The capex of hyperscale operators totaled $22 billion in Q4 of 2017 quarter and almost $75 billion for the full year, representing 19% growth over 2016, according to Synergy Research Group.
Much of that hyperscale capex goes towards building and expanding huge data centers, which have now grown in number to 400. The top five spenders are Google, Microsoft, Amazon, Apple and Facebook, which in aggregate account for over 70% of Q4 hyperscale capex.
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.
On average during 2017, the top five of Google, Amazon, Microsoft, Apple and Facebook in aggregate spent well over $13 billion per quarter. It is also notable that 2017 capex growth was particularly strong at Amazon and Facebook. Outside of the top five, other major hyperscale spenders include Alibaba, IBM, Oracle, SAP and Tencent. Among these five, Alibaba capex more than doubled in 2017, while growth at both Oracle and SAP was also above average.
Other notables outside of the top ten include Baidu, eBay, JD.com, NTT, PayPal, Salesforce, Yahoo Japan and Yahoo/Oath.
“Over the last four years we have seen many companies try and fail to compete with the leading cloud providers. The capex analysis emphasizes the biggest reason why those cloud providers are so difficult to challenge,” said John Dinsdale, a chief analyst and research director at Synergy Research Group. “Can you afford to pump at least a billion dollars a quarter into your data center 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.”
The “Super 7”
A new report from Technology Business Research (TBR) offers different numbers but shows the same growth trend. TBR’s 1Q18 Webscale ICT Market Landscape says that capex spend from the so-called “Super 7” webscale players – Alphabet, Amazon, Facebook, Microsoft, Alibaba, Baidu and Tencent – will reach over $63 billion by 2022 (a 19.5% CAGR) as they continue to invest in network capacity to support traffic growth and data center builds and expansions to support their cloud businesses.
Microsoft and Alphabet are leveraging strong ICT capex spend to help Azure and Google Cloud close the market share gap with AWS. Additionally, the Super 7 are developing machine learning and artificial intelligence features that will become table stakes for cloud providers, though development is not capex-intensive. Cloud providers are investing in AI and ML to differentiate their core solutions, but the market for these technologies is nascent.
“AWS is the leading IaaS provider by revenue, but Microsoft Azure and Google Cloud are growing revenue faster than the incumbent due to years of data center investment across geographies. Microsoft is closing the gap quickly and will challenge AWS in the short term, while Google, which was later to the market, is more of a long-term threat,” said Michael Soper, a senior analyst at TBR. “Beyond data centers, webscale companies are making undersea cable investments to support cloud and video traffic growth. Alphabet, Amazon, Facebook and Microsoft will continue to build these networks to carry traffic across oceans and typically partner with each other as they do so.”
However, that doesn’t automatically spell good news for incumbent vendors, TBR says. After significant ramp-up in network infrastructure and services spending among the Super 7 in 2017, incumbent vendors will likely experience volatility in the webscale market in 2018.
Vendors are coping with a lower level of loyalty from webscale companies, when compared to their traditional customers, as they leverage contract manufacturers and/or their own design teams for new infrastructure. The success of ODMs such as Quanta, Arista, SuperMicro and Celestica, along with new efforts to capitalize on the webscale market from IT services providers, will further fragment the supplier landscape.
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