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Prices for cloud infrastructure soar 30%

Tough macroeconomic conditions as well as high average selling prices for cloud computing and storage servers have forced enterprises to spend less on private cloud infrastructure.

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Cloud providers and enterprises building private clouds paid nearly 30% more for computing and storage servers in the first quarter as manufacturers boosted prices in response to rising inflation and interest rates, IDC reported.

Also causing the average selling price (ASP) to soar were purchases of expensive GPU-accelerated systems bought to train and run AI models, IDC reported this week.

Cloud providers accounted for most of the GPU servers for AI. However, "there's definitely some of that happening on premises with large organizations," IDC analyst Kuba Stolarski said. Financial services and government are examples of enterprises doing AI development.

In the first quarter, enterprises and cloud providers spent $21.5 billion on computing and storage cloud infrastructure -- a 14.9% year-to-year increase. The spending outpaced non-cloud infrastructure spending, which declined 0.9% to $13.8 billion.

The higher ASP and negative economic conditions have forced enterprises to tighten budgets, Stolarski said. Spending on servers for private clouds, which IDC calls dedicated clouds, declined 1.5% to $5.8 billion.

IDC data shows that the largest cloud providers are also making tradeoffs, taking money from other IT projects to pay for AI deployments, Stolarski said. The number of servers bought by cloud providers and enterprises fell 11.4% in the quarter, indicating that both segments bought less cloud-related hardware.

"That's an important indicator that the spending is still there, but it's been shifting around a bit," Stolarski said. "As an enterprise or a cloud provider, you're paying the same amount, and you're just going to be doing with less."

However, because cloud providers are buying gear to support AI applications and other services sold directly to customers, they had no choice but to spend more on servers, Stolarski said.

"They have to invest in this infrastructure to some degree no matter what, because it's what makes them money," he said.

As a result, cloud and digital service providers like social media increased server spending by 22.5% to $15.7 billion.

IDC forecast for cloud computing and storage infrastructure
Cloud providers and enterprises building private clouds will account for 69% of the computing and storage server market by 2027, according to IDC.

Enterprise spending on cloud infrastructure grew at a rate similar to cloud provider spending in last year's second and third quarters before starting to lag in the fourth quarter, Stolarski said. However, much of the spending was due to pent-up demand from supply chain delays that created much higher-than-average backlogs for hardware makers like Dell and Hewlett Packard Enterprise.

"Now we head into 2023, and the brakes go on the enterprise market," Stolarski said. "That's kind of what we're seeing across the board for enterprises, including in their private clouds, which is usually where they invest more than in traditional, non-cloud infrastructure."

Through 2027, IDC expects spending to grow at an annual rate of 11.2% to $153 billion, or 69% of the total spent on computing and storage infrastructure. Cloud and digital service providers will account for 72% of the total, or $110.1 billion, while enterprises will account for the remainder, or $42.9 billion.

Server spending for non-cloud infrastructure will grow at an annual rate of 1.3% during the same period, reaching $68.6 billion in 2027, IDC said.

Antone Gonsalves is networking news director for TechTarget Editorial. He has deep and wide experience in tech journalism. Since the mid-1990s, he has worked for UBM's InformationWeek, TechWeb and Computer Reseller News. He has also written for Ziff Davis' PC Week, IDG's CSOonline and IBTMedia's CruxialCIO, and rounded all of that out by covering startups for Bloomberg News. He started his journalism career at United Press International, working as a reporter and editor in California, Texas, Kansas and Florida. Have a news tip? Please drop him an email.

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