Why Big Tech’s Cloud Shift Threatens Microsoft and Google’s Margins
Don’t count out Amazon. This was not the commerce cloud giant’s week, to be sure. When it comes to the great artificial intelligence cloud race, which now overwhelms all else in tech, Microsoft and Google appear to be ahead. Both companies posted accelerating growth in their cloud units for the June quarter, unlike Amazon. But one element is widely missing from the discussion: how a long-term shift in big tech’s business mix toward cloud services could squeeze profit margins for both Microsoft and Google while improving Amazon’s overall margin.
Why? Because for both Microsoft and Google, their cloud businesses are much less profitable than their giant software and advertising businesses, respectively. Microsoft’s productivity and business processes unit—which includes its business software operations—had an operating profit margin of 57.4% in the June quarter. Its “intelligent cloud” unit, which comprises mostly Azure, had a margin of 40.6%. Its overall margin was 45%. A similar scenario holds for Google: Its cloud margin was 20.7% in the June quarter, while its margin in Google services—mostly advertising—was 40% and its overall margin was 32%.
Microsoft and Google already enjoy faster growth in cloud than in their software and ad businesses. In the most recent quarter, Microsoft’s software business expanded 16%, while its cloud business grew 26%. (Azure grew much faster, at 39%—but the cloud business also includes old-fashioned on-premise data center products, which shrank.) Ditto for Google, whose cloud business grew 32% in the quarter, while its services segment grew 12%.
This trend is likely to be accentuated by the growing demand for AI-cloud services. At the same time, there’s a risk that new AI products will cannibalize Microsoft’s lucrative enterprise software and Google’s search advertising businesses. Of course, both companies are working hard to head off those threats. Microsoft has introduced its own AI software services, including Copilot and AI agents, while Google has enhanced its search with AI features. But they face plenty of competition, as this story and this story make clear.
Amazon is in a very different position: its bottom line will benefit from a shift to the cloud. Its Amazon Web Services cloud unit’s margin in the June quarter was 33%, far higher than its e-commerce margin of 6.6%, reflecting the razor-thin profits shopping services typically operate on. Indeed, Amazon’s margin has improved as AWS has grown: Between 2017 and 2024, AWS rose as a percentage of Amazon’s total revenue from 9.8% to 17%. In the same period, Amazon’s overall operating margin jumped from 2.3% to 10.7%. (The latter increase likely also reflects the contribution of Amazon's expanding ad operation, as advertising is typically a very high-margin business.)
The focus this week was on AWS’ relatively tepid growth rate of 17% in the second quarter, the same rate as for the previous quarter. That’s still faster than for every other part of Amazon except its advertising business, which is half the size of AWS. Moreover, there’s reason to think AWS’ growth rate will pick up. New Street Research analyst Dan Salmon made that point in a report on Thursday, noting AWS’ 25% expansion in its backlog of business—customer commitments, which offers a picture of future revenue—in the quarter.
For all three companies, their cloud profit margins aren’t likely to improve, given how much the humongous levels of capital expenditures cloud requires will raise depreciation expenses. The real issue is that the overall margins for Google and Microsoft could drop closer to their cloud margins over time. The market is well aware of that risk for Google, whose stock has underperformed that of ad rivals like Meta Platforms for a while now. But investors seem to be ignoring the risk for Microsoft, judging by that stock’s premium valuation. At the same time, they may be ignoring Amazon’s potential for growth.