Amazon Soars on Fastest Cloud Growth in Years

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

0:37So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts.

1:02Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, let's get back to Amazon. There's a stock that's working and it's working because the cloud business for them and the AI play. And that's been the story behind Amazon and its stock for a better part of 10, 15 years here. It's not so much the retail, the stuff that we interact with Amazon with, getting the packages at the door.

1:42It's all about their cloud business. Anurag Rana, he's a technology analyst for Bloomberg Intelligence, the technology analyst for Bloomberg Intelligence. Anurag, talk to us about the Amazon Web Services. How did they do last quarter? Yeah, I think this is the one that really changed the tone or the narrative of AWS. because when you look at over the last six months or so, there is, you know, you could say a fear out there that AWS is losing market share to the likes of Oracle, to the likes of, you know, Google and Microsoft because the other three are showing momentum for their AI workloads, but it was absent for AWS.

2:20In fact, their capex went down a little bit last quarter or, you know, when they reported last time. Stock was down, you know, when they had reported their second quarter results, But finally, they came out yesterday, AWS Acceleration. They were very confident about how it's going to do next year. CapEx is going up. Their chip business is doing well. So I think from that point of view, that's a big overhang away from the stock. People should be happy with this. And when it comes to AWS, I feel like that's the OG of the cloud computing. I mean, whenever we talk about cloud, it's really Amazon leading the way.

2:52And then, of course, Alphabet and Microsoft. but their growth rates were much faster than Amazon because Amazon had a bigger base overall. Where does this put, this latest quarter, put AWS versus Azure versus Alphabet? See, that's what I'm saying. The other cloud providers are so good at marketing that they have been beating up on AWS for, I would say, almost two years. And last night they came out, I think, with guns blazing, explaining their entire strategy in a far better way. And I think that's what you resonate. When you look at the market share, you're absolutely right. Just on the infrastructure side, AWS is so much bigger than everybody else.

3:28So much wider, much more entrenched with enterprises than any of the others. But, you know, what's happening is the first part or the first growth phase of AI has been through ChatGPT. And that product is hosted on Microsoft Azure. AWS doesn't have a consumer product like that, which is hosted on them. They're all about enterprising, adding more AI capabilities. And that growth cycle is only beginning. So I think this really puts us very confident that AWS growth rate is going to continue in this good trajectory, not just for next year, but the year after that also. And Anurag, I know that this is something that happened more recently.

4:07But of course, there was a big outage of AWS that seemed to affect everyone across the nation. Schools and students couldn't get online. Businesses couldn't do things and they couldn't log into the websites that they needed to. Did Amazon talk about that at all and give any reassurances? Yeah, I think this is one of the biggest risks for all cloud providers, not just Amazon, but Microsoft also. Microsoft also had a similar breakdown. Now, think of these cloud providers as electricity providers, and it can happen to anybody. One of our big theses is that we know AI is a big growth story for cloud.

4:43I think one of the bigger stories later on is going to be a multi-cloud strategy. Every company, every enterprise is going to go out and have a backup cloud provider similar to what they do in electricity. And I think that is going to add far more to the total addressable market of this important service. I know you guys at Bloomberg Intelligence wrote, I think, the definitive research report on AI. So, folks, if you want to learn about what this whole AI thing is, go to BI Go on your terminal. And that's where you'll find it if you don't have it. Call your salesperson. But what's the bear case?

5:16Is there a bear case for AI here, Anurag? Because they're certainly spending a ton of money. Yeah, the bear case is spending a lot of money. And I think that is something to be extremely careful about. Because, see, one of the things you have to see is, will enterprise suddenly say, you know what? I like this thing. It is good to summarize a handful of emails. It will give me so much of productivity. But that's where it ends. It's not going to lead to massive layoffs. You know, it's like another tool you and I have. We have Excel. now we have chart GPT on the side. That, I think, is the bare case on it, is how much productivity somebody can get out of it.

