By Charles King, Pund-IT, Inc. April 29, 2015
Amazon’s recent earnings call included, for the first time, a financial breakout of the company’s Web Services (AWS) organization. It was a turning point for cloud computing. Why so? For one thing, AWS has long been crowned as the leading cloud vendor, with research firms rating its market share at 30% to 50%, roughly three to 5X its nearest competitors.
Since the company’s penchant for financial secrecy meant there was no way to accurately or fully measure those assessments, this new data helps to sort out the cloud marketplace. That is the main reason Amazon’s results have been subjected to more than the usual run of entrails reading by financial and industry analysts.
Doing so should also spark further honest consideration of various cloud vendors, their strategies and solutions. Amazon’s results suggest that AWS is enjoying a great deal of success but though the company continues to aggressively grow AWS-based services, its approach and the larger benefits it may potentially capture appear far narrower than some of its competitors.
That’s a critical point for both cloud customers and investors. Since cloud essentially qualifies as a new IT legacy system, businesses need to understand the strengths and weaknesses of specific vendors. The same goes for shareholders who are committing funds to the cloud marketplace.
AWS delivers the goods
So how did AWS do both individually and in the context of its parent company? Quite well, overall. Amazon reported AWS results for the past five quarters, and the group had sales of $1.566B in Q1 2015, a year over year (YoY) gain of nearly 50%. AWS’s operating income for the quarter was $265M, which Amazon noted as an 8% gain from Q1 2014 but that somewhat masked notably weaker profitability in Q2 and Q3 2014.
All told, the results supported Amazon CEO Jeff Bezos’ claim that AWS constitutes “a $5 billion (annual) business and still growing fast.” However, AWS is also driving far higher profit margins than Amazon’s overall business. In Q1 2014, the company’s net sales increased 15% to $22.72B, and operating income increased 74% to $255M. But despite that Amazon reported a net loss of $57M during the period, the third quarterly loss it has suffered in the past year.
In essence, without AWS’ contributions, Amazon’s financial situation would be considerably more troubled than it already is. If AWS performance were to falter or to come under significant competitive pressure, the results for the larger company could be serious.
So how are Amazon’s cloud competitors faring? That’s where things get interesting if a bit complex.
The vendor usually placed third behind AWS, IBM, recently reported that its overall cloud business drove $7.7B in revenues during the past 12 months. Its “as a service” cloud offerings constituted about half of the whole ($3.8B – with revenues growing $1.5B during the past year) and the remainder was composed of hardware and software sales and various services. Microsoft is typically ranked second to AWS in terms of size and the company has reported that its cloud business is on a $6.3B annual run rate. That includes software sales, including Office 365 and CRM Online, and a range of offerings from its Azure platform.
Salesforce.com and Google generally round out most analysts’ top five cloud vendor lists, with the former reporting around $5.4B in cloud-related subscription, services and support revenues for its most recent fiscal year. Google’s position is harder to parse clearly, since cloud is incorporated in the company’s “over” revenues category. That portion of Google’s business delivered nearly $7B in sales for 2014 but includes consumer devices, Play store sales and Google for Work. Finally, there are other, serious cloud players beyond the top five, including Oracle, Rackspace and SAP which have each reportedly done around $2B in cloud business during the past 12 months.
So what does all this mean in regards to Amazon? Two things. First that the cloud marketplace is growing rapidly in terms of both size and, particularly among the company’s competitors, diversity of offerings and revenue sources. Second, the only way AWS can be accurately proclaimed the “leader” in cloud is purely in terms of as-a-service-based revenues.
In contrast, the company’s four main competitors, Microsoft, IBM, Salesforce.com and Google, are all earning more from their overall cloud businesses than Amazon. Should the ability to incorporate popular applications, hardware solutions and consulting services into their cloud solutions be considered separately? Why should that strategy require the equivalent of an asterisk when discussed by some market analysts?
The most succinct definition of cloud I’ve run across is: “Your stuff on someone else’s computers, on the Internet,” which appears to have originated on a Yahoo Answers forum in November 2010. That’s about four years after the official launch of AWS, when Amazon’s web services were beginning to appear in many organizations. But did AWS mark the “be all/end all” of cloud computing?
Not at all. From a technological perspective, cloud platforms including AWS leverage technologies long common in highly virtualized servers, including mainframes and other scale-up systems. From a provisioning point of view, clouds including AWS resemble the hosted IT services that have been around for decades. Just as those traditional technologies and service models changed over time, cloud computing continues to grow and evolve beyond the capabilities or control of any single vendor.
Amazon deserves kudos for helping to drive usage of and interest in public cloud. Plus, judging from the company’s recent earnings call AWS appears to be the overall market leader in as-a-service cloud solutions and likely does more business than competitors in some business and customer segments. But from a revenue perspective, Amazon is in nowhere near as dominant a position as some have suggested.
Amazon is continuing to develop its AWS solutions. However, the company’s approach and its potential reach are narrower than its closest rivals since they can leverage a range of complementary cloud-related solutions and services that are not available to Amazon. Moreover, those vendors all enjoy significantly firmer financial positions than Amazon. As a result, if any of their individual cloud efforts were to fail, it would constitute a painful but survivable disappointment.
Can Amazon say the same of AWS? As rapidly as the market for cloud computing continues to grow, expand and evolve, the answer to that question may be nearer than anyone, including customers and investors, believes.
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