IT companies cloud revenue: Hyper-scaler slowdown could dent cloud revenue for IT companies

A third of the revenue of IT service providers could be impacted due to the dip in growth rates of the three largest hyper-scalers – Amazon Web Services (AWS), Microsoft Azure and Google Cloud.

Chinese cloud service providers have already said that growth had slowed due to market regulations, while AWS, Azure and Google Cloud reported a 7% lower incremental revenue in the first half of this year compared to the previous year.

Analysts said the scope for application modernisation – which has contributed to a bulk of incremental revenue for top IT firms including

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IT companies earn around half of their revenues from digital solutions, most of which is directly linked to cloud offerings from the hyper-scalers.

Modernization, or the movement of legacy services to the cloud, has been a huge factor in driving the growth of the services market and, as an indicator of the health of the IT market, a slowdown in hyperscale demand is not a good sign for the industry, said Peter Bendor-Samuel, chief executive of IT industry consultancy Everest Group.

“This slowdown is yet another indication that the modernization movement is running into headwinds, and these will absolutely affect the IT majors as a significant portion of their growth over the last two years has been driven by modernization and the move to cloud,” Bendor-Samuel said. “…we still expect a strong app development market that will partially offset this modernization decline.”

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According to data from Everest Group, TCS continues to lead in revenue share among the top four Indian service providers from a hyper-scaler perspective.

The slowdown in cloud modernization is more precautionary than permanent, said Hansa Iyengar, senior principal analyst, enterprise strategy at technology research firm Omdia.

“If anything, there might be budget constraints in some verticals but not all, and we expect growth to be a little muted for the full year because of that. We also have to be aware that the Covid-19 pandemic pushed a lot of cloud migrations practically overnight and that pace is slowing down as enterprises rationalize their investments in anticipation of the ‘new normal’ becoming business as usual over the next couple of years,” she added.

Infrastructure as a service (IaaS), or hyper-scaler growth, was strong in the first half of 2022 (with annual contract value up 30% so far) but has shown signs of slowing, according to a note from technology advisory firm ISG.

This was primarily due to the impact of increased regulations on big Chinese hyper-scalers, who have historically made up more than 10% of the market share in this sector while the big three US hyper-scalers – Azure, AWS and Google Cloud – make up more than 60% of the IaaS market share.

“The IaaS growth directly impacts IT business services. However, we don’t believe this is going to have an immediate impact for IT services growth. It might take some time to filter down if at all it does,” said Mrinal Rai, principal analyst, ISG.

These companies not only provide managed services for hyper-scalers, but also their application development and DevOps approaches leverage these cloud environments, he added. Therefore, the overall revenue from cloud and infrastructure services goes beyond just the hyperscale revenue stream.

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