Data center capex for cloud service providers Amazon, Microsoft, Meta, and Google saw 33% growth in 2022 and almost broke $100 billion. But 2023 is shaping up to be a different story, according to Dell'Oro Group Research Director Baron Fung's exclusive Q4 cloud service provider market highlights.

Spending was maintained during 2022 as cloud providers neared the end of their data center expansion cycles, extended data center footprints in new regions, and focused on artificial intelligence (AI)-optimized infrastructure, Fung told SDxCentral. Data center capex represents part of the reported total capex and is a combination of capex for servers, networking equipment like routers or optical transport systems, data center construction, and physical infrastructure equipment.

As far as 2023 is concerned, Fung expects the top four providers' capex will "taper to mid-single-digit as they wind down on their expansion cycle and enter a digestion cycle." While the specifics of those digestion cycles will vary between cloud providers, on average these periods last three or four quarters, he said. However, the firm does anticipate the market's existing backlog will continue building capex growth in the first half of the year, "with growth moderating throughout the year."

This year cloud service providers will continue to "be more prudent with their capital investments" and "streamline their infrastructure," Fung said, especially as providers like Google Cloud continue to struggle with profitability. As evidenced in the hyperscalers' latest earnings calls, recent macroeconomic instability has taken a toll on advertising revenue – particularly Amazon, Google, and Meta. And public cloud adoption has seen deceleration as organizations look to optimize their IT spend, Fung noted.

One main factor set to impact the cloud provider market this year is AI applications like Microsoft's OpenAI integrations, Google and Bard, and Meta's efforts with the metaverse.

Computation-heavy AI workloads will require these providers to deploy dedicated infrastructure based on accelerating computing, "as we have seen Meta invested heavily in 2022," Fung said. "Rather than building dedicated facilities, we believe Meta is shifting to a modular architecture that would allow these AI clusters to operate alongside general-purpose workloads," he noted.

Fung also predicts Google's 2023 "spending will shift toward next-generation servers and AI infrastructure," considering the provider's lack of plans for data center region expansion. These types of AI infrastructure "upgrades are costly but will be offset by falling commodity prices, and the company’s recent change in server useful life," he explained.

Microsoft’s data center capex grew slower than the other top providers in 2022 after its data center rollouts were affected by supply chain delays, but as those projects are completed, "we expect Microsoft to lead the other top four cloud [service providers] in 2023," Fung said.