Cloud Providers Blew Past Record Spending Last Quarter On Data Center Buildouts

Hyper-scale cloud and global providers of internet services ramped their infrastructure investments in 2017 — a massive wave of spending that's fending off competition from upstarts looking to muscle into the market.

The industry dedicated $22 billion in capital expenses to data center build-outs just in the fourth quarter of last year, and $75 billion total for 2017. That's a 19 percent boost over the previous year, according to a new report from Synergy Research Group.

The five largest spenders — Google, Amazon, Microsoft, Apple and Facebook — alone spent more than $13 billion on infrastructure in the fourth quarter.

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While Synergy didn't break out growth for each company individually, it was worth noting that growth in Capex was "particularly strong" at Amazon and Facebook, said John Dinsdale, Synergy's chief analyst, in the report.

Third-quarter 2017 was previously the highest spending quarter on record — the first exceeding $20 billion in Capex.

Synergy's research encompassed 24 of the largest global cloud and internet providers, companies offering Infrastructure as a Service, Platform as a Service, Software as a Service, search, social networking and e-commerce services. Their combined footprint stretches across 400 massive data centers.

Alibaba, IBM, Oracle, SAP and Tencent rounded out the top 10 spenders in the fourth quarter. Alibaba is making a particularly strong push to ramp its hosting capacity by doubling Capex in 2017. Oracle and SAP also both spent more than their average.

Trailing them were several prominent providers in the U.S. and Asia: Baidu, eBay, JD.com, NTT, PayPal, Salesforce, Yahoo Japan and Yahoo/Oath.

The eye-catching rate of data center investments explains why so many IT service providers and telecom companies fail in trying to challenge the established cloud leaders, Dinsdale said.

"Can you afford to pump at least $1 billion a quarter into your data center Capex budget? If you can’t, then your ability to meaningfully compete with the market leaders is severely limited," Dinsdale said.

Factors other than Capex are at play, he added, "but the basic financial table stakes are enormous."

For companies that cannot find $1 billion per quarter, and back up those investments with an aggressive long-term management focus, Dinsdale said, the best they can achieve is "tier-two status or a niche market position."

Seven percent of total hyper-scale revenue went to capital expenditures in the fourth quarter. That varied widely "depending on the nature of the business," Dinsdale said. Some individual companies dedicated as low as 2 percent of total revenue, while others shelled out 17 percent.

A previous Synergy report on the hyper-scale data center market revealed the 24 companies evaluated on average operated 16 data centers. The four powerhouses with the largest footprints — Amazon, Microsoft, IBM and Google — all had 45 or more facilities, and Oracle and Alibaba also had a broad global footprint.

Other large operators geographically focused their investments. Apple, Twitter, Facebook, eBay, LinkedIn and Yahoo all congregated Capex spending mainly in the U.S; companies like Tencent and Baidu spent mainly in China.