Hi, it’s Roman from Partner Insight, and welcome to my weekly newsletter, where I deconstruct the winning Cloud GTM strategies and the latest trends in the rapidly evolving world of cloud marketplaces.
The influence of cloud hyperscalers AWS, Azure, and Google Cloud continues to soar. This week, we delve into the strategies that these giants are using to reshape the tech landscape with their cloud marketplaces, setting new standards for purchasing software, services, and potentially even hardware in the future. We’ll also explore real-life examples of how companies are making $100M+ cloud commits and why nearly 5,000 CEOs consider partnerships as a critical driver of profit margins.
My article “The Rise of Cloud Hyperscalers” was initially published in Hubspot’s The State of Platforms 2024 report, which you can read in full here. Now, let’s dive into the insightful world of cloud GTM.
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The Rise of Cloud Hyperscalers as Tech's Ultimate Platforms
For the last decade cloud hyperscalers AWS, Azure and Google Cloud, have laid essential cloud infrastructure as a service on which the rest of tech companies are built and deployed. In the process they become some of the largest and most profitable players in the tech industry. Microsoft Azure surpassed $55Bn in annual revenue in 2023, while Amazon Web Services (AWS) is even larger, passing $85Bn run rate in 2023 and now approaching $100Bn. In a recent quarter AWS was responsible for a staggering 70% of its parent operating income, accounting for only 17% of Amazon’s net sales.
These hyperscalers are now investing billions to scale third-party cloud marketplaces built on top of their infrastructure. These marketplaces are rapidly becoming platforms for purchasing software, services and soon likely hardware as well.
Image: Ofcom, my edits
AWS, the largest of the hyperscalers, mirrors its cloud marketplace strategy on Amazon’s successful third-party seller ecosystem. After establishing itself as a top e-commerce site and building a robust logistics network, Amazon opened its doors to third-party sellers. This strategy has proven to be highly effective. Third-party sales have now reached 60% of Amazon's direct e-commerce revenue, growing three times faster than Amazon’s own e-commerce segment.
Replicating this success in the software domain, AWS has expanded the product range sold on its marketplace to 15 000+ products. This move not only drives AWS's cloud consumption but also brings additional benefits, providing a one-stop-shop for customers.
The year 2023 marked a significant milestone for cloud marketplace adoption in the tech industry. Major SaaS players - CrowdStrike, Splunk, Snowflake, and Palo Alto Networks reported over $1 billion in turnover through the AWS marketplace. This has led nearly all tech companies to reassess their GTM strategies in light of these evolving platforms. Like AI, cloud marketplaces are redefining the tech industry's landscape.
Record $303 Billion in Commits as Hyperscalers Reach Critical Customer Mass
One of the indicators that business is a true platform is reaching a critical mass of users. Hyperscaler are passing this test with flying colors. AWS, Microsoft Azure, and Google Cloud accumulated a staggering $303 billion in customer cloud commitments, as migration to the cloud continues, now further accelerated by AI.
Commits are multi-year contracts signed by customers, binding them to consume a specific amount of cloud services in return for volume discounts. Significantly, hyperscalers allow customers to utilize these commits to purchase 3rd party software in their cloud marketplaces.
Why? Because this accelerates their growth, customer retention, and network effects of their ecosystems. An incredible 85% of UK Microsoft’s customers with Azure Consumption Commitment (MACC) are purchasing via Microsoft marketplace today.
Moreover, cloud marketplaces have reached a new low in fees. Following similar moves by MSFT and Google Cloud, AWS’s recent reduction in marketplace fees has set a new standard of 3% commission. This rate, comparable to credit card or Stripe fees, resets the economics of partnering, making participation in cloud marketplaces a much more straightforward decision not only for CROs, but for CFOs and CEOs of companies whose buyers increasingly prefer to buy via thes new route to market.
Driving Network Effects and 10X Growth Potential
The significance of growing 3rd-party products for hyperscalers extends beyond cloud consumption. Recent research of UK regulator Ofcom highlighted that all hyperscalers aim to make cloud marketplaces the primary online distribution channel for both first-party and 3rd-party solutions. While marketplaces are not yet a major revenue source for hyperscalers, they “can act as particularly powerful generators of network effects”(Ofcom), specifically for customers who use the marketplace to buy with cloud commits.
By inviting Independent Software Vendors (ISVs) to offer services on top of their cloud infrastructure, cloud providers enhance their product offerings. Their customers benefit from a wider range of ISV services, which they can integrate with the cloud provider's native services to build comprehensive cloud solutions. The value customers get from a cloud provider could grow with the variety and quality of ISV services available on that platform. Similarly, ISVs tend to find greater value in aligning their services with a particular cloud provider as the provider's user base expands, offering access to more potential customers.