5:53And at the same time, when you're spending, let's say,$500 plus billion a year in adding more capacity, a lot of people are borrowing that money. Private credit is involved. You have a lot of that coming from one customer that's OpenAI. You know, what if something happens and somebody else comes up with a better model and OpenAI is no longer able to see that kind of growth momentum? So there aren't enough bear cases out there. That's why almost, to be very frank, almost on a weekly basis, you have to track these things very carefully. Yeah, that circular financing you just referenced raises a lot of concerns because so much of the economic growth that we're seeing now is tied to investment and spending on AI.

6:31So if anyone stops spending for just a moment or maybe slows things down, that could have huge ramifications. Anurag, always appreciate your joining us. Anurag Rana is one of our Bloomberg Intelligence Senior Technology Analysts, giving us the lowdown here on Amazon, Amazon Web Services. Fastest cloud growth in years for Amazon Web Services, providing some relief to those investors. Stay with us. More from Bloomberg Intelligence coming up after this. Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. Military withdrawal from Afghanistan. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world.

7:14And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Russia needs to be taught a lesson, to tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts. You certainly ask interesting questions.

7:56You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. It is Halloween, so I think about haunted houses. And there's a great story on the Bloomberg, Paul, about a real estate developer in Pennsylvania who wants to turn his haunted house attraction, which is actually a former Pennhurst asylum, into what else? A data center. Ah, of course. I mean, it's right in line with the times, right? AI is the only thing anyone cares about these days.

8:32Everyone's trying to make money off of it, profit off demand for it. But can the grid actually sustain all of this? It's not clear. Wait, the guy lives in an asylum? No, he owns the asylum and he's turned it into a haunted house. But now he wants to turn it into a data center. You think it's like really wired for that? There you go. All good questions. All right, let's bring in Ryan Mallory. He is president and CEO of Flexential, which is a private company that is tied in to this idea of whether we have enough power. to power all this AI that everyone wants. Ryan, thanks for joining us today. Good morning, Scarlett and Paul.

9:09Thanks for the opportunity to speak with you. So just give us a primer first on what Flexential does and how it ties in with whether our grid can support all this demand for AI. Yeah, so Flexential is a national data center operator. We've got a dynamic platform, 42 data centers across 18 markets. And so, you know, we're right at the cornerstone of that AI on ramp trend that's out there. So we're seeing some of these big deployments like you guys are talking about in Pennsylvania and other places. Flexential is really that that on ramp capability from that network ingress. So, Ryan, you say power availability is the new real estate.

9:50What do you mean by that? Yeah, you know, you know, it used to be trying to find the land. So a piece of property that could support a data center was where everybody started. Now it's really where is the power at? In 2023, there was 176 terawatts of power being generated out there for the data center marketplace. By 2028, there's going to be 580 terawatts. And so what we're seeing is this massive increase in power demand. And they're not making any more land close to the generation and transmission. So being able to have access to that power is that really that real estate mantra of location, location, location.

10:32So you've got to find the power first. I wouldn't know what a terawatt is if I tripped overboard. What I do know is 580 terawatts by 2028. That's 12 % of the national electricity demand is going to go for these AI things. Yeah, and sometimes we don't even have enough electricity just to do what we do right now. So that's the question. Ryan, which parts of the country have this power availability? They're ready for this new revolution and which have massive backlogs and can't afford to have anything more plugged into their grid. Yeah, you know, we've really seen some shifting in the game board over the past several years where, you know, the northern Virginias and the California markets and even Georgia has become power constrained just because of this massive shift to those markets because of at that point in time power availability.

11:23Now we're starting to see it turn to net new markets, you know, Oregon, Utah, Colorado, Texas, North Carolina. These are areas that, you know, from a legacy data center market had been overlooked because they didn't have a lot of the infrastructure, but they've caught up. And those markets are really primed to take off. That's where Flexential is spending a lot of its focus right now. And we see a lot of others in the AI industry doing the same. All right. So I need power to power these things up. But I probably also need some water to cool them down. Talk to us about water. Yeah, you know, water is something that is a hot topic in the data center industry, because, you know, when you're talking about these high density compute workloads with AI, we've seen them, you know, the actual densities per rack go up, you know, 100, 200, 300 percent over the past several years.

