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Information Technology

Cloud Computing: Its Role in the IT Sector

Pomegra Learn

How Does Cloud Computing Shape the IT Sector?

Cloud computing is the economic infrastructure that underpins the modern IT sector's value creation. The shift from on-premise computing — where companies purchased and maintained their own servers, storage, and networking equipment — to cloud-hosted infrastructure and software has been the defining industry transformation of the past 15 years. It has created enormous wealth for the hyperscale cloud providers, fundamentally altered the economics of software companies, and restructured the capital expenditure patterns of enterprises worldwide.

Quick definition: Cloud computing delivers computing resources — servers, storage, databases, networking, software, and analytics — over the internet as on-demand services, organized in three layers: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS).

Key takeaways​

  • Three hyperscalers — Amazon Web Services, Microsoft Azure, and Google Cloud — control roughly 65–70% of global cloud infrastructure revenue
  • Cloud revenue grows roughly 20–25% annually, significantly faster than on-premise IT spending
  • AI infrastructure (GPU clusters, training compute) is now the fastest-growing cloud category
  • Cloud migration creates SaaS tailwinds as enterprises transition from on-premise software to cloud-hosted equivalents
  • Capital expenditure required for AI cloud buildout runs to hundreds of billions of dollars annually

The three layers of the cloud stack​

Understanding cloud computing requires distinguishing three layers that serve different customer needs and carry different competitive dynamics:

Infrastructure-as-a-Service (IaaS) provides raw computing resources — virtual servers, storage, networking — on demand. Amazon Web Services, Microsoft Azure, and Google Cloud Platform are the dominant IaaS providers. Customers rent computing capacity by the hour or second, paying only for what they use. This eliminates the need to purchase, rack, and maintain physical servers. IaaS margins are moderate — the business requires enormous ongoing capital investment in data center build-out and hardware refresh.

Platform-as-a-Service (PaaS) provides development tools, databases, middleware, and runtime environments on top of the infrastructure layer. Developers use PaaS to build, test, and deploy applications without managing the underlying servers. AWS's RDS (Relational Database Service), Azure's Cosmos DB, and Google's BigQuery are PaaS examples. PaaS generates higher margins than pure IaaS because it delivers more value and creates stickier customer relationships — migrating from one cloud's database platform to another is technically complex.

Software-as-a-Service (SaaS) delivers complete software applications through the cloud, accessible through a web browser. Salesforce, Microsoft 365, Workday, and ServiceNow are SaaS examples. SaaS companies sit above the cloud infrastructure layer and use IaaS/PaaS from hyperscalers as their hosting platform. SaaS generates the highest gross margins (65–80%) in the cloud ecosystem because the marginal cost of serving an additional user is near zero.

The hyperscaler oligopoly​

Three companies dominate cloud infrastructure: Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform. In the mid-2020s, these three accounted for approximately 65–70% of global cloud infrastructure revenue, with AWS leading at roughly 31–33% market share, Azure at approximately 22–24%, and Google Cloud at roughly 10–12%.

This oligopoly structure reflects the enormous capital and technical barriers to entry. Building a hyperscale cloud platform requires investing tens of billions in data centers, networking infrastructure, hardware, and software development before generating meaningful revenue. The scale economies then compound: the largest cloud providers can offer services at lower cost per unit than smaller competitors, reinvesting those cost advantages into new services and geographic expansion.

The hyperscalers sit partly in Information Technology (cloud infrastructure) and partly in Communication Services (Alphabet/Google's parent company is classified there). This GICS classification split means that investors seeking pure cloud infrastructure exposure need to own across both sectors.

How it flows​

Cloud capex and the AI investment cycle​

Cloud capital expenditure has entered a new, higher regime driven by artificial intelligence infrastructure requirements. Training large language models requires thousands of interconnected GPU servers, high-speed networking (InfiniBand or custom optical), and enormous power infrastructure. Running inference (serving AI outputs to users) at scale requires additional clusters.

