Cloud spending set to miss full-year forecast despite solid Q3 growth

This is according to research firm Canalys, which said the impact of spending cuts in the enterprise IT market is starting to ease, while growing interest in AI is beginning to offset the slowdown in other areas.

Growth was consistent with Q2, when spending also grew 16% year-on-year, topping out at $72.4 billion. This suggests the cloud market is entering a stable phase, said Canalys.

The big three hyperscalers – Amazon Web Services (AWS), Microsoft Azure and Google Cloud – accounted for 65% of total spending, and grew by 20%, slightly outpacing the rest of the market.

AWS is still the biggest single provider, with a market share of 31 percent, followed by Microsoft with 25%. Google claims 10% putting it some distance behind the top two. Its growth rate also slowed considerably to 10% from 31% in Q2. Conversely, Microsoft accelerated to 25% from 19%.

All three, noted Canalys have been busy ramping up their generative AI activities. Microsoft in particular caused a stir with the official launch of its AI assistant, Copilot, while all three of them have also launched AI partner programmes.

Given gen AI’s voracious appetite for computing resources, it stands to reason that hyperscale cloud providers are in a strong position to capitalise on demand.

“Generative AI unlocks a wealth of opportunities for channel partners to venture into new areas of business growth,” said Alex Smith, VP at Canalys. “The big cloud players and their partners can seize this exponential growth opportunity by identifying customers with an appetite for AI solutions, while simultaneously strengthening their AI capabilities and offering comprehensive portfolios of AI-related products and services to address these evolving needs.”

Despite the healthy growth, the overall cloud infrastructure services market – which for Canalys encompasses infrastructure-as-a-service (IaaS) and platform-as-a-service (IaaS) – is on course to fall short of Canalys’ full-year expectations.

Back in February, Canalys predicted that cloud spending in 2023 would grow 23% on last year, when it reached $247.1 billion. That makes for a projected total of around $304 billion.

However, since then, macroeconomic conditions have taken their toll on spending, tempering expectations for this year.

The running total so far for 2023 is $212.3 billion, which means there is $91.7 billion worth of ground to make up in Q4 if spending is going to meet that target.

Achieving this looks like a tall order, because it would mean the year-on-year growth rate in Q4 would need to be 39.7%. Given the market grew by 19% in Q1, and 16% in both Q2 and Q3, a sudden surge in spending is unlikely.

So, while AI hype is providing cause for optimism, it looks like the cloud infrastructure market won’t quite live up to its billing this year.