In the present day, Amazon Web Services (AWS) continues to be the undisputed leader in the cloud sector, but Microsoft is rapidly closing the gap at a dizzying pace. Although Microsoft does not disclose the revenue figures for its Azure cloud infrastructure, analysts’ estimates indicate that five years ago it was half the size of AWS. Now, it is estimated to be approximately three-quarters the size of its main rival.
A significant part of Microsoft’s recent momentum is due to artificial intelligence (AI). Amy Hood, the company’s chief financial officer, highlighted on the January 30 earnings call that revenue growth in the Azure and cloud services division benefited by 6 percentage points from AI in the last period, compared to 3 points in the previous quarter. Overall, Azure’s revenue grew by 30% in the quarter, compared to 13% year-over-year growth at Amazon Web Services.
Microsoft has been incorporating graphics processing units (GPU) into its data centers so that customers can run AI models on Azure. This includes GPT-4, a large language model that allows text conversations with OpenAI’s ChatGPT chatbot. Many companies have been adding similar generative AI capabilities to their products.
AWS took months to introduce a model that could compete with GPT 3.5 and GPT-4. Now, the company is offering a series of models in addition to its own, including one from Anthropic, in which Amazon has invested. On the fourth-quarter earnings call, Amazon CEO Andy Jassy mentioned that AWS offers “the broadest collection of compute instances with Nvidia chips,” and that customers like Airbnb, OpenAI, and Snap are using their own AI processors.
An AWS spokesperson referred to Jassy’s earnings call comments, including that the company added more incremental revenue in the quarter than “any other cloud provider, as far as we know.”
Amazon also expects that generative AI could generate billions of dollars in revenue for Amazon in the coming years, although the competition is tough.
Currently, Azure is growing much faster. As cloud infrastructure has become a more significant part of Microsoft, representing around 30% of the company’s total revenue, it has also become a significant contributor to earnings.
Microsoft, which recently surpassed Apple to become the world’s most valuable public company, generated nearly $83 billion in net revenue in 2023, up from $67 billion the previous year. The Intelligent Cloud segment containing Azure generated 46% of Microsoft’s total operating income, up from approximately 27% in 2016.
In addition to providing basic computing and storage services, Microsoft offers a variety of services for developers, including high-margin databases and monitoring tools.
Gross margin in Microsoft’s cloud group expanded from 42% in 2016 to 72% in the most recent quarter. The division includes commercial Office subscriptions, the commercial part of LinkedIn, and the enterprise software Dynamics 365, as well as Azure. Hood has said that efficiency gains could come from improvements in energy, cooling, data center design, chips, and software.
Yun Kim, an analyst at Loop Capital, said in a note that Azure’s revenue growth is expected to accelerate.
“We expect their Azure business to accelerate from the next fiscal year (or C2H) as tailwinds from new workloads from both new cloud deployments and GenAI initiatives significantly intensify,” he wrote.