Thanks to AI, Azure is Closing the Gap with AWS

According to a CNBC report, Microsoft’s embrace of AI is closing the revenue gap between Azure and Amazon AWS as the two firms battle for supremacy in cloud computing. If these numbers are true—and to be clear, they’re just estimates—then Azure revenues could surpass those of AWS within just a few years.

Here’s what we do know.

In its most recent financial quarter, Amazon reported that AWS delivered revenues of $24.2 billion, up 11.7 percent from the $21.4 billion it provided in the year-ago quarter. Microsoft doesn’t break out Azure revenues, but in the same quarter, it reported 30 percent growth in Azure revenues. And its Intelligent Cloud business unit, which houses Azure, delivered $25.9 billion in revenues, up 20 percent year-over-year (YOY). So Azure was bigger than AWS by revenue in that quarter, at least, and its business unit grew faster.

But Microsoft has historically compared its (non-formal) Microsoft Cloud business as a basis of comparison with AWS, and that business, which consists of various businesses within Microsoft’s three business units, was responsible for $33.7 billion in revenues in the quarter, with growth of 24 percent. And so no matter how you measure things, Azure is outpacing AWS at the moment.

Additionally, the allure of Microsoft’s AI initiatives has driven the software giant to an astonishing $3 trillion market capitalization, making it the most valuable company in the world, exceeding even Apple. These things are fluid, but at the time of this writing, Microsoft’s market cap is $3.09 trillion, compared to $2.89 trillion for Apple and $1.79 trillion for Amazon. Market cap isn’t an indication of revenue or usage success in AI, Azure, or AWS. But Wall Street is excited enough about the upside of Microsoft’s investments in AI, and the resulting Azure usage explosion, to propel its value higher than that of its rivals.

As for CNBC, it cites two analysts—Jamin Ball of Altimeter Capital and Yun Kim of Loop Capital—who believe that AI usage has helped Microsoft Azure close the gap with AWS. Where Azure was estimated to be about half as big as AWS by revenues five years ago, making it a distant second in cloud computing overall, Microsoft’s cloud business is now estimated to be about three-quarters the size of AWS. And because Azure is growing much faster than AWS, it’s closing that gap even further.

These analysts feel that Microsoft’s unique partnership with OpenAI, the overall leader in AI capabilities, and its aggressive push to market these capabilities, will put Azure over the top. Better still, AI and Azure are poised to become a “meaningful contributor of profit” to Microsoft. Margins in its cloud business jumped to 72 percent in the most recent quarter, up from 42 percent in 2016 (though I’m not clear on why CNBC chose that particular year for comparison).

Of course, anything could happen. Amazon—or Apple or Google, for that matter—could slow Microsoft’s AI momentum by releasing compelling AI-based products and services of their own via partnerships or acquisitions of their own. And AWS still has momentum of a broader kind, thanks to decades of success courting developers. But Microsoft’s sudden financial rocket ride is surprising and in many ways unprecedented. And it’s possible that the greater danger could be its own mistakes and missteps.

Either way, it’s going to be an interesting couple of years.