For example, at the recent OpenAI developer conference, Satya Nadella positioned Azure Marketplace as a platform for developers to rapidly launch their products to market, showcasing the strategic role that Microsoft’s marketplace plays as a platform for accessing customers. He highlighted Microsoft's partner-focused mindset: "I always think of Microsoft as a platform company, a developer company, and a partner company."
While significant, growth of cloud marketplaces so far only represents a fraction of their full potential. Tackle recently estimated that $15Bn will flow through key cloud marketplaces in 2023 and will reach 100Bn by 2026. Jay McBain from Canalys predicts the previous forecast of $45Bn by 2025 will be reached sooner, by mid-2024.
The revenue of hyperscalers that are going through cloud marketplaces still has a potential to increase 5-10X. Applying AWS’s 32% market share to Tackle's $15Bn forecast, we would arrive at $5-7Bn of annual sales attributed to AWS marketplace, or <10% of their $85Bn ARR this year. Benchmarked to the share of 3rd-party sellers in Amazon's e-commerce and factoring the growth of the cloud itself, the growth for the AWS marketplace over the next 5-7 years could be 10X.
AWS CEO Adam Selipsky recently estimated that only “somewhere in the realm of 10% of IT has moved to the cloud. And people think it's a lot higher than that…but they forget that there are a lot of IT dollars spent in the world. There's maybe several trillion dollars of IT spent per year.
Even though a lot of dollars have moved, we're probably still only in the, you know, 10-15% range. That means there's a huge amount of workloads that are still going to be moving to the cloud for years to come.”
IDC pegged global public cloud services revenue at $663 billion in 2023, a 20% growth from 2022. Expectations are similarly high for 2024, with a projected five-year CAGR of 19.4%, leading to a staggering $1.34 trillion by 2027.
Buyer-Led Marketplace Transactions & The Ultimate Cloud Platform Race
Cloud marketplaces are increasingly becoming a customer's choice for not only buying using cloud commits, but also for discovering new products. The increase in customer-driven transactions within marketplaces in 2023 indicates a shift in purchasing behavior.
In 2023, cloud marketplaces experienced a significant uptick in adoption, with an increasing number of business application software joining their platforms. This follows the initial trend set by cloud-complementary products, such as cybersecurity solutions. Recently, however, even Salesforce, the business application company that pioneered the App Store concept has announced it is offering its top-grossing products on the AWS marketplace. It remains to be seen whether business line software will achieve the same level of success, given their distinct buyer personas. Still, the rising presence of business software in marketplaces was also highlighted by Tackle's CEO at a recent event.
In our Cloud GTM Leader course, we see that many software companies have honed sales through Private Offers and are now broadening their collaborations with hyperscalers, signing strategic collaboration agreements, automating co-selling and some expanding to public offers.
As IT spending shifts towards software rather than infrastructure, becoming the first-choice platform for ISVs is crucial for hyperscalers. With AWS, Microsoft Azure, and Google Cloud marketplaces already hosting 10X more 3rd-party listings than their own products, the race to bring as many SaaS solutions as possible and make them successful is heating up.
This competition will drive the growth and innovation in marketplaces. Looking ahead, they will be not just distribution channels, but true platforms shaping the future of the tech industry.
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Decoding How Businesses Make Cloud Commits
To understand cloud commits, let’s go beyond hyperscalers’ perspective and unpack their strategic impact on businesses, using UiPath as an example. In 2023, their cloud commits were equal to a significant 13% of their revenue.
In UiPath's FY2023 scenario, they signed $138M in cloud infrastructure commitments (from one third-party vendor), equating to 13% of their $1.06Bn revenue.
~1/3 of commits were less than a year, with 2/3 due in 1-3 years. This distribution is typical as companies often sign 1-3 year contracts based on predictable spending.
Crucially, cloud commits are not just declarations; they are “enforceable and legally binding”.
As a tech company, UiPath's cloud spend might naturally be higher than that of some non-tech businesses. However commits equal to 13% of revenue is a significant number that is impossible to ignore even at C-suite or board level.
Thus, cloud commits are becoming a crucial C-level topic across various sectors. and not only about making these commitments but also effectively utilizing them.
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Partnerships: Key Driver of Profit Margins
PwC’s survey of 4,702 CEOs reveals a striking insight: partnerships are the second most impactful action for boosting revenue margins and ensuring the longevity of businesses. Incredibly, 45% of CEOs believe their companies might not survive the next decade without substantial reinvention.
The survey spotlights partnerships as a key driver of profit margins, which can contribute to a 4.8% profit margin premium. This impact is second only to "developing new technology in-house." By forming alliances to bolster their capabilities, companies can achieve substantial boost in profitability, which significantly surpasses results from implementing other strategies like M&A or new pricing models (see the slide for more details).
Previous PwC research found that companies that lean into ecosystems significantly outperform their peers, creating more value than any firm could achieve alone.
Companies that lean into ecosystems are
✔️ 1.7X faster to market
✔️ 1.2X more flexible and agile
✔️ 2.3X more innovative
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