The U.S. Commerce Department and the Biden administration are considering imposing restrictions on China’s access to cloud computing to curb its AI development capabilities. The American concern is that cloud services could offer China’s companies and military the computing power needed for AI models, bypassing investments in data centers and the regulations that govern them. However, regulating cloud computing is challenging compared to semiconductors, making the proposed tracking difficult.
This effort to counter Chinese AI development is a priority for the Commerce Department and complements previous actions to control the export of semiconductors. Details are being finalized this summer, and the proposal may impact cloud services provided by Amazon and Microsoft.¹
And according to a new Mizuho Bank survey of CIOs, the rush to develop generative AI is boosting cloud demand and helping make up for the slowdown in demand seen in Q1 of this year.
IT budget cuts made in anticipation of a recession caused cloud deals to take 50% longer to close in Q1, with discounts of 30% to 40% offered on services. However, in Q2, deal cycles have returned to an average range of 30 to 60 days, with price concessions mostly limited to large customers on multiyear contracts. CIOs are now focused on directing savings toward generative AI.
While this is good news for all cloud providers, it could prove a particular boon to Amazon Web Services (AWS). The Mizuho report highlights the appeal of Amazon’s Bedrock model for generative AI development, with around 200 companies already waiting to use it for training and launching generative AI apps.²
Company Specific Updates
Microsoft and Activision Blizzard are exploring options to address objections raised by the U.K.’s Competition and Markets Authority (CMA) regarding their $69 billion merger. To appease the CMA, the companies are considering relinquishing control of their cloud-gaming business in the U.K. This could involve selling cloud-based market rights to a telecom, gaming, or internet company, or to a private equity firm. The CMA had initially denied the deal in April, citing worries about limited competition in the emerging cloud gaming space if Activision content was added to Microsoft’s xCloud service.³
However, with recent court decisions allowing the deal to proceed in the United States, Microsoft has submitted an updated appeal to the CMA that highlights cloud gaming agreements with competitors that will maintain access to games on other platforms post-acquisition, including a deal with Sony to keep “Call of Duty” on PlayStation. These deals were instrumental in getting regulator objections denied by U.S. courts.⁴
The CMA is expected to make a decision by the end of August, and the deal’s closing date has been pushed back to October 18 to address any additional concerns from the regulator.⁵
Google Cloud partnered with Voltage, a Bitcoin Lightning Network infrastructure provider, to expand global Bitcoin-based services. The collaboration enables Google Cloud to deploy Lightning network nodes in specific target regions like the U.K. and Asia, boosting Bitcoin activity and integrating with services like Google Pay, which serves hundreds of millions of users in more than 15 countries.
Additionally, Google Ventures, the investment arm of Google, has displayed a strong interest in blockchain, Web3, and Bitcoin, participating in a $6 million seed round for Voltage in 2021. The partnership further solidifies Google’s interest in cryptocurrency at a time when competition is exiting the space, leaving it wide open. Apple, for example, recently delisted a Lightning-friendly social media protocol from the App Store as it reconsiders its role in crypto.⁶
Investing in Cloud Computing with DATA ETF
If you’re interested in investing in a cloud computing ETF, consider the Evolve Cloud Computing Index Fund (DATA ETF), Canada’s first cloud computing ETF. DATA ETF invests primarily in equity securities of companies located domestically or internationally that have business operations in the field of cloud computing. To learn more about DATA ETF, please click here: https://evolveetfs.com/data/.
Portfolio Strategy and Activity
For the month, Intuit Inc made the largest contribution to the Fund, followed by Alphabet Inc and Salesforce Inc. The largest detractors to performance for the month were Oracle Corp, followed by Microsoft Corp and Manhattan Associates Inc. On last rebalance, these securities were added to the portfolio: Confluent Inc and SPS Commerce Inc.
- Edgerton, A., “US Considers Limits on Cloud Computing For China,” Bloomberg, July 5, 2023; https://www.bloomberg.com/news/articles/2023-07-05/us-said-to-consider-limits-on-cloud-computing-for-china
- Thomas, E., “Generative AI is bringing back cloud demand after IT budgets were slashed, which could be a big win for Amazon,” Business Insider, July 10, 2023; https://www.businessinsider.com/generative-ai-cloud-deals-demand-amazon-web-services-aws-2023-7
- Nylen, L., Ludlow, E. & Bass, D., “Microsoft, Activision Eye UK Rights Sale to Get Merger Done,” Bloomberg, July 13, 2023; https://www.bloomberg.com/news/articles/2023-07-13/microsoft-activision-weigh-sale-of-some-uk-cloud-gaming-rights
- Novet, J. & Goswami, R., “Microsoft and Sony sign deal to keep Activision’s Call of Duty on PlayStation,” July 16, 2023; https://www.cnbc.com/2023/07/16/microsoft-and-sony-sign-deal-to-keep-activisions-call-of-duty-on-playstation.html
- Warren, T., “Microsoft argues its Activision Blizzard case with UK regulators,” July 31, 2023; https://www.theverge.com/2023/7/31/23813956/microsoft-activision-blizzard-cma-argument-uk-regulator
- Hall, J., “Google Cloud furthers Bitcoin Lightning ambitions with Voltage partnership,” Cointelegraph, July 7, 2023; https://cointelegraph.com/news/google-cloud-bitcoin-lightning-voltage-partnership