Cloud firms need $1bn datacentre investment a quarter to compete with AWS and co

Cloud service providers need to invest at least $1bn a quarter in their datacentre estates if they want to compete seriously with the likes of Amazon, Google and Microsoft.

According to John Dinsdale, chief analyst and research director at US-based market watcher Synergy Research Group, IT service providers and telcos that cannot pair that level of investment with an “aggressive, long-term management focus” will struggle to compete with the hyperscale cloud giants.

“If companies can’t find at least a billion dollars per quarter for datacentre investments and back that up with an aggressive long-term management focus, then the best they can achieve is a tier-two status or a niche market position,” he said.

Dinsdale’s comments coincide with the publication of Synergy’s research into how much capital expenditure (capex) the hyperscale cloud firms pumped into their operations in 2017.

Its findings are based on an analysis of the capex and datacentre footprint of the world’s 24 biggest cloud and internet service firms. This reveals that the hyperscale community collectively spent $75bn in capex during 2017, which is 19% up on the previous year. Of that $75bn, $22bn was paid out in the fourth quarter alone.

Most of the capex is channeled towards helping the hyperscale cloud firms expand and upgrade their datacentres, with Amazon, Apple, Facebook, Google and Microsoft name-checked by Synergy as being top five biggest spenders, accounting, in aggregate, for more than 70% of capex spend in the fourth quarter.

“On average during 2017, the top five of Google, Amazon, Microsoft, Apple and Facebook in aggregate spent well over $13bn per quarter,” states Synergy’s research. “It is also notable that 2017 capex growth was particularly strong at Amazon and Facebook.

“Across all hyperscale operators, 2017 capex equated to just over 7% of total revenues, although the ratio varies greatly by company, from a low of 2% to a high of 17% depending on the nature of the business.”

Chinese infrastructure-as-a-service (IaaS) provider Alibaba is flagged in the report for doubling its capex throughout 2017, as its efforts to expand its operations in Europe and the Asia-Pacific region, specifically, gather pace.

Alibaba, along with IBM, Oracle, SAP and Tencent, round out Synergy’s list of the top 10 hyperscale cloud companies.

Dinsdale said the figures provide some telling insights into why so many organisations have tried and failed over the years to significantly challenge the market dominance of the hyperscale cloud giants.

“Over the last four years, we have seen many companies try and fail to compete with the leading cloud providers,” he said. “The capex analysis emphasises the biggest reason why those cloud providers are so difficult to challenge.

“Can you afford to pump at least a billion dollars a quarter into your datacentre capex budget? If you can’t, then your ability to meaningfully compete with the market leaders is severely limited. Of course factors other than capex are at play, but the basic financial table stakes are enormous.”