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April 26, 2024

Strong Microsoft cloud revenues fueled by rising AI demand

Chief executive Satya Nadella also credited the growth in Microsoft cloud revenues to an uptick in cloud migrations and its partnership with OpenAI.

By Greg Noone

Third-quarter Microsoft cloud revenues amounted to $35.1bn, equivalent to year-on-year growth of 23%, the software giant has reported. The results contributed heavily to the firm’s bottom line for that quarter, with overall revenues rising by 17% to $61.9bn in the quarter ending in March. 

The results outpaced analyst expectations and boosted the software giant’s stock market valuation by $128bn. This was despite increased AI-driven capital expenditures almost $1bn above market estimates, a choice that saw fellow big tech giant Meta’s share price pummeled in trading earlier this week.  

Microsoft’s chief executive Satya Nadella credited the strong growth in its cloud business to rising demand among businesses for AI services, with the number of Azure deals valued at over $100m increasing by 80% compared to this time last year. “The number of Azure AI customers continues to grow and average spend continues to increase,” Nadella told investors during the firm’s latest earnings call. “Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus, multiyear commitments announced this month from Cloud Software Group and the Coca-Cola Company.”

A photo of the Microsoft Azure logo on a smartphone screen, used to illustrate a story about Microsoft cloud revenues.
Microsoft posted impressive third-quarter cloud revenues, but critics say that it is yet another sign of the firm’s dominance of the cloud market alongside hyperscalers Google Cloud and AWS. (Photo by Shutterstock)

AI solid contributor to Microsoft cloud growth

Nadella went on to ascribe the solidity of demand for Microsoft’s cloud services to its ability to deliver a diverse set of self-developed and third-party AI accelerators, as well as its partnership with OpenAI. “More than 65% of the Fortune 500” now use one of the latter’s services, said the Microsoft chief executive, with the firm’s model-as-a-service offering allowing businesses of all stripes to implement AI services without recourse to investing underlying infrastructure. 

“Hundreds of paid customers from Accenture and EY to Schneider Electric are using it to take advantage of API access to third-party models, including as of this quarter, the latest from Cohere, Meta, and Mistral,” said Nadella. An uptick in cloud migrations also fuelled Azure’s revenue growth, added the chief executive, from customers including the World Bank and Dick’s Sporting Goods. 

Lingering competition concerns

While the markets lauded the news about the rise in Microsoft cloud revenues, the firm’s critics said that the billions of dollars generated by Azure were yet another sign of a lack of meaningful competition in the international cloud market. Mark Boost, the chief executive of independent cloud provider Civo, cited alleged anti-competitive practices in the UK cloud market highlighted by a recent Ofcom investigation, including free credit schemes and high egress fees, as reasons for regulators to pay greater attention to the conduct of hyperscalers like Azure. “A monopoly is forming, which is damaging the ecosystem and ultimately breaking cloud,” said Boost.

Following the publication of Ofcom’s report Azure was placed under investigation alongside AWS and Google Cloud by the Competition and Markets Authority. Similar investigations have also been undertaken in the US, Japan and France. Boost hopes that increased regulatory scrutiny will lead to greater competition between the hyperscalers and their smaller rivals. 

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“In 2024, we need a new approach,” said Boost. “Otherwise, Big Tech’s coffers will continue to grow at the cost of customers and the whole cloud ecosystem.”

 Read more: Have the hyperscalers broken the UK cloud market?

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