12:19you have to have water, you know, from a heat rejection standpoint. And so a lot of companies historically had just used evaporative water cooling to, you know, to be able to cool and empower these data centers. That's just not efficient. And so it's really about utilizing, you know, closed loop systems where you can, you know, put a liquid across the chip, you know, in the rack to be able to dissipate that heat or reject that heat that's out of there. There is a little bit of a nuance out there. Companies that are looking at operating at a zero WUE or water use efficiency are really what's needed in today's environment.

12:58So we don't become burdens on those local communities. Let me ask a dumb question here. We have climate change, which is causing extreme weather here in the New York region. We just had flash floods that resulted in the death of two people and have really inundated the infrastructure. Does that matter when you're looking at water as a valuable resource in making sure that we can keep these data centers running? Yeah, I mean, climate change is a topic that's near and dear to everybody in the data centers, data center world's heart, because we have big footprint impacts in communities. But when you're looking at how we're building the data centers in today's environment with these closed loop systems, we're just not drawing off of those off of those water sources that are out there because they're closed and contained.

13:45So it's not the same impact that historically was happening in the industry. I'm all about nuclear here, particularly small modular reactors, SMRs. Talk to us about that technology. And is that going to be a solution in any time in the near future? You know, SMRs are the future of the data center world, as is nuclear in general. You know, we've got to be focused to the climate comment that Scarlett made just a second ago around how we're impacting the environment. SMRs are small footprint reactors. We've been doing those for 30, 40 years, you know, for government based use. And, you know, they're tried and true from a performance perspective.

14:27What we've really got to get through is just the permitting process and being able to deploy them. You can deploy anywhere from a 50 megawatt to 300 megawatt reactor in a small form factor. And that's going to really deliver that capability that's out there to be able to power these data centers in a more rapid fashion. A 10-year permitting process is just not going to help anybody in the industry, whether it's the home consumer or the data center consumer. All right. Good stuff, Ryan. Thank you so much for joining us today and sharing your expertise with us. Ryan Mallory is CEO of Flexential on the growing strain on power due to this AI boom.

15:08And he joins us from Denver, Colorado. So a lot to think about there as everyone, it feels like, wants to find some way in on AI. Stay with us. More from Bloomberg Intelligence coming up after this.

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16:42You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. I tell you, near and dear to my heart, we were just talking about the, you know, what are some of these companies in these industries that are kind of slowly decaying like the cable television industry? What do they do? But it's also fine, but they're not dead and they're not going to be dead anytime soon. Right. No, no. And I think the other one here is just kind of what are some of these big legacy cable media companies do?

17:15And that's certainly true with when you look at Warner Brothers Discovery, Paramount, all these companies. They're trying to figure out what to kind of do. And they're teaming up as a one solution, right? Because maybe scale gets them somewhere that they can't get on their own. Exactly. Our next guest has got a really interesting opinion piece out on this. Paul Hardart. He's a distinguished clinical professor of marketing at New York University's Stern School of Business. By the way, I think Stern has basically – half of Global Wall Street came out of the Stern School of Business, I'm convinced.

17:44These people are everywhere. Paul, thanks so much for joining us here. Talk to us about Warner Brothers. You know, it's a it's a legacy media company now part of Warner Brothers Discovery. You know, the question is, should they be sold? Should they merge with another company? It's a proud company with a lot of just legacy media assets. What do you think they should do? It's a great question. Thanks for having me, Paul and Scarlett. Nice to be with you. You know, it's a challenging. So from a business standpoint, it seems like they have a lot of debt. I think the plan was always to sell. As you know, they were originally Time Warner.

