Outlook for the Cloud Market

Satya's description of why Cloud is a secular trend from Microsoft earnings call

The way I think about the computing landscape going forward is if you sort of said at the highest of levels today as a percentage of GDP, tech spend is 5%. We think it will double in the next 10 years. And if anything, this pandemic perhaps has accelerated that doubling.

And in that context, what's the large — the most secular need, it's the need for distributed cloud infrastructure. It's both needed for modernizing existing applications you have, and so that's why, by the way, 20% penetrated so there's more 80% that needs to move. But more importantly, there's going to be new application starts which need infrastructure. And so if you sort of add those up, I think that we're still in early innings.

There will be, between quarters, volatility, all of the points that Amy made even earlier. But we think distributed cloud infrastructure is the most important layer. But the way we have approached it is not to just think of that layer in isolation but the data layer work we do composes, the AI layer composes and more importantly, our SaaS applications, whether business applications, Power Platform, Microsoft 365, all reinforce that same modern tech stack. So I would still say that digitization in its — this new tech stack is in its very infancy. - Satya Nadella

Milestone moment

This is the first year when Azure revenue is larger than Windows revenue. Azure revenue has grown to 17% of the revenue. 

Google's Cloud Strategy

• Six priority industries : healthcare, retail, media, finance, manufacturing, public sector
• 5 major geographies
• 4 customer segments
• Data processing, analytics, AI/ML - differentiation
• Migration of legacy datacenters to google cloud and cut in IT spending and infrastructure. eg : Nokia migrating 30 data centers to the cloud across 12 countries
• Google meet saw a peak of 7.5 billion daily video call minutes

How Big Tech Makes Money - Q3, 2020

Apple 

• Net sales : 64.7 billion
• Product : 50.1 bn
• iPhone : 26.4 bn (33bn in Q3, 2019)
• Mac : 9 bn (> Q4 2019 revenue 7.56 bn)
• iPad : 6.7 bn (> Q4 2019 revenue 5.9 bn)
• Wearables :7.8 bn
• Services : 14.6 bn (> Q4 2019 revenue 12.6 bn)
• Cost of sale : 40 bn
• Operating expense : 10 bn
• Operating Income : 14.7 bn
• Net Profit : 12.7 bn
• Cash in hand ~50 bn
• Commentary : Overall revenue and profit is constant from 2018 and 2019. However, stock price has gone up as the company has reduced the number of outstanding stocks through buy backs. However, PE has gone up from 12 to 35 and future growth seems to be priced in, until Apple opens up new revenue streams. Apple shared no revenue guidance for Q4

Amazon

• Net sales : 96 bn
• Operating Income : 6.1 bn
• Net income : 6.3 bn
• All the above figures are higher than Q4 2019
• Investing in Amazon provides significant international exposure : NA 62%, International 26% and AWS 12% of net sales. YoY net sales grew by 39%, 37%, 29% across those 3 categories
• Online stores 48 bn, Physical stores (includes whole foods) 3.7 bn, Third party seller services 20 bn, subscription services 6.5 bn, AWS 11.6 bn, Ads 5.3 bn
• Online stores grew at 37%, physical stores at -10%, third party seller services at 53%, subscription services at 32%, AWS at 29% and ads at 49% YoY
• Commentary 
• Physical stores slowdown is expected due to Covid, but all other categories grew faster than AWS. Net sales increased 37% YoY. With Covid-19 expediting Amazonification of the world, this will be an unprecedented holiday season. Amazon expecting 112bn in net sales in Q4. 
• Some of the demand from COVID like grocery, gloves may not recurring next year. But COVID is increasing engagement, retention of the Prime membership program and usage is growing across different categories
• Prime videos is a very good acquisition channel for Prime members - > higher membership renewal rates and higher engagement
• International has been profitable for 2 quarters now

Microsoft

• Revenue 37.2 bn (12% growth)
• Productivity and business processes : 12.3 bn (11% growth)
• Office commercial products revenue growth of 9% (Office 365)
• Office consumer products revenue growth on 13%
• Linkedin 16% up
• Dynamic products up 19%
• Intelligent cloud 12 bn (20% growth)
• Azure up 48%
• Personal Computing 11.8 bn (6% growth)
• Windows OEM down 5%
• Windows commercial products up 13%
• XBox content and services up 30%
• Surface revenue up 37%
• Search advertising down 10%
• Net income : 13.9 bn
• 9.5 bn returned to shareholders, 5.3 bn share repurchases and 4.2 bn dividends

