It's official: Microsoft (NASDAQ:MSFT) is now the second-largest cloud services provider after Amazon (NASDAQ:AMZN) , pulling away from the chasing pack that included Google, IBM (NYSE:IBM), and In the first quarter of the current fiscal year, Microsoft had a blistering 154% year-over-year growth. The company's cloud services consist of IaaS, PaaS, and its hybrid cloud.

According to Synergy Research Group, Microsoft's cloud infrastructure grew almost 2.3 times faster than Amazon Web Services, or AWS, which recorded 67% growth. IBM's cloud service recorded the second-fastest growth with 80%, Google was fourth with 60%, while Salesforce's cloud grew 37%.


Source: Synergy Research Group

AWS, however, is still the overwhelming leader with 27% share of the market, which is more than the combined market share of Microsoft, IBM, Salesforce, and Google, which have 8%, 6.5%, 6%, and 4.5% share of the market, respectively. AWS' quarterly revenue now exceeds $1 billion, with most of it coming from cloud infrastructure services.

Microsoft has been relying on its powerful brand and marketing muscle to establish itself as a clear No. 2 behind Amazon. The recent pricing wars between Amazon, Microsoft, and Google saw the companies slash their cloud by huge margins.

Microsoft Azure made price cuts that matched AWS' cuts in many categories, and exceeded it in several others. The software giant chopped computing prices by 27%-35% and storage by 44%-65%. Additionally, Microsoft cut the pricing for Windows instances by 27% and memory-intensive Linux instances by 35%.

Microsoft also reported that it was lowering the prices of Block Blob storage by 65% for LRS, or locally redundant storage, and 44% for GRS, or geo-redundant storage.

With the drastic price cuts, Microsoft is now in an excellent position to challenge AWS' leadership in cloud services. Although Microsoft's cloud is still less than one-third the size of AWS, it would take only 6-7 years to catch up, in terms of size, assuming that it grows at a rate of 80% for the next 7 years and AWS grows at only 50%. Faster growth for Microsoft's cloud could cut that time to as little as 4-5 years.

Forrester revises cloud growth projections upward
Faster-than-expected cloud growth is a result of customers opting to replace legacy systems with cloud-hosted alternatives, and has prompted Forrester Research to increase its previous cloud growth forecasts by 20%. The research firm cranked up its forecast for business spending on cloud services and software in 2014 to $72 billion, and expects the overall market to hit $229 billion by 2020, up from its earlier estimate of $191 billion.

The improving economy is inspiring confidence in companies and their IT managers to upgrade existing hardware and legacy systems. In most cases, companies are choosing to outsource their data centers, rather than invest in their own equipment. Businesses view cloud services as a means to cut costs because pound-for-pound, the cost of cloud-based IT services is usually far lower than that of in-house systems.

Why IBM is the biggest winner
The rapid growth in cloud services will be a major revenue boon for all of these tech companies. For IBM, however, its significance could be far greater than it is for the other four.

IBM's overall revenue has been declining, and fell 5% last year to $95 billion in fiscal 2013. Practically all the company's business segments have been faltering, with the exception of its software and cloud businesses. The company reported revenue of $22.48 billion in the last quarter, a 3.9% drop from a year ago.

IBM's cloud business is currently its saving grace, showing the most promise, and could help stem declines in other segments. The company recorded an annual growth rate of 100% for its cloud-delivered-as-a-service to $2.3 billion last year. IBM's cloud business is now almost as big as its traditional server division.

IBM's SoftLayer cloud service sports special features such as bare-metal cloud capabilities, which give it a competitive edge over rivals. IBM has also been ramping up its cloud businesses by adding a host of new features. Big Blue has been relying on this edge to maintain higher cloud prices, and the company did not participate in the recent cloud price wars. This advantage might be significant, as cloud services become commoditized and companies cut their prices to the bone.

IBM's strong cloud growth can help it offset declines in its other businesses in about three years, after which the company should see overall revenue growth.

Bottom line
Overall, the cloud market is growing rapidly, with the market leaders recording robust growth in their respective services. Microsoft's cloud is growing at a blistering pace, and has catapulted the company to the second position behind Amazon.

Meanwhile, IBM's strong cloud growth should help it offset declines in its overall business within three years, after which the company should see overall revenue growth powered by its cloud business segment.


Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends, Google (C shares), and The Motley Fool owns shares of, Google (C shares), International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.