Meta's Inevitable Cloud
Meta has a problem. Well, two of them, actually.
First, after years and years spent trying to diversify, their business is still almost entirely advertising-based. To be clear, it's a great business – one of the best ever created, in fact. It's a good problem to have, but it's still a problem. Because if that business ever slows... Look out below.
That leads to the second problem. The latest way Meta thinks they can fix the first problem is with AI. Sure, they'll use AI to super-charge the ads business, but ideally it will also unlock other businesses for them. Again, to diversify. Currently, they view it as the key to their devices strategy, led by their smartglasses. But they're also working on other products and ways to potentially monetize AI beyond just selling ads. But the problem here is that it's expensive to build out those AI capabilities. Like, insanely expensive. Like the most expensive endeavor in human history, perhaps.
Wall Street doesn't like this. Specifically, Wall Street doesn't like this for Meta. Why? That first problem. Because unlike their Big Tech peers also clearly determined to pour all of their free cash flow into the AI build out, Meta doesn't have an obvious, direct way to monetize the capabilities. Again, there are ads, but that's indirect. Amazon, Google, and Microsoft are all selling their AI directly.
Are you seeing it yet? These two problems have a single solution. It's not simple, but it is fairly straightforward: Meta needs a cloud business.
It's a notion and solution that's so obvious that I've been noting it for quite some time now. After Meta bought Manus late last year (before they were forced to un-buy them), it occurred to me that at least part of the play was to get Meta into the business of selling products to other businesses. That is, enterprise sales. Granted, Meta has been trying to do this for years – remember Workplace, their short-lived Slack competitor? – but nothing has really worked. Again, Meta has remained the ads-based social media company. But Manus was already working. And beyond their consumer angle, there was clearly a big business brewing in selling agentic workflows to enterprises. As I concluded that post:
This deal seemingly makes a lot of sense for Meta on a few fronts. And it also may point to the start of a renewed push into enterprise. Again, easier said than done, but don't be shocked if this is a wedge of sorts. If they can keep Manus expanding into businesses, we should see other Meta cloud offerings follow, putting them more in line with those aforementioned Big Tech peers. And perhaps easing some concerns Wall Street has with regard to their AI spend.
Well, again, Manus, sadly, didn't really work out for Meta. But not because the business or the strategy wasn't good – if anything, those may have been too good, to the point where China took one look at the deal and said essentially: "yeah, no." Honestly, Meta probably should have used the "hackquisition" method to try to do the deal, but again, they clearly wanted the Manus actual business, not just the employees and some "non-exclusive rights". But I digress... The point is that with Manus, you could see a path for Meta to get a toehold into enterprise sales and expand from there – perhaps all the way up to a true cloud offering.
A few weeks later, another bit of Meta news made this general game plan even more obvious, at least to me. As I wrote about the formation of "Meta Compute" – their formal AI infrastructure play:
When I read about this new initiative within Meta, I can’t be the only one who assumes it will eventually lead to a full-on Meta Cloud, right?
Again, it seemed fairly obvious, though a number of people pushed back on the notion. Specifically because it would be so far afield from Meta's core business – and a huge potential headache, going up against the aforementioned Amazon, Google, and Microsoft clouds. That's obviously true, and I noted as much – in particular how it has taken Google years and several micro-pivots to be able to effectively compete in the space. Why? Because for as massive as Google is, and as good as they have always been with infrastructure, they didn't have the muscles to really do enterprise sales. It took bringing in someone like Thomas Kurian from Oracle to make that happen. And he has made that happen. To the tune of $20B in revenue a quarter – fast approaching a $100B/year business for Google. That makes it nearly 20% of Google's overall revenue – and again, rising.
My point is simply that Google, a company once knocked as being a one-hit wonder thanks to their ads business – again, one of the best businesses ever created – eventually found a way to diversify. It was painful and took a long time, but it worked. No one talks about them being a one-trick pony anymore. Meta has tried many things to diversify – going so far as to change the name of the company to one of those bets that, at least thus far, has not panned out – but they haven't tried the one that has worked so well for Google.
And so while some thought Meta doing a cloud business would be crazy because it's so far from their core, I viewed that as sort of the point. Again, they need to diversify! But one final element really drove this notion home: the AI build-out.
When Meta rolled out their first "Muse Spark" models in April, the most interesting element to me wasn't the models themselves but the idea of how they might sell access to them. As I wrote at the time:
One more thing: perhaps the most interesting element of the Muse movement is the notion that Meta intends to sell access via APIs. A first step towards a bigger Meta Cloud offering? You don't spend $140B a year for table stakes.
Even with these new models out there in the wild, and Meta's AI pivot from their failed Llama strategy seemingly on the cusp of being complete, Wall Street continued to throw up all over the company due to their CapEx spend without that clear path to directly monetize it.
Given their valuation as a private company, investors have started to worry about this as well for OpenAI. And so unsurprisingly, the company has started to say that they might be able to launch a cloud offering of sorts to help support their infrastructure build out. I've called this "Field of Dreams Economics" in the past – that is, if you build it (the data centers), they will come (the cloud customers). It's unproven at best, and folly at worst.
