Apple (NASDAQ:AAPL) and Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google compete against each other in mobile operating systems, smartphones, smart speakers, streaming media services, digital payments, and other growing markets. However, Apple is also one of Google’s top customers.
Five years ago, Apple signed a deal with Google Cloud to host some of its iCloud services. The details weren’t disclosed, but it was considered a loss for Amazon (NASDAQ:AMZN) Web Services (AWS) and Microsoft‘s (NASDAQ:MSFT) Azure, which previously hosted most of Apple’s iCloud services.
Many people wondered if the deal would last. However, digital media newssite The Information recently claimed Apple would boost its spending on Google Cloud by 50% this year and become Google’s largest enterprise cloud storage customer. Let’s see what this expanded deal could mean for both tech giants.
Image source: Getty Images.
Why doesn’t Apple build its own cloud platform?
Back in 2016, a Re/code report claimed Apple was mulling the development of its own cloud infrastructure platform and estimated it could break even on its own data centers in “about three years.”
That cloud independence would eliminate Apple’s dependence on Amazon, Microsoft, and Google, which all compete against Apple in certain markets. It could also support its expansion into next-gen industries, including connected cars, augmented reality devices, and smart home appliances.
However, Apple also has tremendous bargaining power in securing favorable contracts with the big three cloud platforms. Just as it splits its component orders and manufacturing contracts between different companies, Apple can shop around for the best cloud hosting deals.
Apple also charges users fees for additional iCloud storage. So as long as that incoming revenue offsets its cloud hosting payments to Google Cloud, AWS, and Azure, it might be more economical to maintain the status quo instead of building a first-party cloud infrastructure platform.
The Information claims Apple will spend about $300 million on Google’s cloud storage services this year — but that would only equal 0.08% of Apple’s estimated revenue this year.
Will higher spending from Apple actually help Google?
Google Cloud’s revenue rose 53% to $8.9 billion in 2019 and grew 46% to $13.1 billion — or 7% of Alphabet’s top line — in 2020. That robust growth was supported by a growing list of customers, including Target, Home Depot, P&G, PayPal, and Twitter.
Many retailers didn’t want to feed Amazon’s most profitable business unit, while some tech companies didn’t want to tether themselves to Microsoft’s sprawling software ecosystem. For those enterprise customers, Google Cloud seemed to be an attractive alternative.
However, Google Cloud controlled just 7% of the global cloud infrastructure market in the first quarter of 2021, according to Canalys. AWS controlled 32% of the market, while Azure ranked second with a 19% share.
Google Cloud also isn’t profitable yet. Its operating loss widened from $4.3 billion in 2018 to $4.6 billion in 2019, then widened again to $5.6 billion in 2020. AWS is consistently profitable, while Microsoft doesn’t disclose Azure’s exact revenue or operating profits.
These numbers suggest Apple would likely secure the cheapest cloud hosting rates from Google, which needs to gain more partnerships to keep pace with AWS and Azure. That might be great news for Apple, but bad news for Google Cloud’s operating profits.
The key takeaways
The Information claims Apple’s increased cloud spending could make it Google Cloud’s “largest” corporate client, but $300 million only equals 2% of Google’s total cloud revenue last year. Apple is still likely hosting a lot of its iCloud services on AWS and Azure, so the report doesn’t necessarily mean Google Cloud will become Apple’s preferred cloud provider.
Instead, this report indicates it’s smarter for Apple to pit the three cloud platform kings against each other to gain favorable hosting prices than it is to build its own cloud infrastructure. It also suggests that Google Cloud — which likely has significantly less pricing power than AWS and Azure — could remain unprofitable for the foreseeable future.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Leo Sun owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Home Depot, Microsoft, PayPal Holdings, and Twitter. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.