"Invasion" of the cloud computing field, NVIDIA partners with emerging players to challenge the traditional three giants

NVIDIA's entry into cloud computing intensifies competition, threatening the existing territory of traditional giants like Amazon.

On Wednesday, according to The Wall Street Journal, NVIDIA's DGX Cloud service, launched two years ago, has seen rapid growth, with UBS analysts estimating its annual revenue could exceed $10 billion.

NVIDIA adopts a dual strategy in the AI cloud computing field: directly operating the DGX Cloud service while investing in emerging cloud computing companies like CoreWeave and Lambda. CoreWeave went public on NASDAQ in March this year, with expected revenue of about $5 billion.

Traditional cloud computing giants are facing threats, as cloud computing contributes substantial profits to tech giants. Although Amazon's cloud business only accounted for 29% of its latest quarterly revenue, it contributed over 60% of its operating income. Microsoft and Google, as the second and third largest cloud service providers, also face threats from changes in market dynamics.

DGX Cloud business rapidly expands with a unique business model

Since its launch in March 2023, NVIDIA's DGX Cloud service has quickly expanded its partner network. This service allows customers to remotely access NVIDIA's AI supercomputers without the need to purchase expensive hardware.

Analysts indicate that while NVIDIA has not separately disclosed the revenue and profit from DGX Cloud, the company stated that it signed multi-year cloud service agreements worth $10.9 billion in the latest fiscal year, up from $3.5 billion the previous year, largely to support DGX Cloud. Given that cloud computing typically has high profit margins, this already constitutes a considerable business scale.

It is worth mentioning that DGX Cloud employs a different operational model: cloud computing giants are responsible for purchasing and managing equipment, including NVIDIA chips, which form the service infrastructure. NVIDIA then rents these devices back from them and subleases them to enterprise customers, while also providing AI expert support and software services.

This arrangement puts cloud computing giants in an awkward position. While they generate revenue from it, they are essentially helping a service that may compete with themselves. Some companies are not actively participating; for instance, Google did not appear on the list of companies participating in the DGX Cloud chip rental market announced by NVIDIA in May.

Roy Illsley, chief analyst at tech research firm Omdia, stated that a few years ago, participating in such collaborations made sense for cloud service providers, as their own AI services were not yet mature. When the AI revolution emerged, they needed to respond to the market, and NVIDIA provided solutions before they were ready.

Revenue of cloud computing giants faces threats

NVIDIA's move into the cloud computing space has triggered subtle changes in the relationships with its partners. On one hand, companies like Google, Microsoft, and Oracle need NVIDIA's chips to meet their own AI business demands; on the other hand, NVIDIA's DGX Cloud service somewhat competes with these companies' cloud services.

Cloud computing has become a key profit pillar for tech giants. Amazon's cloud business sales exceeded $107 billion last year, leading the market, but any challenges could impact its high-margin business Microsoft and Google similarly rely on cloud computing businesses to maintain growth. Current macroeconomic concerns have intensified cautious sentiment regarding IT spending, while Google also faces antitrust scrutiny in the United States, and its core search engine business is challenged by OpenAI.

As computing demands continue to shift towards AI, NVIDIA's position as a major "arms dealer" in the industry gives it the potential to reshape the market landscape. The company holds about 80% of the AI chip market, and all major cloud service providers need to rent its chips to provide AI computing services.

However, as NVIDIA enters the realm of cloud giants, the latter are also developing their own AI chips, which may ultimately replace NVIDIA's products. This will save them costs but at the expense of NVIDIA's revenue