During the last quarter of 2017, $23 billion was spent on “hyperscale” data centers, or computer clouds. About 70% of that capital expenditure was made by five companies I have termed the “cloud czars” — Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft Corp. (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB).
Two other U.S. companies, International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL), appear in the top 10. Almost half the cloud data centers in the world, 44%, are located within the U.S.
The cloud czars had a combined market cap of $3.642 trillion as the market opened Mar. 1. That’s more than 10% of the entire stock market.
Despite its size, this capex spending represented an average of just 7% of revenues, according to the Synergy Research Group, which compiles the figures quarterly. For newer cloud players, it represents up to 17% of revenues.
You might say the cloud czars make money the old-fashioned way: They earn it.
Story of the Decade
The hyper-spending of the hyper-leaders was a business decision. None of the cloud czars are more than 43 years old. Google was founded in 1997, and Facebook in 2004.
AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) could have built the clouds, but they instead chose to hand money to stockholders as dividends, despite billions of dollars in government subsidies for broadband. Now they’ve been displaced on land, and the cloud czars are displacing them at sea, creating an undersea cable boom.
The decisions to build were taken at different times. Google and Amazon started investing late in the last decade, to serve their own needs. Amazon’s big innovation was to re-sell this capacity through Amazon Web Services, and it now dominates the market for cloud infrastructure, while Google and Microsoft are gaining in revenue from cloud platforms and applications.
Facebook made its commitment early in this decade, when it represented a much larger proportion of its revenue than it does now. Microsoft committed fully in 2014 with the appointment of Satya Nadella as CEO. Apple has only been doing this a few years under CEO Tim Cook, as its services revenue has ramped up.
The losers have been those who were late to the party, like Oracle, those that chose to focus on dividends like IBM and AT&T, and those that never got in the game, like Hewlett Packard Enterprise Co (NYSE:HPE) and Dell. The losers have been displaced, or are being displaced, by both the cloud czars and those that took advantage of their spending, such as Salesforce.com, Inc. (NYSE:CRM) and Workday Inc (NASDAQ:WDAY) in the software application space and Netflix, Inc. (NASDAQ:NFLX) in the consumer space.
Break Up the Clouds?
The earned success of the cloud czars on getting a return from their huge investments is now being met by demands to break the companies up. Critics like Jonathan Taplin insist the consumer-facing czars, Google and Facebook, have “a monopoly on culture” and credits past antitrust action against Microsoft with maintaining competition in software.
Other critics are going after all five, calling them the Web Trust. The critics come from academia, like Scott Galloway, from business like Roger McNamee, and from both ends of the political spectrum.
The Bottom Line
What investors want is for companies to spend their investments on things that will make money. The cloud czars have been the decade’s biggest winners because they invested tens of billions of dollars, building out their cloud systems ahead of demand.
But there is nothing certain about their lead. In the past, AT&T, IBM and Microsoft have all been declared monopolies by the government. The companies that dominate the next decade will also be those that put the most capital to work.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AMZN.
