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Webscale Network Operators: 4Q22 Market Review

This report reviews the growth and development of the webscale network operator (WNO) market. In 2022, webscalers represented $2.23 trillion (T) in revenues (+4% YoY), $268 billion (B) in R&D spending (+23% YoY), and $203B in capex (+14% YoY). They had $618B of cash and short-term investments (-17% YoY) on the books as of December 2022. Webscalers employed approximately 4.11 million (M) people in December 2022, from 4.09M in December 2021 and 3.61M in December 2020.

Webscale market hits speed bump in 2022 after unsustainably strong 2021

The webscale market of big tech players has grown rapidly in the last decade. Revenues grew from $640B in 2011 to $1,454B in 2019, just before COVID, for an average growth rate (CAGR) of about 11%. Revenues then grew by 18% and 25% in 2020 and 2021 respectively, as webscale business models benefited from the dislocations in economic activity created by COVID. This growth was unsustainable. In 2022, webscale revenues grew just 4% YoY, to $2,234B. By quarter, the last three months of 2022 were the worst for the market: revenues were flat YoY globally, at about $621B, after growing 9%, 4%, and 6% YoY in the year’s first three quarters.

Growth was slowed down by a confluence of factors. One was simply the post-COVID recovery: in 2022, people went back to work and school, and physical transactions often beat out online ones. Another was China’s ongoing, though unsteady, crackdown on the power of its own big tech players. Macroeconomic weakness was another: high inflation and rising interest rates enticed some webscalers to take the foot off the gas of growth. The fact that most big webscalers rely on ads for the bulk of their revenues have made the macro issues tougher to deal with. Finally, another factor is the slow development of 5G-based services and apps. Webscalers benefited enormously from the rollout of 4G and the behavior changes enabled by 4G. With 5G, though, most early users are signing up to do more of the same thing with their devices, just a bit faster. It's true that webscalers have invested heavily in new technologies which can benefit from 5G, such as autonomous vehicles, robotics, smart factories, and health care delivery, but most of these new ventures are on a slow growth trajectory.

Webscale tech spending surged in 2022 despite topline moderation

Webscale capex had another stellar year in 2022, up 14% to $203 billion. Strong capex growth means the sector’s capital intensity (capex/revenue) ratio grew in 2022, from 8.3% in 2021 to 9.1% in 2022. This is the highest it has ever been. Webscalers spent heavily on capex in 2018, but even then annualized capital intensity’s peak was 8.8% (in 4Q22). Across the top webscalers, capex has surged due to new data centers, supporting cloud services and new network functions. Smaller webscalers struggle to keep up, now relying more on third party data centers and migrating to capex-light strategies. That’s especially true for IT services focused companies like Cognizant, Fujitsu, HPE, IBM, and SAP; they are fading away in importance. By company, Amazon was by far the biggest spender in 2022, accounting for 31% of capex (2021: 34%), followed by...

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Matt Walker
Chief Analyst
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