Microsoft, Google Cloud Revenue Grows Faster than AWS, But Rule of Three Seems to Hold

Amazon Web Services grew revenue at a 29 percent rate in the third quarter. Google Cloud grew 45 percent in the same quarter, while Microsoft’s Azure business grew 48 percent. 

The faster growth rates for Microsoft and Google are about what you would expect in a market where the leader has about 33 percent share while number two has about 18 percent share and number three has share in single digits. 

source: Synergy Research Group 

Stable markets tend to have a market share structure led by three firms with market shares on a 4:2:1 pattern. In other words, the leader has twice the share of number two, which in turn has twice the share of number three. 

Bruce Henderson, founder of the Boston Consulting Group is credited with a couple of foundational ideas about business, including the notion of the experience curve, which explains how the cost of products decreases with volume, as well as the stable market share theorem. 

"A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

So far, the cloud computing market seems to have the rough structure the rule would suggest, especially if one considers that Microsoft Azure includes both the computing “as a service” and “hosted applications” revenue streams, where Google and AWS revenues are almost exclusively from “computing as a service.” 

The point is that the rule of three might suggest the cloud computing market is stable, with price or other attacks unlikely to change the market share positions.