Big Enterprises Increase Cloud Spending, Small Startups Focus on Saving

Alphabet’s ( Google’s parent company) cloud growth is near a three-year low, as Google’s exposure to smaller businesses slows growth. Meanwhile, Microsoft’s Azure for large enterprises, along with its early bet on OpenAI, has helped the software giant continue to widen the gap with its direct rival.

In the battle to tap the next growth engine for its cloud business, Microsoft has focused on core business customers that already use many of its software services, while Google has turned to startups.

“Demand for artificial intelligence (AI) has driven Microsoft’s growth. Google’s large customers have similar needs, but the company is more exposed to startup and high-growth customers who are more aggressive with cost control efforts,” said Morningstar analyst Ali Mogharabi.

The AI boom and demand from large enterprise customers could add $90 billion to Microsoft's market capitalization.

If the stock continues to lose money, Alphabet could lose more than $100 billion in market value, raising concerns that its focus on startups and slower rollout of AI services will leave it behind technologically. Meanwhile, Microsoft’s stock gain is expected to add about $90 billion to the company’s market capitalization.

“Microsoft is leveraging its existing software relationships, while competition from Google is negligible,” said Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet and Microsoft. The results, he said, suggest that cloud spending is coming from enterprise customers, while smaller businesses are cutting back.

The aggressive use of AI helped Microsoft's cloud business grow 3 percentage points in the September quarter. CEO Satya Nadella said about 40% of Fortune 500 companies are using a trial version of its "Copilot" AI service, powered by OpenAI technology.

The company will launch a $30/month subscription offer next month for its 365 service, with a standout feature that summarizes all of a day's emails into a single report.

Analysts say that will further boost adoption of AI services. Alphabet has also deployed AI in products like the Pixel phone and recently tested adding generative AI to its search engine.

Observers are optimistic about the strength of Alphabet's core search business, but they warn that weakness in the company's cloud business will persist for a few more quarters.

(According to Reuters)

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