What Google’s earnings tell us about its cloud business

Google says cloud is a "major investment area" for 2016

This week Google’s earnings provided a peak into how the company’s Cloud Platform is doing – and while Google has big plans for its cloud, it’s clear that so far usage has been driven by SaaS applications, and overall cloud revenues still trail Amazon Web Services.

Company-wide, Wall Street folks were impressed with Google’s $23.3 billion in revenue and a $4.9 billion profit, mostly based on advertising revenue. Google’s CEO Sundar Pichai went out of his way in the earnings call this week to highlight the company’s work in the cloud market, saying it will be a primary area of investment for the company this year.

+MORE AT NETWORK WORLD: Why Google’s cloud hasn’t taken off yet +

Technology Business Research Inc. in New Hampshire estimates that Google’s fourth quarter cloud revenues were $896 million, which is up 65% from the same quarter a year ago. That includes both SaaS and IaaS revenues, such as Google Apps for Work, Education and Government and the Google Cloud Platform IaaS. TBR says at that pace, Google’s cloud could generate $4.1 billion in revenue in 2016.

By comparison, Amazon reported $2.4 billion in quarterly revenue and said AWS is on a $10 billion annual run rate (made up mostly of IaaS). AWS posted a $1.86 billion profit last year. To put that in perspective, AWS made more net income last year than Google made in all of its cloud sales in the fourth quarter.

Diane Greene Google

VMware co-founder Diane Greene will be leading Google's cloud efforts

Google’s cloud is gaining momentum, however. In past earnings calls Pichai has said Google Drive for Work – the cloud-based storage service – has 1 million paying active customers. This week Pichai added that Google Cloud Platform is hosting 4 million applications.

The hiring of Diane Greene to head up the company’s cloud operations is a sign of how aggressively Google will be pursuing this market. “Now that Google has a more concentrated focus on cloud, TBR expects Google to accelerate its innovation around cloud solutions to more aggressively compete with other public cloud leaders,” TBR analyst Meaghan McGrath wrote in a research note based on Google’s earning results.

Google is in a unique position in the IaaS market: It’s considered one of the top three IaaS cloud platforms, but is almost universally regarded as being in third place behind Amazon Web Services and Microsoft Azure. Google has some attractive offerings in its cloud though. Its custom machine images allow customers to select the size of their virtual machines instead of choosing from pre-defined VM sizes at AWS and Azure. Google also offers aggressive usage discounts; the more customers use Google the steeper the discounts. Google has perhaps the strongest Artificial Intelligence platform among the providers too.

Stay tuned to future earnings calls to see if Google's big investments in the cloud start to pay off.

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Copyright © 2016 IDG Communications, Inc.