Cloud computing as a whole is slowing down, but the "AI Cloud Battle" between Microsoft and Alphabet-C is just getting started.

As two giants in the global technology industry, Microsoft and Alphabet-C have always been competing in various fields such as search and office software. Now, the AI wave is driving the battle to a new level, and the "AI Cloud Battle" between Microsoft and Alphabet-C has begun.

During the second quarter earnings call on Tuesday local time, Microsoft CEO Satya Nadella stated that although Microsoft is not the largest provider of cloud infrastructure, it ranks first in sales of cloud-based AI services, and OpenAI currently has 11,000 customers.

Microsoft believes that the growth of the AI business may enhance its overall position in the field of cloud computing.

"We continue to see more cloud migrations because, in terms of long-term cloud opportunities, we are still in the early stages."

Alphabet-C's parent company, Alphabet-C-C, also emphasized the expansion of its AI cloud business during the second quarter earnings call.

Alphabet-C-C CEO Sundar Pichai stated that over 70% of generative AI startups rely on Alphabet-C's cloud infrastructure and AI capabilities.

"Our AI-optimized infrastructure is the leading platform for training and serving generative AI models. Over 70% of generative AI unicorns are Alphabet-C cloud customers, including Cohere, Jasper, Typeface, and others."

Pichai also said that large language models (LLMs) like PaLM2 and the upcoming Gemini will help the company reimagine many products, especially Alphabet-C's most important product - search.

While the two giants are engaged in the "cloud battle," the cloud computing market is slowing down its growth.

Last year, the global economy was sluggish, the stock market experienced its worst performance in over a decade, and companies cut spending, resulting in a continuous slowdown in the cloud computing market over the past year.

Moreover, the situation of weak corporate spending in the future may become even more severe. Data shows that global spending on cloud infrastructure services is expected to grow by 23% in 2023, lower than last year's 29% and 35% in 2021.

Microsoft and Alphabet-C's cloud business growth slows down, AI revenue has not yet been reflected

By investing $13 billion in OpenAI and integrating generative AI into its Bing search engine, Microsoft ignited the battle for AI dominance. Subsequently, Microsoft extensively integrated AI tools into its vast software empire, especially Azure cloud services.

Given this rapid shift, investors hoped to see accelerated expansion of Microsoft's AI business, but the reality is different. Microsoft announced that in the second quarter of 2023, its cloud services, including Azure, grew by 26% compared to the same period last year. Since Microsoft reported a 51% growth in Azure cloud in its mid-year report for 2021, the growth rate has been steadily declining, and this quarter's growth rate is the slowest in two years.

On the bright side, Microsoft's annual revenue from its cloud services exceeded $110 billion, with Azure accounting for 50% of the total revenue for the first time.

Considering the complexity of enterprise cloud migration, there is a lag in reflecting cloud revenue in financial reports. In addition, Microsoft recently announced the availability and pricing of its latest AI products and services, so analysts expect that it may take another one or two quarters for AI to have a significant impact on Microsoft's cloud performance.

Alphabet-C, which was mocked for its slow response in using the immature Bard to counter ChatGPT, later corrected its mistake. At the I/O developer conference held in May, Alphabet announced its plan to integrate AI on a large scale into its products and services.

Like Microsoft, investors were hoping to see a boost in Alphabet-C's cloud performance, but it has not been realized yet.

The financial report shows that Alphabet-C's cloud grew by 28% compared to the same period last year, with a flat growth rate compared to the previous quarter, which is enough to maintain its reputation as the fastest-growing cloud provider among the "Big Three." However, Alphabet-C's cloud growth has been steadily decelerating since reaching its peak of 54% in the mid-year of 2021, and this quarter's growth rate is the slowest in two years. Alphabet-C's cloud achieved profitability for the first time in the first quarter, and this trend continued in the second quarter.

Analysts predict that it may take another one or two quarters for the market to start seeing the contribution of AI to Alphabet-C's cloud business.