In 2024, Amazon, Microsoft, Google, and Meta collectively committed to spending approximately $200+ billion annually in data center and cloud infrastructure capital expenditure, a sharp increase from the $100–120 billion per year range of 2022. This spending surge benefited semiconductor companies (Nvidia's GPU revenues), data center REITs, power utilities serving data center campuses, and networking equipment providers.

From an IT sector investment perspective, the cloud capex cycle has two sides: the hyperscalers spending (which compresses their margins and free cash flow in the near term) and the beneficiaries receiving that spending (semiconductors, equipment, facilities). Investors need to assess which part of the cloud ecosystem they are buying at any point in the cycle.

Real-world examples​

AWS's competitive dominance illustrates how early-mover advantage compounds in cloud infrastructure. Amazon launched AWS commercially in 2006, more than five years before Microsoft's Azure began offering comparable services. By 2023, AWS generated approximately $91 billion in annual revenues with operating margins of roughly 30% — making it one of the highest-profit technology businesses in the world. This lead developed through years of infrastructure investment, developer tooling, and service breadth that competitors have struggled to close despite billions in spending.

The cloud migration of enterprise software companies during the 2010s–2020s created significant value. SAP, Oracle, and Microsoft all converted significant portions of their on-premise enterprise software customers to cloud subscriptions. SAP's S/4HANA Cloud, Oracle's Fusion Cloud ERP, and Microsoft's Azure integration with Office 365 each drove substantial ARR growth. The transition created near-term revenue recognition headwinds (subscription revenue recognized more slowly than upfront license fees) but dramatically improved the long-run quality of their revenue.

Common mistakes​

Conflating cloud growth with individual company quality. The cloud market is growing rapidly at the sector level, but individual cloud companies compete aggressively on price, technology, and service breadth. Rapid market growth does not guarantee that any specific cloud company will maintain its position or margins. Amazon and Microsoft are investing heavily to prevent Google Cloud from gaining share; the competition has real pricing implications.

Ignoring power and real estate constraints. AI data center buildout requires extraordinary amounts of electrical power — a 100-megawatt data center requires as much electricity as a small city. In many markets, power availability is becoming the binding constraint on cloud capacity expansion. This creates opportunities for utilities and energy producers serving data center campuses, and creates risks for cloud companies whose expansion plans depend on power permitting that may be delayed.

FAQ​

Is the cloud market approaching saturation?​

Enterprise cloud adoption is still in its early-to-middle innings globally, with many industries (manufacturing, healthcare, government) still running significant on-premise workloads. AI workloads represent a new layer of demand on top of the existing migration. However, the rate of cloud revenue growth will eventually moderate as the addressable market of easily migratable workloads shrinks. Growth rates of 20–25% annually will eventually slow to mid-single digits as the market matures.

How do I evaluate which cloud provider to invest in?​

Compare revenue growth rates, operating margin trajectory, AI/ML differentiation, data center geographic footprint, and customer retention metrics. AWS and Azure benefit from deeper enterprise relationships; Google Cloud benefits from superior AI research capabilities through DeepMind. All three are growing revenue faster than cloud infrastructure capital costs, suggesting continued margin improvement. Consulting sec.gov filings provides detailed segment breakdowns for each company.

Summary​

Cloud computing is the foundational infrastructure of the modern IT sector, organizing value creation across three layers — IaaS, PaaS, and SaaS — with the hyperscaler oligopoly (AWS, Azure, Google Cloud) capturing the greatest share of infrastructure economics. The AI investment cycle has elevated cloud capex to a new, higher steady state, creating winners (semiconductor and infrastructure suppliers) and near-term margin pressure on the hyperscalers themselves. Investors in the IT sector cannot avoid engaging with cloud computing dynamics, as the shift to cloud-hosted software and AI infrastructure is reshaping the competitive position, capital requirements, and financial profiles of virtually every IT company.

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