Enterprise spending on cloud services keeps accelerating

The cloud market continues to grow at an accelerated rate, defying the economic pressures that are stifling the rest of the industry. Spending on cloud services is in turn driving massive investment in equipment, which is good for the IT vendors because the on-premises data center market is largely flat.

According to Synergy Research Group, enterprise spending on cloud infrastructure services was $79 billion worldwide in the second quarter, up $14.1 billion or 22% from the second quarter of 2023. This is the third consecutive quarter of significant growth – more than 20% year-over-year – meaning that the cloud market is showing no signs of slowing down.

“While some economic, currency and political headwinds remain, the fundamental strength of the market continues to push spending on cloud services to new highs,” Synergy said in its report.

Amazon maintains its strong market-share lead with 32%, followed by Microsoft at 23% and Google at 12%. The big movers in the quarter with the highest year-over-year growth rates were Oracle, Huawei, Snowflake and MongoDB. Oracle surpassed IBM this quarter and is now tied with Salesforce as the fifth-largest cloud provider.

“Oracle has gained momentum, driven by more corporate focus on cloud and a big increase in its capex investments. That may enable it to gain an edge on the tier 2 players, but there remains a gulf between it and the market leaders,” said John Dinsdale, chief analyst and president of Synergy.

In the big picture, the cloud providers are gaining share from new customers, not stealing it from each other. It’s simply a rising tide lifting all boats. In the case of IBM, which dropped from about 10% market share a few years ago to just over 2% share, that’s due to a reduced emphasis on the cloud market by the company itself.

“Both Microsoft and Google continue to grow their cloud revenues by about 30% year-on-year, which is pretty impressive for such large operations,” said Dinsdale.

The Q2 market share numbers for the leading cloud providers are Amazon 32%, Microsoft 23%, Google 12%, Alibaba 4%, Salesforce 3%, Oracle 3%, IBM 2%, Tencent 2% and Huawei 2%. Other companies that have a market share of 1% (to the nearest percentage point) include Baidu, China Telecom, China Unicom, Fujitsu, NTT, Snowflake, SAP, Rackspace and VMware.

On-prem not suffering for cloud’s gain

Separately, Synergy has found that while the overall share of on-premises data centers has plunged in recent years, overall capacity remains consistent. It’s just that hyper scale operators are growing so much faster.

In 2017, the on-premise data centers of enterprises accounted for 60% of all data center capacity. By 2029, that share will have dropped to just a little over 20%, Synergy said. But the reason is not that on-premises data center capacity is falling. Despite all the talk of shutting down data centers and moving to the cloud, much work remains on premises, and capacity is actually staying relatively constant.

“On-premise share of the total will drop by almost three percentage points per year, though the actual capacity of on-premise data centers will remain relatively stable,” Synergy reported.

The big change in data center capacity will come from hyperscale operators – in 2029, hyperscale operators AWS, Microsoft, and Google will have eight times as much capacity in their data center footprints as they had back in 2017. That hyperscale capacity is shared between owned, own-built data centers and leased facilities, with owned capacity accounting for an ever-larger share of the total.

Capacity of colocation data centers will also continue to grow strongly, the report said. The rest of the colocation footprint will grow by almost 50% from 2023 to 2029, driven by enterprises and service providers that are trying to minimize investments in on-premise facilities.

“In 2012 enterprises spent twelve times as much on their data center hardware and software as they did on cloud infrastructure services, while today they spend three times more on cloud services then they do on their own data center infrastructure,” Dinsdale wrote.

“Enterprises are also choosing to house an ever-growing proportion of their data center gear in colocation facilities, further reducing the need for on-premise data center capacity. The rise of generative AI technology and services will only exacerbate those trends over the next few years, as hyperscale operators are better positioned to run AI operations than most enterprises,” he wrote.

Dinsdale told me the workloads staying on-premises tend to be workloads that are either very complex and cannot easily be transitioned, are focused on highly sensitive data, are governed or influenced by regulatory issues, or are highly predictable and can be managed economically on premise.

Enterprises worldwide are spending around $100 billion per year on their own data center IT hardware and associated infrastructure software, which has held flat for the last several years/ By comparison, enterprises are now spending $80 billion per quarter on cloud services; not to mention another $65 billion per quarter on SaaS. “And those cloud and SaaS numbers are growing like gangbusters,” he said.

On-prem not suffering for cloud’s gain

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