Are Tech Giants Really Making Money on the Cloud?
It's now safe to assume that all software-based businesses will be cloud-based eventually. That raises an important question: Do we know how the major players are doing in the cloud? The answer is, "not really," and that's an issue that investors should raise with tech leaders.
Installing software, especially specialized business-oriented systems, on local computers is obsolete, as is downloading media content. Companies increasingly sell applications and content as cloud services, charging a subscription. Some of the newer market entrants -- such as Salesforce.com or Netflix -- are cloud natives, and their business models are viable for years to come. Older tech companies, however, have to switch to a new way of doing business, and that's never easy.
In 2013, Adobe Systems, the company behind Photoshop and other industry-standard image manipulation software, decided to stop selling its products in boxes and switched to a subscription model. Now, a graphic designer or video producer can use the company's Creative Suite applications by paying for access to what Adobe calls Creative Cloud. The momentous decision caused an 8 percent drop in Adobe's revenue in 2013, and it was only in 2015 that the company finally had higher sales than in 2012. It was a risky move, but it gave Adobe a sustainable business model.
Other companies, such as enterprise solution suppliers Oracle and SAP, have chosen to move gradually. Cloud-related revenue only accounted for 8.2 percent of Oracle's total and for 14.3 percent of SAP's in the companies' latest quarterly reports. That's a slow-ticking time bomb.
Most major tech companies showed impressive growth in the segments that include the cloud business. Oracle and SAP, for example, posted the fastest growth as they fought to update their business models, though they are relative newcomers to the cloud trade, which still accounts for a small part of their business.
The problem with these numbers, though, is that they're impossible to compare in a meaningful way.
It's pretty clear that Netflix's revenue comes from video-streaming subscriptions and Salesforce.com's from fees for the use of its cloud-based customer-relationship management software. In their earnings statements, Oracle and SAP also show pretty clearly where their cloud-based business ends and old-style sales begin.
Other companies, however, aren't as transparent. Amazon breaks out revenue for Amazon Web Services, the business offering cloud capacity to companies. The e-commerce giant, however, offers other cloud-based services: It competes with Netflix in video streaming, and it stores customers' e-book libraries in the cloud. These revenue streams are not broken out and they are not part of Amazon Web Services.
IBM, by contrast, lumps so many different businesses into its "Technology Services & Cloud Platforms" segment -- it even includes some hardware sales -- that its $7.4 billion in revenue in the latest reported quarter allows it to claim leadership in the cloud, though industry experts say that isn't accurate.
Apple's "Services" segment is mostly cloud business -- it includes audio and video streaming -- but it's also music downloads, a legacy business that is not long for this world and that is not broken out.
Google's financial reporting is so opaque it's impossible to tell how much money the company makes from cloud services. Yet it is known to be a strong competitor to Amazon and Microsoft in providing cloud capacity to other companies, and it's also in the content streaming and cloud-based office application businesses.
There have been calls for more transparent cloud-business reporting. In March, for example, Om Malik, a veteran tech writer and now a venture capitalist, wrote an open letter to the cloud business leaders asking them to adopt some common metrics. Malik would like to see some tech parameters such as total storage and computing capacity, as well as more clarity on the business side: cloud-related gross margins and per-customer revenue.
Malik, however, is most interested in the "public cloud" -- renting out capacity to others. I would argue that although the Amazon-Microsoft-Google race in this area is exciting, the need to unify reporting on the cloud goes far beyond describing it. There are lots of ways companies could choose to develop in the cloud. They might never want to offer capacity to others. Building it to run only one's own applications, or even renting it from the public providers, are both legitimate models. The important thing is to shift quickly to any of these modes of operation from the traditional model of selling stuff in boxes or as downloads: Staying in that business much longer makes a company vulnerable to competitors, including cloud-native start-ups.
It's probably unrealistic to demand that companies report each of their cloud activities in detail: The competition is fierce and the players don't want to provide too many specifics. It would be enough, from an investing point of view, to know how a company's revenue and profit from the cloud are evolving.
In that sense, Microsoft appears to provide the most relevant snapshot. Its "Intelligent Cloud" segment contains revenue from its Azure cloud platform, a direct competitor to Amazon Web Services, and those from the cloud incarnation of its Office suite and its Dynamics CRM, a Salesforce.com rival. It would be great if these three streams were reported separately, too, but it's more important to know that revenue from the cloud the last reported quarter barely grew from a year earlier and that the cloud's share of total revenue remained about the same, at 27 percent -- while Amazon, Oracle, SAP and Apple all increased that share by several percentage points.
Segment reporting is relevant because it tells investors how a company's business model is developing. The cloud's importance to tech companies is growing, and it's time for them to start talking about that business to investors more clearly.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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