Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google is the market leader in online search, but it's an underdog in the cloud market, which is dominated by Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). That's why it wasn't surprising when Google recently announced that Diane Greene, who led the cloud unit for three years, will leave in early 2019.

Thomas Kurian, a former president of Oracle (NYSE:ORCL), will replace Greene. The bulls might believe that a leadership change can reinvigorate Google's cloud business, but it could still be an uphill battle, for four simple reasons.

A network of cloud computing connections.

Image source: Getty Images.

1. It's already too far behind

Google disclosed that it generated over $1 billion in cloud revenue during the first quarter of 2018, but didn't update that figure in the second and third quarters. For comparison, Amazon Web Services (AWS) generated $6.7 billion in revenue last quarter, while Microsoft generated $8.5 billion in commercial cloud revenue.

AWS is the world's largest cloud infrastructure platform, and competes directly against Microsoft's Azure. Microsoft generates its commercial cloud revenues from Azure, Office 365, Dynamics CRM, and other cloud software services, so the two companies' results aren't directly comparable.

Google's Cloud Platform competes against AWS and Azure in the platform and infrastructure as a service (PaaS/IaaS) market. Its G Suite services compete against Microsoft's Office 365 and other software as a service (SaaS) products. AWS enjoys a first mover's advantage in the PaaS/IaaS market, and Microsoft leverages its dominance of PC operating systems and productivity software to lock in enterprise customers.

2. Privacy issues

Amazon and Microsoft also don't generate most of their revenues from targeted ads. Alphabet's overwhelming dependence on Google's ad revenues -- which accounted for 87% of its top line last quarter -- likely raises privacy concerns among enterprise clients.

Google keeps its advertising and cloud businesses (part of its "other" revenues) in different silos, but recent privacy concerns -- amplified by Facebook's big mistakes -- likely made it harder for Google to attract cloud customers. Google's attempts to score big government contracts, like a $10 billion Pentagon contract that will now likely go to Amazon, also flopped due to objections from Google's own employees.

A hacker stands in a "cloud" of data.

Image source: Getty Images.

3. An ongoing brain drain

Greene isn't the only major exec to leave Google's cloud unit. COO Diane Bryant, who joined the unit last November and was considered a potential successor to Greene, abruptly resigned in early July.

In September, the cloud unit's chief scientist Fei-Fei Li resigned amid concerns about Google's desire to offer its cloud and AI services to the Pentagon. In an internal email, Li praised the bid but cautioned colleagues to avoid discussing its AI component, which could spark concerns about "weaponized" AI.

Google's AI efforts, which are closely integrated into its cloud offerings, also lost major leaders. Google's AI and Search chief John Giannandrea left the company to join Apple in April. Shahriar Rabii, Google's Senior Director of Engineering, left Google in July to join Facebook. Rabii previously led the development of chips that were installed in Google's Home speakers, Nest thermostats, Pixel phones, and AR/VR devices. The losses of all those cloud and AI execs could make it much harder for Google to keep up with Amazon and Microsoft.

4. Oracle has its own problems

Google's decision to hire Kurian to replace Greene doesn't inspire much confidence, since Oracle's cloud unit is also struggling against Amazon and Microsoft. The growth of Oracle's SaaS and IaaS/PaaS revenues decelerated significantly over the past year, and the company stopped disclosing those growth figures separately in the fourth quarter of 2018.

However, even Oracle's new reporting method -- which bundled its cloud service revenues into two opaque segments -- couldn't mask the fact that its cloud growth was still slowing down as Amazon and Microsoft's cloud revenues continued to rise. Kurian reportedly left Oracle following a conflict with Chairman Larry Ellison over the company's cloud strategy, but that difference of opinion doesn't guarantee positive results at Google.

Can Google still catch up?

Google probably can't catch up to Amazon or Microsoft in the cloud without some huge investments or acquisitions, but it can probably still defend its third place position with three strategies.

It can win more business from retailers (like Target and Home Depot) that don't want to feed Amazon's most profitable business. It can focus more on the hybrid cloud market -- which straddles the private and public cloud markets -- to gain an enterprise foothold against Microsoft. It can also keep expanding its portfolio of enterprise cloud services to lock in customers and cross sell more features. Those tactics might help Google tread water, but the cloud unit needs to get its act together under its new CEO soon.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Apple, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook. The Motley Fool owns shares of Microsoft and Oracle and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short February 2019 $185 calls on Home Depot, long January 2020 $110 calls on Home Depot, short December 2018 $52 calls on Oracle, and long January 2020 $30 calls on Oracle. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.