Google’s cloud business is losing money, but it’s a winning strategy
- Google’s fastest-growing business is Google Cloud, which generated $13.06 billion in 2020.
- However, this segment of Google is also increasing its losses. But it’s all part of a strategy.
- The loss is tied to building infrastructure and hiring a team — both of which will set them ahead.
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When Google announced its earnings on Tuesday, like many of its peers, the company reported a record quarter. In fact, despite pressure from the pandemic on its advertising business earlier in 2020, Google rebounded to post its largest revenue numbers.
It was the advertising business that accounted for all of Google’s profit. But there were two other numbers that stuck out.
For the first time, Google gave us a look at both the top and bottom line numbers for its cloud-computing business. That segment generated $13.06 billion in 2020, which represents growth of 46% over the previous year. That makes it Google’s fastest-growing business.
At the same time, Google’s Cloud segment recorded a loss of $5.61 billion, up from $4.6 billion in 2019.
Obviously, increasing losses is usually a bad thing. In Google’s case, however, it’s all a part of what looks like it might be a winning strategy.
Specifically, there are two things that are true.
First, the loss is mostly associated with the amount of money Google continues to invest in building out the massive infrastructure and hiring a sales organization. “An important element of our operating loss is that we have been building out our organization ahead of revenue, and that includes our product portfolio, the network of data centers,” said Ruth Porat, Google’s CFO.
That definitely sounds like corporate financial-speak, but it actually makes sense. A successful cloud business requires expensive data centers and networking capabilities. It also requires people who can go to businesses and make the case for why they should use Google instead of its larger rivals.
Google is behind the competition in both cases, and is spending big to catch up. In 2019, it brought in Thomas Kurian, who was previously Oracle’s president, to step up those efforts. Kurian replaced Diane Greene, who’d been the cofounder of VMware and brought enterprise experience to the company, but who struggled to gain traction against Amazon and Microsoft.
Kurian has focused on building an organization capable of winning the business of enterprise customers, something that’s quite different from the whimsical culture Google has long been known for. To that end, the investment has started to pay off, even if not in the bottom line.
Google has succeeded in landing clients like Snap and Twitter. Just this month, it also announced a partnership with Ford to become the automakers “preferred cloud provider,” as well as to integrate Android into its vehicles.
Second, Google can afford it. Unlike Amazon’s AWS, which makes up almost two-thirds of the company’s total net income and effectively subsidizes the lower-margin retail business, Google doesn’t need its Cloud business to make a profit, yet. While it took less than 10 years before Amazon reported that AWS was profitable, and Google Cloud is already about nine in with no profits in sight, Google has much more cushion. Google’s advertising business generated $54 billion in profit in 2020, more than double Amazon’s entire bottom line.
Google also has $136 billion in cash on its books, meaning it has the financial resources to invest heavily in a business that isn’t generating enough revenue to support itself, with an eye toward continued growth in a market that’s expected to more than double by 2025.
In that sense, it’s absolutely worth it.
Google also has another advantage: millions of existing cloud services customers.
Currently, Google says it has more than 2 billion G Suite users. While many of those are free Gmail users, last year Google said it had more than 6 million paying G Suite customers, all of which count toward Google Cloud’s operating performance.
G Suite, which Google now calls Workspace, is the company’s answer to Microsoft Office365. It includes Gmail, Docs, Sheets, Slides, Meet, Drive, and a handful of other productivity tools geared toward businesses. While Microsoft is still the dominant player in business productivity software, especially at the enterprise level, Google is quickly becoming a rival.
In some ways, it’s important to understand the difference in strategy for acquiring customers across the three different platforms.
AWS famously approaches cloud computing in much the similar way it runs its retail business. Anyone can “walk up” and purchase time on its servers and simply “pay as you go.” The goal is to attract as many customers as possible and make it up on scale.
In “The Everything Store,” author Brad Stone recounts a meeting where Jeff Bezos’ team proposed charging 15 cents an hour for EC2 instances. Instead, he unilaterally cut it to 10 cents. “You realize you could lose money on that for a long time,” said Willem van Biljon, a member of the team that built Amazon’s EC2 platform.
“Great,” Bezos said.
The point was that even if Amazon lost money on it in the short term, the major cost was in building out the infrastructure, not in serving each additional customer. Bezos wanted to offer a low price that would attract as many customers as possible. While the fixed costs were huge, there were few incremental costs for adding individual customers, so the more you could add, the less expensive it became to serve each one. Eventually, you would reach a scale that’s profitable.
Microsoft has relied on its existing relationships with enterprise customers to expand the products and services it offers through its cloud platform, Azure. That’s similar to how its Teams software managed to pass 115 million daily users — they were already using Office. Since Teams is included, it just makes sense to use it instead of signing up for a service like
, for example.
In the same way, the company leveraged its deep relationships to build out its cloud offering. Even when Azure was new, it was still Microsoft, and enterprise customers trust Microsoft because they’ve been using Windows and Office for decades.
Google is far newer to the enterprise space, which explains why it’s investing so heavily not only in building out the technical side of the platform, but the people side as well. Still, it has billions of users already — meaning it’s a known quantity. As it continues to add capabilities to its platform, it becomes a more attractive option.
One of the things Google does well is build products with sophisticated technology in a way that anyone can use. Gmail made email basically free, and gave people what’s essentially unlimited storage. Google Docs made it easy to collaborate on documents over the internet, eliminating the need for sending files and documents.
And, of course, search made it possible to find just about any information available online in a fraction of a second, even if you had no idea where to look. In that regard, there may be no other company that’s more closely associated with cloud computing than Google.
Google has an opportunity that sort of combines the best of its competitor’s strategies.
Google Cloud is accessible to everyone, in the way that AWS is, but the company also has relationships with millions of users, many of whom are, by nature of being smaller businesses, less likely to have moved their computing needs to the cloud. It also continues to aggressively pursue enterprise customers, a push that’s starting to pay off.
Google Cloud is not only the company’s fastest-growing business, it also represents its greatest opportunity. That’s especially true as the company looks to diversify its revenue as it faces pressure on its advertising business in the form of a landmark antitrust case.
The bottom line is that when you look at the numbers, it’s not a surprise at all that Google is still losing money on its cloud business. It also shouldn’t be a surprise that it’s all part of the plan.