Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google recently landed Apple (NASDAQ:AAPL) as a cloud platform customer, dealing a nasty blow to its other two cloud providers, Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
While Apple won't stop using Amazon's AWS (Amazon Web Services) altogether, CRN estimates that its annual payments of about $1 billion to Amazon might be cut in half, while Microsoft might also lose an uncertain amount of cloud revenue.
While the deal represented a victory for Google over Amazon and Microsoft, it also raised an interesting question -- why doesn't Apple, the world's most valuable tech company, simply build its own cloud platform to decrease its dependence on rival tech giants? Amir Efrati and Steve Nellis at The Information recently looked into that issue, but concluded that it could take "years" for Apple to catch up.
How did Apple fall behind?
Efrati and Ellis believe that it isn't money holding Apple back; it's the fact that the iCloud stores so many exabytes of data that "there is no ready-made software on the market that is adequate to handle it." While Amazon, Google, Microsoft, and Facebook spent years developing custom hardware and software to address their own cloud storage needs, Apple relied on third-party platforms like AWS and Microsoft's Azure.
Apple has already taken steps toward declaring cloud independence by opening three data centers over the next two years in Arizona, Ireland, and Denmark. Morgan Stanley analyst Katy Huberty estimates that once all three facilities open, they'll provide about 2.5 million square feet of data center space of iCloud, iTunes, and other services. That would make it a substantial cloud platform player, considering that AWS had 6.7 million square feet of capacity at the end of last year.
But as Efrati and Ellis noted, the problem isn't just data center capacity, but custom software, which hasn't been Apple's strong suit in recent years. Various bugs in iOS updates, problems with first-party apps, cloud security issues, and iOS malware attacks have all marred Apple's reputation. Walt Mossberg recently wrote in The Verge that the "gradual degradation in the quality and reliability of Apple's core apps" seemingly indicate that Apple had "taken its eye off the ball" as "it pursues big new dreams like smartwatches and cars." Apple might simply buy and absorb more experienced cloud software companies to get its act together, but those quality control issues could get worse as its cloud business expands.
A three-year plan
Apple estimates that factoring in the fees it now pays Amazon, Google, and Microsoft, it can break even with its own data centers in "about three years," according to sources cited by Re/code. In addition to saving cash, it would free itself from awkward partnerships with companies which are direct competitors in certain markets.
But a lot could change over the next three years. Apple's biggest source of revenue, the iPhone, could start fading as global demand peaks. If the iPhone's market share declines and the iPad doesn't pull out of its current slide, Apple's share of the mobile market could fall and cause the company to question the logic of building its own cloud platform. Moreover, the pricing war between Amazon, Google, Microsoft, and others is already dramatically reducing the cost of cloud storage.
Therefore, it might simply be cheaper to stick with its three providers, have them battle it out over pricing, and reap the benefits. However, building a first-party cloud ecosystem might make sense if Apple plans to aggressively expand into new markets like smart homes, augmented reality, and connected cars.
What does this mean for Apple's future?
I believe that Apple's strategy for declaring cloud independence indicates that the company is confident in three things. First, it likely believes that demand for its future hardware products will remain strong enough to drive an increased flow of iCloud data. Second, it probably thinks that its current software problems won't be amplified when it develops its own custom software. Lastly, it thinks that the cost of building its own data centers and developing custom software won't exceed the cost of paying other cloud providers over the long term, despite the fact that prices are plunging.
It's impossible to tell whether or not those three things will happen, but one thing is clear -- Apple currently stands at a technological crossroads, where it must decide between bulking up into a software superpower or playing it safe by paying its rivals.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Apple, and Facebook. The Motley Fool owns shares of 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.