Dive Brief:
- Microsoft and Google plan to invest heavily in cloud infrastructure and data center capacity this year to meet growing customer demand for AI-related compute services. Both companies reported quarterly earnings Tuesday for the three-month period ending Dec. 31.
- Alphabet reported Q4 capital expenditures of $11 billion, up from $7.6 billion in the same period last year, an increase driven overwhelmingly by investment in servers and data center infrastructure, President and Chief Investment Officer Ruth Porat said, during the company’s Q4 2023 earnings call Tuesday. Microsoft spent $9.7 billion on property and equipment during the quarter, compared to $6.3 billion in the final three months of 2022.
- Microsoft cloud revenue grew 22% year over year, to $33.7 billion, while Alphabet saw Google Cloud revenue reach $9.2 billion, increasing 26% year over year. Microsoft’s Azure public cloud segment growth outpaced both, increasing 28% year over year. Six points of that growth can be attributed to AI services, CFO Amy Hood said during the company’s Q2 2024 earnings call Tuesday.
Dive Insight:
The trajectory of cloud and AI are tightly intertwined, with each technology driving growth in the other.
“Being in the cloud has been very helpful to build AI,” Microsoft Chairman and CEO Satya Nadella said, “but now AI is redefining what the cloud looks like, both at the infrastructure level and the app model.”
As organizations emerged from a prolonged period of cost optimization, generative AI enthusiasm helped propel a renewed modernization and innovation push that is remaking cloud. Providers have moved quickly to expand capacity and upgrade the infrastructure supporting multimodel marketplaces, chatbot applications and coding assistant tools.
“You started to see the acceleration in our capital expense starting almost a year ago, and you've seen us scale through that process,” Hood said of Microsoft’s strategy. “That is going toward, as we talked about, servers and also new data center footprints to be able to meet ... changing demand.”
For both Microsoft and Google Cloud, the second and third largest cloud providers behind AWS by market share, accelerating cloud revenue provides the ROI needed to justify billions in capital expenditures.
“The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers,” Porat said of Google Cloud’s infrastructure investments, which the company expects will increase in the coming year.
Microsoft, similarly, is factoring the technology broadly across its enterprise strategy.
“The tech stack we’re building, no matter what team it’s on, is inclusive of AI enablement,” Hood said. “It’s been a real pivot of our entire investment infrastructure ... and I think that’s important, because it means you’re shifting to an AI-first position, not just in the language we use, but in what people are working on, day to day.”
Hood said the company anticipates operating expenses to increase to $15.8 billion or $15.9 billion this quarter, from $15.4 billion last quarter, and expects "capital expenditures to increase materially on a sequential basis driven by investments in our cloud and AI infrastructure.”
