Trade Talk: Cloud Computing
Written by: Jack Lau
According to the Wall Street Journal and Bloomberg a few days ago, one of the most significant issues that the United States and China are discussing would be that of cloud computing. Why is it important, from an economic point of view? https://www.bloomberg.com/news/articles/2019-04-10/u-s-china-said-to-further-talks-on-cloud-access-in-trade-deal
Let’s do an example to illustrate.
Take Pinterest, a unicorn which has just filed for IPO. https://www.pinterest.com/. Pinterest is wildly popular as a quick way to get information pictorially. You can get a simple photo or drawing explaining how to bake a cake to a doing a yoga post, for instance.
The targeted valuation is about US$11.3 Billion, making it yet another successful unicorn. https://www.ft.com/content/7c4fb5cc-59ea-11e9-9dde-7aedca0a081a But, if you look at the cost structure of the Pinterest business, you would realize that Pinterest has signed a contract with Amazon’s cloud service called AWS. The contract was signed in 2017. Pinterest would be using the AWS service and would be paying AWS about US$750 million till 2023. And since 2017, Pinterest has already spent more than US$300 Million on AWS. https://www.businessinsider.com/pinterest-ipo-amazon-web-services-2019-3
As a comparison to revenue, in 2017 Pinterest did US$473 Million of business. And, in 2018, Pinterest grew by more than 50% and achieved a revenue of US$756 Million.
in whatever way you look at the numbers, the amount paid to AWS cloud is a very significant portion of the revenue — very double-digit percentage.
Not a too crazy question to ask. If a unicorn’s revenue tracks with a cloud service such as that on a scale of tens of percentage point all the time, while the unicorn is worth billions of dollars in valuation, then shouldn’t the cloud service be also be worth billions of dollars — with just one client?
And, if you look at the number of clients who are dependent on cloud services such as AWS, that is a really long list.
As a matter of fact, Amazon spent nearly US$28 Billion on CAPEX on cloud last year. The huge investment is also consistent with the other tech giants. In 2018, Microsoft spent US $15.8 Billion, while Google spent US$25.1 Billion.
Cloud business is not just big, many businesses are highly dependent on the service providers. Given that many companies build their infrastructures and services based on the particular offerings provided by the cloud service providers, once you have selected a provider, it is actually very difficult, time-consuming and even risky to switch.
There is clearly a first mover advantage in the cloud business. Let’s see what the outcome would be on this particular subject in the trade talk.