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Why Amazon’s Cloud Numbers May Be the Only Ones That Count

January 25, 2016, 10:59 PM UTC
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Nothing is, er, cloudier, than the cloud sales, revenue, and usage numbers put out by information technology giants.

Aside from Amazon (AMZN) Web Services—which derives almost all of its money from the sale or rental of computing power, networking and storage—all of these figures should be carefully scrutinized, or perhaps even disregarded, analysts said.

It’s not that Amazon is a paragon of transparency: It just started breaking out AWS revenue and sales from its overall results last April. But since virtually all of the AWS business is from these rentals and it launched its first cloud service in 2006, its sales numbers don’t include a lot of legacy hardware and software products. That makes its numbers, analysts say, reasonably legitimate cloud figures.

But AWS’s tremendous success—as of last year it ran 10 times more computing capacity than the next 14 competitors combined according to Gartner estimates—has forced other, older IT companies to paint their cloud business in the best possible light, sometimes in ways that strain credulity.

Oracle, for example, pushes customers to buy the cloud vs. on premises versions of its software to boost its cloud numbers and IBM does not really specify where its cloud revenue comes from, said Judith Hurwitz, president of Hurwitz & Associates, a Needham, Mass. IT consulting firm.

Holger Mueller, analyst with the Constellation Group agreed. There is a product mix issue, he said.

“Does Microsoft account for Xbox usage as cloud? Is a server sold by IBM or Oracle to run cloud classified as cloud? But ultimately the traditional enterprise vendors—Microsoft, Oracle, SAP have a lot riding on cloud revenue dollars with regard to market valuation and general expectations so they make those numbers look as great as possible.”

So,it’s hard for these older businesses, with a mix of bona fide cloud services and a lot of older products, to categorize the numbers, since some of the older technology underlies the new stuff. But they’re all doing their darndest to make their own cloud business look as big as possible because they have concluded most IT business will be going to the cloud, the only question being when.

And they want to make sure that customers move to their own, not their rivals’, clouds. Their mortal if unspoken fear is that AWS will eat their respective lunches.

For more on cloud, check out this Fortune video.

One flashpoint in this growing paranoia came in 2013 when AWS beat out IBM for a coveted $600 million CIA cloud deal, even though Big Blue’s bid was lower. That was a wake up call to all the entrenched companies that had discounted AWS as a worthy competitor. Indeed, in its most recent quarter, closing September 30, AWS reported $2.09 billion in cloud services revenue.

For that same period, Microsoft (MSFT) reported $5.9 billion in “Intelligent Cloud” revenue but that category includes such huge money-makers as Windows Server and Exchange Server, which don’t necessarily run in any cloud.

That’s a prime example of how mature companies are throwing everything but the kitchen sink into their “cloud” numbers to show that they have a thriving cloud businesses.

Gartner (IT) analyst David Smith put it more soberly in a research note last month when he wrote:

In a highy competitive IT marketplace, vendors often designate as much revenue growth as possible to “cloud” to demonstrate relevance and leadership (often targeted to Wall Street) in a fast-changing market.

So all that middleware that IBM (IBM) or Oracle (ORCL) or Hewlett-Packard (HPQ) used to sell to make sure a customer’s on-premises database and other enterprise applications work together? It’s now classified as “cloud.”

On its fourth quarter earnings call last week, IBM claimed its cloud revenue for the year to be a whopping $10.2 billion, up 43% from the prior year. (Or up 57% if they factored in currency changes and the company’s sale of its System x franchise.)

Satya Nadella’s Q&A

But hardly anyone outside of IBM heeded those cloud numbers. How much of that total would otherwise have counted towards IBM’s hardware or software or service businesses? On the earnings call, IBM chief financial officer Martin Schroeter said that the company had moved some of its middleware business into its cloud unit last year. But how much, exactly, he didn’t say.

It’s almost as if General Motors—to boost its numbers in the electrical vehicle market—started counting the big gas-fueled trucks that deliver its electric Chevy Volts to dealerships in its electrical vehicle category.

In the past, Microsoft (MSFT) has been knocked for counting the cloud software licenses it gave away to reseller partners as part of its overall cloud usage number, a practice that the company says it’s dropped.

AWS is primarily in the public cloud infrastructure space (selling basic computing, networking, storage) which Gartner just said should grow 16.5% this year into a $204 billion up from $175 billion in 2015. But there are huge other categories of cloud as well.

Other vendors have attacked what they call Software as a Service (SaaS), a model, pioneered 16 years ago by Salesforce(CRM). In the SaaS scenario, the tech company runs and manages the software in its own data centers and then sells it to business customers on a per-user, per-month basis instead of in big enterprise license deals.

Over the past decade, Microsoft, Oracle, and other players like NetSuite (N) have flooded the market with their own SaaS offerings. And many of those companies, to some extent, offer partners and customers free trials, that they then may tout as part of their usage or per-seat numbers. So there’s yet another source of uncertainty.

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But the upshot of all these cloudy numbers, as Gartner’s Smith wrote, is that big enterprise customers should focus on what they need from their IT supplier, and evaluate each prospect’s products and issues before committing.

And, perhaps more important, customers should avoid basing their “strategic and tactical cloud decisions on vendor cloud revenue claims,” Smith wrote.

After all, it appears that many are full of hot air.

Note: This story was updated at 7:06 p.m. EST with additional analyst comment and with Gartner’s projections for the cloud infrastructure market.