In walks Elon Musk...
In a way, Meta and xAI found themselves in the same boat having spent billions to try to catch up in AI and not having much to show for it. At first, it looked like throwing money at the problem would work, but now it looks more like they've built out and up a ton of compute capacity without the demand to truly put it to work. Amazon, Google, and Microsoft don't have this problem, because beyond the varying degrees of success for their own AI products, they have third-party customers. Which is to say, they have their clouds.
As a result, if anything, they each have the opposite problem: they're having a hard time striking the right balance between their own needs and those of their customers. In a way, at the highest level, this is clearly what drove Microsoft to push OpenAI away. As a customer of their cloud services – the most massive customer – they were eating Azure alive. These days, we have Google telling Meta that they need to cut back their compute usage. Anyway, what this all showcases is that the cloud demand is there – and rising.
And beyond AI services, raw compute is driving much of this. This, in turn, led Elon to connect the obvious dots on his own problem.
In an age where data center capacity is king, xAI found itself holding the crown jewels. They clearly didn't want to be in that position – they'd love for demand for xAI models to take up all available compute – but it's actually not a bad position to be in given the current situation. And that's especially true if you're, say, about to IPO and need a good narrative around why you merged your cash-incinerator (xAI) with your cash machine (SpaceX).
xAI is not a cash-incinerator, as it turns out – well, it still is, but not as big of one because it's also now a cash generator in the form of a neocloud!
Yes, Elon figured out a way to turn his space company into a cloud company too. He wants it to be an AI company, and it is, to some extent, but the better narrative is the cloud, because it's the far better business at the moment. And while the "neocloud" business isn't exactly what Amazon, Google, and Microsoft offer, it's arguably a far more straightforward cloud business. Granted, it's one that may be a moment-in-time thing given the capacity constraints that are even forcing even Big Tech to cut deals with the neoclouds to try to boost their capacity. Still, it's better than just burning money with nothing to offset it!
Zuckerberg clearly saw Elon's jujitsu maneuver in getting first Cursor to sign up to use xAI's compute, and then Anthropic, and finally Google. And saw how the market reacted: a huge potential weakness (AI costs) got turned around to help fuel the largest IPO in history. If everything else above made it clear that Meta would need to have a cloud business at some point, the SpaceX neocloud made it an imperative to happen – or at least be talked about – now.
Meta's stock is in the dumps? Zuck could simply pull the "Elon Lever".
And now he has. I've buried the lede some 1,750 words in, but yes, Meta is planning to launch a cloud business, reports Riley Griffin and Kurt Wagner for Bloomberg:
Meta Platforms Inc. is developing plans for a cloud infrastructure business that will sell access to AI computing power and models, setting up a new vector of competition with industry leaders like Amazon Web Services, Microsoft Azure and Google Cloud.
Meta, which has been rushing to secure expensive data centers and other infrastructure to fuel its own artificial intelligence ambitions, is forming a business to generate revenue from excess computing power sold to outside customers, according to people familiar with the matter, who asked not to be named as the details aren’t public.
There we go. But they're also seemingly torn in terms of what their cloud should offer:
One potential plan includes selling access to various AI models that are hosted on Meta’s existing AI infrastructure, an approach similar to AWS’s Bedrock offering, the people said. Meta would run the data centers and chips that power the models, including its own Muse Spark models, and charge developers to access them.
The company is also considering selling access to “raw” computing capacity, akin to other so-called neocloud businesses like CoreWeave Inc., the people said. Development of these new business lines is part of Meta Compute, an internal initiative to build and manage the company’s AI infrastructure efforts, according to a person familiar with the plans. Meta Compute is led by Santosh Janardhan, Meta’s head of infrastructure; Daniel Gross, a leader inside the Meta Superintelligence Labs AI unit; and Meta President Dina Powell McCormick.
The answer may end up being both. The reality is that it will end up being whatever the market demands. And what investors end up liking. And sure enough, Meta's stock, after months in the Wall Street doghouse, shot up nearly 10% yesterday on this news.
Now, maybe it's all a head fake just to juice the stock, but it certainly doesn't seem that way. It seems like Meta is figuring out a way to launch a cloud service that will add to their top and bottom lines. And that should, in turn, help to diversify their business away from ads.
That doesn't mean they'll offer everything that Amazon, Google, and Microsoft do – and they probably shouldn't even try to do that. But they should probably have some sort of neocloud offering, at least to start, mixed with that 'Bedrock' competitor, which would include selling their own models via APIs. And perhaps they can even hark back to their "open source" AI roots by serving up DeepSeek models and the like.
Maybe down the road, Meta starts to augment their AI cloud with other types of cloud services. And maybe one day 'Meta Cloud' even makes up a double-digit percent of revenue. Or maybe it doesn't work, just as many of Meta's recent initiatives haven't.1 But it's certainly worth trying, for the optics alone, if not the actual business potential. It has been obvious and inevitable for a long time now.
M.G. Siegler
M.G. Siegler
M.G. Siegler
1 Certainly I'm more than a little worried about Meta's ability to execute on much of anything, as I'm currently on day 3 of getting continuously banned by WhatsApp which they can't seem to fix...
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