Dive Brief:
- Microsoft and Google attributed growth in their cloud businesses to high demand for AI services, executives for the providers said during earnings calls Wednesday. Despite the rush in demand, Google's parent company Alphabet reported weaker-than-expected revenue in its core business — search — as AI reshapes the company.
- Alphabet’s demand for AI services, in its infrastructure and model offerings, drove stronger cloud profitability and improved overall operating margins, but search grew just 12% from last year, executives said during the Q3 call.
- Microsoft reported 19% revenue growth in its Q1 2027 earnings call Wednesday, driven by growth in its Azure cloud infrastructure business, as it rapidly builds out data center infrastructure to meet AI demand.
Dive Insight:
Both companies’ growth trajectories show strong demand for AI, and their investments in AI infrastructure are laying the groundwork for deeper development of the technology throughout their businesses.
But proving that AI is a meaningful commercial growth engine, rather than an infrastructure investment cycle, will be critical for both tech titans, Forrester Principal Analyst Tracy Woo said in an email to CIO Dive.
Azure and cloud continue to drive Microsoft’s growth as it did last quarter. Microsoft executives reported $45.2 billion in capital expenditures this quarter, up about 30% from last year. CEO Satya Nadella spoke on Wednesday’s call about the company expanding their pricing models to include consumption-based pricing.
“Typically, IT funds this, consolidating frontier advances for everyone across the organization,” Nadella said of the changing spending models within enterprises. “As agents take on higher-value work, consumption opens up business-funded demand with spending tied directly to the value these agents deliver.”
Microsoft’s results show that enterprise demand for AI is strong, but that they face similar challenges as everyone in the tech industry: how to capture AI value, Woo said.
If the application layer is where enterprises create and capture value from their AI investments, Microsoft is well-positioned to continue capturing that market. But if value shifts more toward infrastructure, chips and foundation models, the competitive landscape could evolve, Woo said.
“AI competition is no longer just about building capacity; it is increasingly about which providers can turn innovation into sustained business outcomes at scale,” Woo said.
Alphabet reported that its CapEx spend was $51.4 billion in the third quarter, compared to $24 billion a year ago. A majority of the spend went to technical infrastructure to support its AI investments, executives said.
Alphabet’s losses in its search business highlight the challenge of funding massive AI investments while maintaining the strength of established businesses, Woo said.
Google executives reported that AI Overviews and AI Mode are generating queries, but it’s not yet clear whether those additional queries are commercially valuable enough to expand Google's monetizable inventory, instead of taking activity away from traditional search results, Forrester Principal Analyst Nikhil Lai said in an email.
“Alphabet's Q3 isn't really a referendum on whether AI will kill Google Search,” Lai said. “It's a test of whether Google can use AI to expand Search beyond keywords, links, and clicks into an AI-mediated decision and commerce engine.”
The company has shown that demand for its AI infrastructure is strong, particularly for providers with differentiated AI platforms and infrastructure, but it's not yet clear if that demand reflects broad enterprise adoption or concentrated spending from a smaller amount of customers, she added.
Tech leaders and their soaring budgets will probably benefit from greater choice in the market, increased competition and more pressure on providers to demonstrate value, Woo said.
“The next phase of the market will be defined less by who can build the most AI capacity and more by who can help customers generate sustainable business outcomes from it," Woo said.
