Amazon's cash cloud as AWS revenue soars 81%
- Summary:
- Amazon Web Services turns in some amazing numbers, but there's growing competition in the rear view mirror.
That profit number, a turnaround McGrath from a year ago loss of $126 million, would have been enough in its own right to make Wall Street happy. But what really got investor excited was the 81.4% increase in Amazon Web Services-related revenue.
AWS revenue was $1.824 billion, up from $1.005 billion year-on-year, while profit topped $391 million, against $77 million a year ago. The division has an operating margin of 21%, compared to that of 5% in the retail arm.
Amazon CFO Brian Olsavsky says that the firm intends to carry on cutting prices, but is adamant that AWS success is not down to pricing alone:
Innovation is accelerating, not decelerating. We had over 350 significant new features and services, and we believe that's what resonates with customers. While pricing certainly is a factor, we don't believe it's always the primary factor. In fact, what we hear from our customers is the ability to move faster and more agilely is what they value.
But he adds:
We have continued to lower prices. We've had multiple price cuts this year. We are now up to 49 since launch in 2006, so it is a fundamental part of our business model.
We're in this for the long haul. We are looking for return on invested capital, free cash flow, and happy customers in the space.
The firm is continuing its regional expansion of data centers. The EU (Frankfurt) region, which opened in October 2014, is now AWS’ fastest growing international region to date, while a new region will open in India in 2016. Olsavsky says:
From a distribution of customers, it is a global business. We have regions spread throughout the world; we have 11 regions at this point and have announced plans to launch a region in India in the future.
All good?
The analyst community is upbeat on AWS prospects. Doug Anmuth of J.P Morgan points to the number of independent software vendors that have opted to run on the platform as indicative of its success:
By focusing on increasing the features and services available on the cloud ecosystem, AWS, in our view, is growing to become a more dominant one-stop cloud shop.
But one alternative view was offered by Meaghan McGrath with Technology Business Research, who cautions that AWS will see more competition coming from challengers in the space.
According to Synergy Research Group, AWS controls 28% of the cloud infrastructure market, ahead of Microsoft on 10%, IBM on 7% and Google on 5%. McGrath’s argument is that those three can and will increasingly gain traction:
Each competitor offers its own threats to AWS: Google with constant innovation in cloud, mobile, BI and IoT; Microsoft with a large and devoted customer base and Azure’s ability to run across hybrid environments; and IBM’s sheer determination, execution and investment dollars in its cloud capabilities to move into a leadership position in the space.
Glancing over its shoulder at the encroaching IaaS and PaaS competition does not worry AWS quite yet, but the vendor’s position as a niche public cloud IaaS vendor will limit its upside potential as customers look for cloud suites that simultaneously offer robust development and hybrid IT deployment capabilities alongside a full applications suite, professional and managed services, popular open-source support and out-of-the-box integration.
McGrath adds:
While the dominant leader (for the foreseeable future) in the public cloud IaaS market, AWS lacks on-premises deployment options, private cloud presence and a SaaS presence. AWS’ lack of a highly adopted and feature-rich SaaS suite (like that of Microsoft, Google, Salesforce and others) will be a concern.
There’s also a shadow hanging over from the Amazon mothership, she warns:
Amazon historically has much lower margins in comparison with competitors Microsoft, IBM and Google. Amazon realized a net loss in 2014, and competing firms Google, IBM and Microsoft realized double-digit profit margins in the same time frame, as the latter companies are able to more freely invest in their cloud business units. Competitors’ capability to invest ahead of growth and to cut prices regardless of margin gives these competitors a business lever AWS is missing.
Finally, McGrath voices concerns about AWS lack of portability in comparison to rivals such as Google and IBM which support initiatives such as OpenStack:
While AWS’ short learning curve and APIs make it easy for developers to launch services, the APIs also “stick” customers to the AWS platform. While AWS has opened its code and supports open source vendors like Docker, it does not support popular open source cloud frameworks OpenStack or Cloud Foundry.
My take
Astonishing numbers that got Wall Street understandably excited. But as McGrath notes, it's still relatively early days in the IaaS market and the competition will get tougher over time.