Google

• Revenue - 46 bn (up 14% from Q3 2019)
• Search ads 26.3 bn
• Youtube ads 5 bn
• substantial growth in direct response
• brand advertising (create brand and interest)
• YTs strong watch time growth enables advertisers to reach people who they cant reach on TV
• Google network 5.7 bn
• Cloud 3.4 bn
• Data processing, analytics, AI/ML
• Migration of legacy datacenters to google cloud and cut in IT spending and infrastructure. eg : Nokia migrating 30 data centers to the cloud across 12 countries
• Google meet saw a peak of 7.5 billion daily video call minutes
• Six priority industries : healthcare, retail, media, finance, manufacturing, public sector
• 5 major geographies
• 4 customer segments
• Other revenues (YT subscriptions, Google play) 5.4 bn
• Other bets 178 mn
• TAC : 8.16 bn
• Net income - 11 bn (operating margin 24%)
• Losses on other bets : 1 bn, nicely masks the operating margin from 27% to 24%
• Cash on hand : 133 bn
• International exposure : US 21.4 bn, EMEA 13.6 bn, APAC 8.4 bn, Other americas 2.6 bn
• Google has greater than 50% ex-US revenue exposure
• PE (1.1 tn / 50 bn) ~ 22. Alphabet looks cheap going forward given it is growing revenue at double digits compared to the rest of big tech. 
• Youtube music has 30 mn paying customers and Youtube TV has 3 mn paying customers
• In Q4, 2020 GCP will be its own reporting segment
• Commerce
• Shopping listings available in 48 countries
• Google checkout option opened the platform to paypal and shopify integration
• advertisers in Youtube at the mid-funnel level
• Earnings call transcript

Facebook

• Revenue : 21.4 bn (22% growth)
• Operating income : 8 bn (operating margin 37%)
• Cash on hand : 55 bn
• 200 mn businesses, 10 mn active advertisers, 40 mn people viewing a business catalog every month, more businesses are doing things online due to COVID
• Earnings call transcript

Commentary

• Big Tech companies are generating revenue worldwide. All of them have considerable international revenue exposure. 
• Amazon (37%), Facebook (22%), Google (14%), Apple (~flat) - revenue growth
• Facebook (37%), Google (24%), Microsoft (37%) - operating margin
• 265 bn in revenue, net profit of 52 bn, operating margin of ~20%, market cap ~7.5 tn
• Cloud is an extraordinary secular trend and all cloud players are gaining from IT spending and cost cutting
• Digital advertising continues to be a secular trend - TV dollars, CPG marketing budgets, retail goods moving online all driving this trend, organic small businesses trying to reach customers online

The Firehorse Effect

• In the early 20th century, a horse pulling a wagon would all of a sudden gallop towards a burning building nearby, endangering itself, the driver, & the passengers. What was the reason for this peculiar phenomenon? And why does this matter today?
• Fire has been one of the biggest dangers that humans have faced ever since they started living in structures. In the olden days, firefighting was a community responsibility. When a fire broke out, the people in a town or a village would form a "Bucket Brigade". 
• Visualize a double-line of people passing buckets of water from a nearby water-source to the fire, and sending empty buckets back to be refilled. That’s a Bucket Brigade. Eventually, tanks of water, hand pumps, & hoses became the preferred firefighting equipment. 
• Then came steam pumps, more powerful & efficient. Great, but the equipment got heavy & it became difficult for firefighters to pull it to wherever the fire was. What to do? 
• Enter horses. It wasn’t an easy change. Horses had to be trained to reliably run towards a fire. They also had to be strong. As horses became more commonly used to pull fire engines, places like Detroit even created a Horse College, along with report cards for each horse (!) 
• What happens when one is trained to do a job well, is systematically evaluated, & rewarded or punished based on job performance? One often gets rather good at that job. Same with these firehorses. 
• At some point, a firehorse would be retired from the firefighting job & given the job of pulling wagons on the street. A new job! Things were generally fine in the beginning. 
• But whenever a former firehorse heard a fire alarm or felt the presence of a fire nearby, it instinctively galloped towards the fire: terrorizing its drivers, passengers, & owners. 
• This firehorse did a rather poor job in its new context due to the very behaviors and patterns that were reinforced in its old context. Twitter, this is the Firehorse Effect. 
• The Firehorse Effect is why some accomplished business leaders fail to inspire, create a compelling strategy, eliminate drama, or rebuild the culture when they take on a leadership role in a new organization. The Firehorse Effect is also why a manager with a string of prior successes is just unable to execute at your startup. 
• What can be done about the Firehorse Effect? As with most such things, the solution needs to be grounded in Self-awareness, Organizational-awareness, & Sound Management. Leaders in a new setting should regularly think about the Firehorse Effect. 
• Leaders in a new setting should take the time to observe & learn. Doing is important, but doing without a deep understanding of one’s new role can be frustrating or even fatal. 
• The leader should invite people to challenge them. Ask "X has worked for me in the past, will it work here?" And the leader's managers & mentors need to help accelerate this process by candidly sharing organizational context & feedback during the leader's early days. 

This term is coined by Shreyas Doshi, I heavily recommend reading his writing for organizational and leadership development.