Microsoft’s Growing Ai is Contributing to the Decline of Its Cloud Business

By Roze 5 Min Read

Among cloud providers, Amazon Web Services is at the top. However, Microsoft is making great strides in catching up. Despite Microsoft’s silence on the matter, analyst estimates place Azure’s size at half that of AWS five years ago. Analysts now believe that it is approximately 75% smaller than its main competitor.

Recent success for Microsoft has been due in part to AI. In the most recent quarter, artificial intelligence (AI) accounted for 6 percentage points of revenue growth in Microsoft’s Azure and cloud services division, according to Amy Hood, the chief financial officer of the company. This is an increase from 3 percentage points in the previous quarter.

Overall, Azure’s revenue grew by 30% in the quarter, while AWS’s revenue grew by 13% year over year. To facilitate the execution of artificial intelligence (AI) models on Azure, Microsoft has been augmenting its data centers with graphics processing units (GPUs).

As an example, OpenAI’s ChatGPT chatbot can have textual discussions with GPT-4, a big language model. A lot of companies have been incorporating generative AI features like this into their products.

“We now have 53,000 Azure AI customers,” CEO Satya Nadella said to analysts during the company’s earnings call. It appears that some organizations are considering Azure in particular because of the buzz around AI and Microsoft’s perceived market leadership thanks to its partnership with OpenAI, according to Jamin Ball, a partner at investment company Altimeter Capital.

Microsoft’s AI growth is helping its cloud business

AWS finally released a model that could compete with GPT-4 after months of work. The business has expanded its model offerings to include many third-party options, including one from Amazon-backed Anthropic.

Amazon Web Services (AWS) provides “the most expansive collection of compute instances with Nvidia chips,” according to CEO Andy Jassy, who announced the company’s fourth-quarter earnings call. Jassy also mentioned that Airbnb and Snap are among the customers using AWS’s in-house AI processors.

A representative from AWS directed CNBC to remarks made by Jassy on the earnings call, whereby the business claimed to have added more incremental revenue than “any other cloud provider as far as we can tell” during the quarter. Generate tens of billions of dollars in revenue for Amazon over the next several years, according to Jassy.

Right now, Azure is expanding at a far quicker rate. Additionally, cloud infrastructure has grown in importance to Microsoft, contributing significantly to the company’s bottom line (now accounting for about 29% of Microsoft’s overall income).

In 2023, Microsoft’s net income increased to about $83 billion from $67 billion the year before, solidifying its position as the most valuable public firm in the world. An increase from 27% in 2016 to 46% in 2017 was the result of the Intelligent Cloud sector, which includes Azure. Microsoft provides developers with a wide range of services, such as basic computing, storage, high-margin databases, and monitoring tools.

From 2016 to the most current quarter, Microsoft’s cloud group’s gross margin increased from 42% to 72%. Azure, LinkedIn for business, and Microsoft Dynamics 365 are all part of the commercial Office subscriptions that fall under this category. Hood has stated that advancements in power, cooling, data center architecture, semiconductors, and software can lead to efficiency benefits.

Azure revenue growth may accelerate, according to a note by Loop Capital analyst Yun Kim. In his post, he predicted that Azure’s business will pick up speed in the upcoming fiscal year (or C2H) due to the “tailwinds” from additional workloads caused by cloud installations and GenAI activities.

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