Where Is The Opportunity For Google Cloud Partners?

At Volpi Capital, we are bullish on the outlook for service partners within the Google Cloud ecosystem. Google Cloud has been outgrowing the overall cloud market at a rate of 1.5x to 2x YoY, remaining competitive in 3^rd place in a tightly contested race among the "Big Three" cloud providers, who continue to dominate this oligopoly market.

While Google Cloud Platform (“GCP”) accounts for less than 10% of Alphabet's total revenue, it serves a pivotal role as:

• the data repository laying the foundation for Alphabet's ambitious goals in data analytics and machine learning;
• a crucial component of a comprehensive ecosystem of seamlessly integrated enterprise solutions, creating a similar platform lock-in effect as the one we observe in Microsoft, complementing applications such as Google Workspace for productivity software, Looker for BI/ Analytics, Vertex AI for enterprise GenAI agents, or the Build platform for DevOps; and
• one of the fastest-growing business segments, enabling Alphabet to diversify beyond Google search advertising. This diversification is increasingly important as this revenue stream navigates the potential threats posed by the emergence of LLM and shifts in user behaviours.

The Expanding Role for Google Cloud Partners

Since Thomas Kurian took the helm at Google Cloud in 2018 and pledged an 100% partner attachment rate to GCP deals, the network of certified partners has seen remarkable growth, with a fifteenfold increase in the number of registered partners. GCP’s dual engagement model—partner-led for small and medium-sized enterprises (SMEs) and direct engagement for large enterprises—allows smaller partners to compete effectively with Global System Integrators (“GSI”) in the SME segment, where GCP has a strong foothold. Smaller partners can forge close relationships with their customers and grow alongside them. Moreover, larger GSI practices have also reported strong growth rates, exceeding 75% year over year. This rapid expansion reflects the partner ecosystem's increasing importance in GCP’s overall GTM strategy, both in the SME and Enterprise segments.

It’s Working - But There Is Still Large Untapped Market Potential

The strength of the platform, coupled with Google's globally recognized brand and a rapidly expanding partner ecosystem, has made Google Cloud generate record sales and profitability in the last quarter, hitting an $11bn+ run-rate and $1bn+ in operating income. On average, service partners generate >$6 of services revenue for every $1 of GCP cloud revenue, reflecting the immense potential for value creation. Our assessment, however, is that Europe’s market for GCP services, although expanding rapidly, remains underserved. Our estimate is that GCP’s cloud revenue in Europe is around €6.6 billion, of which only c.€1.6bn is sold via partners, which generate revenues of €9.9bn, meaning there is significant growth potential for partners, especially in markets with limited competition and high demand for specialized GCP services.

What we’re hearing from our conversations with GCP partners

• Investing in Talent and Specialization: The success of a partner’s GCP practice hinges on the expertise of its team. Investing in continuous training and upskilling, particularly in GCP’s core areas such as data analytics, machine learning, and AI, is crucial. Specialization credentials in these high-demand areas enable partners to differentiate themselves in a competitive market and capture high-margin business.
• Aligning to GCP’s partner incentives: In 2024, changes to partner incentives reflected an aggressive growth strategy centred around AI-driven cloud consumption and new customer acquisition. The success of partners largely depends on aligning to this strategy. For example, partners driving GenAI solutions can access 10x incentives, new AI specializations, and enhanced training programs. In the Google Workspace arena, there is a strong emphasis on new logo acquisition. Workspace new logos now offer partners 60% margin, whilst renewal margins on existing customers have reduced from 20% to 12%.
• Consolidation: There have been at least seven M&A/PE transactions in Europe in the last three years and consolidation in the GCP ecosystem is well underway. Nonetheless, the GCP services market is still highly fragmented, with many small partners operating independently. We expect companies to acquire or merge with other specialized partners, broadening their expertise and market reach.

We’d love to hear from you.

Whether you are a Google Cloud partner looking to take advantage of these opportunities, or simply have insights to share, we would love to hear from you!

You can reach out to Tom Mears-Alcaide (tom@volpicapital.com) and/or Fernando Piekenbrock (fernando@volpicapital.com)