September 25, 2018

Infrastructure-as-a-Service Giants Own the Cloud with Lavish CapEx

capex-msft-goog-amzn-cloud-infrastructure-as-a-service

Another day — another glitzy article about infrastructure-as-a-service from the Wall Street Journal. You may recall my skepticism about the sustainability of this business model last summer. Still, as 2016 numbers show, the capital expenditures of the top three cloud computing companies show no indication that they’re worried about going all in:

Combined, Amazon, Microsoft and Alphabet doled out $31.54 billion in 2016 in capital expenditures and capital leases, according to company filings. That is up 22% from 2015.

I continue to wonder if the market can support the hefty depreciation expenses that are on the horizon. That’s not to mention the potential for impairment. Technology does tend to become obsolete quickly, after all.

Is it just a bottomless pit that these companies have to keep throwing money into? As companies who hop on the cloud happily shift from capital expenditures to operating expenditures to protect themselves from obsolescence and unpredictable future hardware needs, it’s not as if these inherent risks disappear. It’s just the cloud computing companies’ problem now, so it’s still a gamble. A gamble to the tune of $31.54 billion in 2016.

Investor optimism

Investors seem to be taking a lot of big gambles lately in the realm of tech. Tesla leapfrogged GM for a time and continues to have a crazy-high valuation. The WSJ says that “investors are willing to tolerate the hefty tab, as they often do for energy exploration, or by telecommunications companies unfolding vast networks of fiber” hoping for a big payday.

Again, I am still skeptical whether the infrastructure-as-a-service business model has long-term staying power as the infrastructure starts to age. Fortunately for these companies, they have a lot of stokes in the fire to manage the risk.

A deep moat

One thing is for sure in our cloud-dependent environment, these companies have a lot of power. Our reliance on the cloud enables the spending, and total industry domination, to be “concentrated in the hands of a few companies.”

And challenging the dominance of the big players is out of the question. The Wall Street Journal doesn’t give startups much hope:

The massive investment is creating a barrier for would-be rivals that would need to spend tens of billions of dollars to match the computing capacity Amazon, Microsoft and Google already have, Deutsche Bank Securities Inc. analyst Karl Keirstead said.

“They’ve created a powerful moat,” he said.

No kidding, Karl. I don’t know of many companies that can even dream of competing with these big players. Oracle may be the only one trying to catch up with a $1.7 billion capex spending this year. And Oracle isn’t small, of course. It’s a Fortune 100 company with an $180+ billion market cap. But even Oracle, a company not know for its modesty, has been called brash for challenging Amazon.

Public accounting déjà vu

This situation reminds me of another industry we all know and love: public accounting. There is a huge moat around the Big 4 and large regional firms. Caleb reported earlier this week that  “the seven largest firms — Big 4 + BDO, Grant Thornton, RSM — audit 96.5% of the large accelerated filers.”

It would be very unlikely to claw your way into that stratosphere unless you got bought out by one of the bigger firms. Which could happen — in both IaaS and public accounting — so maybe it’s not all doom and gloom?

Eh, who am I kidding? That’s still like winning the lottery, but more a lot more work.

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In rumored merger talk news, apparently Microsoft and Yahoo have started playing footsie again which annoys the living crap out of us. According to Bits Blog:

A handful of top Microsoft executives are in Silicon Valley meeting with their Yahoo counterparts to try to iron out remaining wrinkles in a proposed partnership, according to people briefed on the talks who agreed to speak on condition of anonymity because the negotiations are confidential.

Get it over with you two! T. Boone Pickens isn’t cock-blocking anymore so you don’t have any excuses. We’d all really prefer if you just got down to biznass instead of flirting in front of everyone and then saying that you’re not interested in each other. Nobody is buying it.
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