Google Cloud fails to cash in on generative AI

The explosive growth in the demand for generative AI has been a big revenue driver for public clouds. However, while some cloud players are reaping the benefits of user demand, Google Cloud seems to be failing to cash in on one of the biggest technology opportunities in decades.

As Alphabet declared its third-quarter earnings on Tuesday, all eyes were on the company’s cloud division, Google Cloud, since — even while up to now costs have outweighed sales — it has been the biggest revenue growth driver for the company over the past several years.

While Google Cloud revenue managed to grow at 22% year-over-year to $8.4 billion, the growth was slowest for the business unit in the last 11 quarters. In the previous sequential quarter, Google Cloud reported a year-on-year revenue growth of 28%.

In sharp contrast, Microsoft, which also reported its quarterly earnings on Tuesday, reported 29% revenue growth in Azure and other cloud services.

In one piece of good news for Google, the cloud unit reported a profit of $266 million for the quarter, compared with a loss of $440 million in the year-ago period. The unit posted its first profit only two quarters back.

However, the deceleration of revenue growth for cloud services is a sign that Google has been unable to reap the benefits of growing demand for generative AU, according to analysts.

“There are two cloud spending trends in enterprises,” said Pareekh Jain, CEO of Pareekh Consulting. “First, enterprises are optimizing their cloud spending to get business value in this macro environment, which led to the slowdown in cloud growth rates of hyperscalers this year. Second, enterprises are investing in new workloads primarily driven by generative AI. Here, Azure is taking the lead and is able to reverse the declining growth rate trend this quarter. It appears that Google Cloud is still suffering from optimizing cloud spend trends and is not able to gain from genAI spend trends as Azure has.”

Cloud users face budget pressure

Alphabet CEO Sundar Pichai acknowledged during an analyst call on Tuesday that the company has been struggling with customers who are experiencing spending budget pressures. “We had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing. And so that was a factor,” Pichai said when asked about the challenges in the cloud business.

Google Cloud has been late in the generative AI game, said Jain. “Azure and AWS have taken the lead of perception in enterprises about their genAI maturity. Google works more with startups and the tech sector, and that sector is struggling more with macroeconomic issues. Google needs to capture more genAI spending to come back to industry growth,” Jain said.

While generative AI is still in its early stages, the spending on the technology is expected to reach $143 billion by 2027, growing at an astonishing compound annual rate of 73%, according to market research firm IDC.

“GenAI projects are still at the pilot stage and limited scaleup has happened,” Jain said. “Azure estimates a 3% increase in cloud business due to genAI. These are good ballpark figures for genAI impact on the cloud this year. The important thing is it is a new and growing spend in this macro environment.”