Amazon has quickly become a significant force in the market for corporate IT services, where it now competes against big technology names like Hewlett-Packard Co., Dell Inc. and Oracle Corp., to name a few.
Just last week, Andy Jassy, senior vice president of Amazon Web Services, gave attendees at an AWS Summit in San Francisco an example of how much AWS has grown in the market for cloud-based data storage.
“If you look at how much new server capacity that AWS is delivering every day, it would have handled all of Amazon globally back in 2003, when we were a $5.2 billion business with 7,800 employees,” Jassy told the crowd. “That’s a lot of data centers.”
That business is still relatively small compared with Amazon’s massive retail operations. The company doesn’t disclose exact revenue figures for AWS, but when Amazon reported its first-quarter results on April 25, the company listed what it called “other” revenue of $798 million. Analysts widely believe that AWS comprises the large bulk of the “other” category, and total revenue from that segment was up 60 percent in the first quarter.
By comparison, Amazon’s $16.07 billion in total revenue for the quarter rose 22 percent in the same period.
Perhaps most importantly, the AWS business offers the promise of much higher profit margins at a time when Amazon has virtually trained investors to expect ultra-low margins on its traditional online retail business. That is considered one of the main reasons behind the company’s push to disrupt the cloud-computing industry in much the same way it upended markets for books, consumer retail and even tablet computing.
“The company has sped up the rate of web services releases in the first quarter,” said Jillian Mirandi, cloud-computing analyst with Technology Business Research. “We think AWS will see increased growth over 2013 due to an expanded portfolio (of cloud-computing services), and the maturing of the public cloud market.”
With the growth of AWS, Amazon has become an alternative to the traditional big iron server and data-storage technology providers such as HP, Dell, Oracle, International Business Machines Corp., SAP AG, EMC Corp. and NetApp Inc.
Brian Marshall of ISI Group told MarketWatch that AWS’s storage offerings “will commoditize… servers, and will cannibalize some storage opportunities for EMC and NetApp, in particular.” But he added that, at least for now, he doesn’t see a huge rush of companies abandoning what they have to let AWS run their cloud environments.
“It’s way overblown today,” Marshall said.
Not all agree. Last month, a team of analysts at Robert W. Baird issued a broad report, predicting that Amazon’s AWS business will “catalyze a substantial and accelerating shift in the technology landscape,” as money deployed by corporations to cloud services represents sales lost to traditional IT vendors.
“We estimate that for every dollar spent on AWS, there is at least $3-4 not spent on traditional IT, although this ratio will likely expand further with greater scale,” the Baird team wrote. “In other words, AWS reaching $10 billion in revenues by 2016 translates into at least $30-40 billion lost from the traditional IT market.”
Amazon didn’t make any company officials available to comment on AWS. But Jassy, who runs AWS, spoke at an AWS summit in San Francisco on April 30, and outlined the business strategy, and why the company has cut prices on AWS services 31 times since its launch in 2006, including seven price cuts this year.
Jassy called it a “virtuous circle” that benefits customers and Amazon.
“As we have more AWS customers, it leads to more AWS usage,” Jassy said. “As we have more AWS usage, we have to buy more infrastructure. As we buy more infrastructure, it gives us economies of scale, which lowers our infrastructure cost, which allows us to reduce our prices.”