An analyst at Morgan Stanley reading the tea leaves of recent financial disclosures from Apple predicts that the company could be transitioning away from using Amazon Web Service’s cloud, which if true could represent a blow to the leading IaaS cloud vendor.
In its first quarter earnings call last week Apple executives noted plans to build three new data centers in the next two years. Morgan Stanley analyst Brian Nowak says that could be a sign that the company is looking to decrease its reliance on AWS’s cloud.
Nowak predicts that Apple spends upwards of $1 billion annually on AWS, which is about 9% of AWS’s predicted 2016 revenue. “The loss of Apple’s +/- $1 bn annual spend could materially impact AWS’s revenue growth (and potential overall profitability),” Nowak writes in the note, which was published Monday.
Apple is increasing its capital expenditures 30% this year to build out 2.5 million square feet of data center space, Nowak says. That includes a data “command center” in Arizona opening this year and data centers in Ireland and Denmark to power iCloud, iTunes and the App Store next year. “We believe this build is a signal that Apple is increasingly likely to move away from AWS in the next 18 to 24 months,” Nowak wrote in a note with colleagues. Nowak predicts that Apple’s data center build out represents about 40% of the size of Amazon’s data center footprint of 6.7 million square feet.
Neither company has ever publicly acknowledged they do business together but in 2011 reports surfaced that Apple uses AWS, and perhaps even Microsoft Azure, for its iCloud and iTunes services.
There are many reasons Apple could be looking to transition away from using AWS, if Nowak’s predictions are true. The two companies are increasingly competing with one another across a variety of industries. Amazon has its own iTunes competitor in Prime Video and its own consumer-grade cloud storage service in Cloud Drive.
There could be technical reasons for Apple to move away from AWS too. At a certain scale, Apple could believe that it can run its own data centers more efficiently than using the public cloud. Data sovereignty issues could be influencing the decision as well.
Nowak notes that the impact of Apple building its own data centers on AWS is unknown. It’s unclear how much of its cloud usage, if any, Apple will be moving into its own data centers.
AWS’s growth could absorb some of the loss of a major customer too, if that were to happen. AWS reported last week that its revenue grew 69% in the fourth quarter of 2015 compared to a year earlier. AWS said it’s on a $10 billion annual revenue run rate. Morgan Stanley predicts the overall IaaS spending will reach $240 billion.
Amazon Web Services had no comment.
(Addition): Morgan Stanley released a video explaining the research in more detail. You can watch it here.
One issue to note is that the analysts say they got some pushback on their assessment that Apple spends 90% of its IT budget on AWS, or $1 billion annually. Nowak says even if only half of Apple’s IT spending goes to AWS, it’s still more than a $500 million customer. If Apple does transition away from AWS, that could still be a notable loss for AWS.