Generative AI boosts cloud revenue for Microsoft, Google

Microsoft and Google, who saw cloud revenue slow in recent quarters, are reporting a resurgence of growth due to the proliferation of generative AI (genAI).

Both companies on Tuesday reported revenue numbers for the final quarter of 2023.

“Google Cloud has left behind years of quarterly losses and now accounts for 10% of Alphabet’s revenue, as it uses the AI momentum to reintroduce itself to enterprise IT leaders as a partner,” said Lee Sustar, principal analyst at Forrester.

“The notable gain in Microsoft Cloud revenues, which include both Azure and SaaS offerings like Microsoft 365 and Dynamics 365, show that the AI boom is giving a significant boost to cloud providers’ bottom line,” Sustar said.

Google reported cloud revenue of $9.19 billion for the quarter, up 28% from a year earlier. (Alphabet posted revenue of $86 billion for the same period.)  

“It was a record quarter, driven by the continued strength of Microsoft Cloud, which surpassed $33 billion in revenue, up 24% (22% in constant currency),” said Microsoft CEO Satya Nadella said during an earnings call, according to a Motley Fool transcript. “By infusing AI across every layer of our tech stack, we are winning new customers and helping drive new benefits and productivity gains,”

The company, Nadella said, now has 53,000 Azure AI customers — a third of whom subscribed to its services in the last 12 months. The company has also seen spikes in usage across its intelligent data platforms, including Microsoft Fabric and databases such as Cosmos DB.

Microsoft, which saw its revenue momentum slowing a year ago, has bolstered its  bottom line via vast array of genAI services, including multiple flavors of Copilot across Microsoft 365, Dynamics 365, GitHub, and the Azure OpenAI service.

Jason Wong, a Gartner vice president analyst, said Microsoft’s Azure business is getting a lift from its own customers and from partners such as OpenAI, which run on Azure.

“As Microsoft partners expand their AI offerings this should also add to the Azure growth,” Wong said.

The uptick in cloud revenue at both companies, according to Franco Chiam, IDC’s vice president of cloud for Asia Pacific region, can also be attributed to the role cloud plays as a key enabler of digital transformation.

“Cloud and infrastructure play a crucial role in enabling generative AI, as the technological foundation that supports the development, deployment and foundation of this advanced AI system,” Chiam said. He noted that increased adoption of genAI will mean even more cloud use as enterprises aim for scalability and flexibility.

Beyond that, broader efforts at IT modernization are ongoing and will likely trigger new software, next-gen datacenter and data-centric changes, though Chiam feels companies are still moving cautiously, looking to save money as they invest in other projects.

At Google, “the strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area,” Alphabet CFO Ruth Porat said during an earnings call, according to a Motley Fool transcript.

In the previous quarter, cloud revenue grew 22% year-on-year, down slightly from the 28% increase the company reported for the quarter that ended last June. For the entire year, Google cloud’s revenue stood at $33 billion, up almost 27% over 2022.

CEO Sundar Pichai pointed to cost optimization strategies at companies that have been navigating uncertain macroeconomic conditions. But efforts to embrace generative AI have brought in new customers.

In 2023, the company introduced several updates to its Vertex AI platform and new large language models along with Duet AI. “Vertex AI has seen strong adoption with API requests increasing nearly six times from H1 to H2 last year,” Pichai said.

Microsoft last year took center stage with the launch of Open AI’s ChatGPT. (Microsoft owns a majority share in OpenAI.) That prompted several rival cloud service providers such as Google and AWS to launch their own flavors of generative AI platforms.  

“Google showcased its Gemini capabilities late last year, highlighting its multimodal AI in comparison to ChatGPT,” said Chiam. “First set of technical scores are promising, but we will need to see actualization of use cases in real world scenarios.”

Analysts are now waiting to see what Amazon reports on Feb. 1 to see whether AWS has seen similar gains from AI.