare just below that. So they've got some momentum, VMware cloud and AWS. It's come down from its highs, but it's in there. You got Red Hat OpenStack as we've reported before. You know, that's a lot of the sovereign cloud, if you will, the private clouds, particularly in Telco, they want to build their own stacks. Now you will also have HPE with GreenLake. You've got Dell with Apex. You've got the IBM cloud in there. You've got the Oracle cloud in there. Oracle, you know, consistently moving to the right, but, you know, well below all those companies, well below the high 40% mark, you know, kind of in the red, maybe not in the red, in the gray. And then you got Alibaba way down low. It's a small sample. It's only 40N. You can see that in the very last one, but negative 17 and a half percent. You know, Alibaba's had some challenges and it's, you know, reformatting or restructuring its cloud business. I think it's spinning out its cloud business, like Lena Kahn wants AWS to do. We'll save that for the CUBE pod. But anyway, you get the point. You saw the dominant position of Microsoft. And so that informed us. And so we'll keep digging and we had no choice, we think, but to revise our forecast. So let's talk about some of the things that we're watching going forward. And so if you take a look at this, the key points here, Amazon reports earnings on 8.3, August 3rd, we're working on some planning assumptions as follows. Gen AI we think is a tailwind for the cloud, particularly the big three cloud players. The big three clouds all had significant presence. AWS, Google and now Microsoft has sort of cut the line as we've talked about before with open AI and has certainly high end of the mind share. We think the deceleration in cloud growth rates reverses in Q4 as AI monetization starts to become more meaningful. People are looking for AI, you know, so much hype around AI. People want to, okay, where's the beef? Where's the money? People are spending on AI. We'll talk about that in a moment. From some additional ETR survey that we have, survey data that we have. And then we still think despite this deceleration, cloud growth continues to dramatically outpace the overall IT spending rates, which are hovering around 3%. Cloud is significantly higher than that at, you know, just below 20%, 17, 18%. But as we've reported, there's a more balanced market vis-a-vis on-prem versus the cloud. We certainly have reported on that extensively. That sort of rebalancing, that optimization. We're not repatriates just yet, but we have talked about the platform inomics Charles Fitzfitsy's repatriation index, which is essentially the revenues of digital realty and equinex divided by those of AWS. And it bottomed last quarter and bounced up. We'll see how it does this quarter. I would suspect it's not going to be a dramatic reversal. I think it's going to really more hit an equilibrium. Now, on this last point, I want to give a shout out to a piece of work, some research that was recently published by Dion Hinchcliff of Constellation Research. He interviewed more than 20 CIOs. He did some IDIs in-depth interviews. And as our research has indicated, the market is reaching a sort of equilibrium between cloud and on-prem spending. Cloud's still growing significantly faster, but work that isn't already in the cloud, it's going to be tougher to move into the cloud. So the cloud is building on its existing momentum and building new apps on top of that. So why will it be tougher, we think, to move existing work that's on-prem into the cloud? First is, look, if it hasn't moved, there's probably a good reason. And then the second thing is the cloud operating model is coming to a data center near you, whether it's on-prem guys leaning into as-a-service like Apex and GreenLake doing it in private data centers or doing it in Equinix data centers. The other point is those offerings are better than outposts. It's kind of what outposts should have been. So it took a while for guys like HPE and Dell to really get its as-a-service act together, but that's now really happening. I mean, they're just finally getting some significant traction in that business. It's billions of dollars of revenue that they're each generating. So that's going to continue to grow. And the other point is that the work that is on-prem it has characteristics that favor keeping the data where it is. And that's what Dion's research articulates very nicely and we're showing in this chart. I'm not going to go in-depth here, but you should read his report. We'll put a link in the show notes. He did a very nice job of laying out the decision points for where work should be placed with some nice industry considerations you can see here on this chart. For instance, he says financial services, very data security conference, health care, really compliance focus. Government's got a lot of legacy, legal's got regulatory considerations, et cetera, et cetera, et cetera. And again, laid some of the characteristics and considerations as to the salient points of to as to where data is best suited, whether it's on-prem or in the public cloud. Now, as I just mentioned, Gen AI, we think it's going to be a tailwind for the hyperscalers, AWS with SageMaker and Bedrock, it's custom silicon, it's got other AI tooling, Google with BigQuery and all of its surrounding machine learning and AI capabilities, not the least of which of course is, is it's Gen AI and Bard and other things that it's announced. So it's got significant prowess there. And of course, Microsoft, as I said, just cut the line. It jumped ahead in terms of the mind share lead with open AI. It also has long-term relationship with Databricks, we went a lot of work with them historically, although we think that open AI is now front and center. So these platforms, they're dominant in AI today. We've reported on that, the big three clouds. You've definitely got Databricks in there. You've got Snowflake trying to sort of elbow its way in to the AI conversation. And this is going to, we think, definitely benefit cloud consumption for new workloads. But AI is also going to come on-prem. So we'll be watching that closely. We do believe again that the big three clouds in the U.S. will have dominant positions with LLMs and maybe others that fit in there. Obviously open AI is one to watch. Companies like Anthropic, et cetera, will play. But we think there's only going to be a handful of the big LLMs. There's going to be a lot of many more smaller models that use proprietary data, various industries and use cases like inferencing at the edge. Now the ETR data shows that 96% of companies in a recent survey this month, either have or are formulating an AI strategy. 64% say it will increase their infrastructure needs. We think a lot of that's going to be in the cloud and 30% say it will accelerate their cloud spend. So it's interesting to see that gap. 60% say it's going to increase their infrastructure needs and only 30% say it'll accelerate their cloud spend. So that begs the question, where's that other spend going? Is it on-prem? Is it just sort of an underestimate of the cloud spend? So this is something we're watching closely. All right, we got a wrap. I want to thank Alex Meyerson who's on production and manages the podcast. Ken Schiffman as well. Kristen Martin and Cheryl Knight helped get the word out on social media and in our newsletters. And Rob Hough is our EIC over at Silicon Angle who does some great editing for us. Thank you all. Remember all these episodes are available as podcasts wherever you listen. Just search, breaking analysis podcast. I publish each week on wikibon.com and siliconangle.com and you can email me at david.volante at siliconangle.com or DM me at dvolante or comment on our LinkedIn posts. And please do check out etr.ai. They got the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching and we'll see you next time on breaking analysis.