18:19Then there was a sort of disastrous AOL Time Warner merger. Then they were sold to AT &T, which didn't go well. AT &T then spun it off with Discovery, led by David Zaslaw. And now here we are just a few years later. Once again, they're for sale. So first of all, I feel very bad for the people that work there. It's been a really tumultuous history. But they have to optimize the assets, right? That's their job as it relates to the shareholders. So I think they're trying to figure out an exit. I think there was a period of time where a lot of people felt that ultimately they could wrap these up and sell it to a big tech firm.

18:55That was same. I think that was the viewpoint of Sherry Redstone originally with Viacom and CBS and then ultimately Paramount. So I think they're trying to get the most value for what they have. Originally, like you had just talked earlier about the cable assets. The plan was sort of reflecting exactly what Comcast is doing, is spinning off its cable assets into Versant. The plan had been for Warner Brothers Discovery to split the company with their CFO taking the cable assets and the other assets, the Warner Brothers Discovery, the studio and the HBO Max platform, the streaming platform, staying as one entity.

19:34So in that time, David Ellison has come out and made three successive offers. The value, the stock price has gone up, has effectively tripled since April. So, you know, their job is to do optimize the value for their shareholders. And so I think that's what they're trying to do right now. So what's a value here to a Skydance Paramount or to a Comcast or to a Netflix is the IP of Warner Brothers. You just go to the HBO app and you see friends there. You see Game of Thrones. You see all kinds of assets that the company owns. That IP is valuable, but does it diminish over time? I mean, does it need to be folded into something bigger to maximize its value?

20:16Yeah, well, so, you know, in anything in media, we sort of always talk about the content and the distribution, right? You sort of need both. You can't just have great content. It has to be to be able to be discovered. And as we all know from following the pandemic, our habits have changed. And a lot of us now, we stream content. So scale is helpful in that. So one of the things, the value propositions for any of these buyers, whether it's Comcast, whether it's Netflix, whether it's possibly Apple or certainly Paramount, is Paramount Plus has struggled a little bit. So pairing that with HBO Max, you'd get a huge subscriber base.

20:50You'd get extra content. It's not that different than what Disney did by merging with Fox, realizing that to compete with Netflix, they need a huge amount of content. So I think it's sort of the same playbook of scaling up, having a large, deep library that some people when, you know, we all have credit card bills. We all everyone has to check and see how they are spending their money. And if we're all subscribing to five or six or seven streaming services, it becomes, you know, uneconomic. So I think the idea is you want to be one of those two or three streaming services that, you know, the family needs.

21:26And Paul, what I think is one of the unique aspects of a potential deal with Warner Brothers Discover is you've got a CEO and a board that says basically, hey, we're open to doing a deal. We're for sale, kind of. How does that play into it? Absolutely. Well, they've basically said that, you know, they've turned down three offers. And again, the stock price is more than tripled. So at some point they are. You know, the board is also going to have to sort of base the music and say, you know, why they're not accepting this offer. So I think what they're looking for, right, they're trying to, you know, elevate, you know, having more parties interested is always good in any dynamic.

22:02So it's unclear exactly how interested Netflix or Comcast is. But some of those assets, just like, you know, if you go to a consignment shop, there's definitely something that would be interesting. And I think that the benefit to Comcast, Netflix, and the other people giving access to the data room there is, first of all, you learn a lot about what your competitor is doing. So you get access to information. Two, there is a deal, right? They may only want HBO Max. They may only want certain IP. But there's probably a deal worth looking at. And then lastly, sort of what Comcast did with Disney is you might also elevate the price for one of your competitors.

22:42So that's not a bad thing. You're sort of the skunk at the picnic a little bit. So I think all of those factor into it in a way. But there's no reason. I think it would be an obligation of duty from these other companies not to look at it, just kick the tires a little bit. Paul Hardhart, Distinguished Clinical Professor at NYU Stern School of Business. He is a Bloomberg Opinion Contributor as well. You can check out what he writes on the Bloomberg Terminal. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m.

23:19to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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