Investors May Balk, But Amazon Plans to Boost Cloud Spending

Investors sent Amazon.com shares spiraling down in July after the company’s second-quarter financial report blamed larger-than-expected red ink, in part, on its cloud-computing business.

But it turns out that the profit pressure from Amazon Web Services, or AWS, won’t likely taper anytime soon. Amazon is in the final stages of winning tax breaks and local government approval to build a $1.1 billion data center in Dublin, Ohio, a suburb of the state capital, Columbus.

It’s an eye-popping number from a company that never discloses business-operation costs unless required. Amazon has never publicly divulged the amount of money it costs to develop the massive AWS data centers, known as regions in company parlance.

The division, launched in 2006, rents data storage and computer-server time to corporations and agencies to run core business processes. It has 10 such regions worldwide, including four in the United States (not including the proposed Ohio site).

Details of the giant data center’s price tag have only emerged in public records related to Amazon’s bid to get tax breaks and land from both the city and state.

In late August, the Ohio Tax Credit Authority acknowledged in a public filing that it had approved a 100 percent, 15-year sales-tax exemption for Vadata, a wholly owned Amazon subsidiary. As part of that deal, the Ohio agency noted that Vadata committed to make “a capital investment of at least $1,110,000,000 during the 3-year investment period starting on August 25, 2014.”

It’s a huge investment. By comparison, Amazon’s fulfillment centers, the company’s name for its massive, 1-million-square-foot warehouses, cost roughly $100 million each.

“Amazon is the early leader in the market, and they clearly want to defend their position,” said Colin Sebastian, an analyst at Robert W. Baird & Co.

The reason the cost for a giant data center is so much higher than its warehouses is likely that Amazon fills them with racks upon racks of computer servers that run the services offered to businesses.

What’s more, the rooms that house those servers often require expensive equipment to maintain constant, specific temperatures. Amazon also builds its own power generators, servers, and networking and storage gear, all of which likely factor into the price tag.

As expensive as the new data-center operation will be, Amazon is clearly not done building them. Company executives declined to comment on the Ohio site. Instead, the company issued a brief statement, noting it is “constantly evaluating a long list of additional target countries and U.S. locations.”

Indeed, Amazon may be working on similar deals with other municipalities, and those negotiations haven’t surfaced publicly yet. Even if Ohio officials approve the Amazon deal, the company might still opt to set up a data-center operation in a different location, where it may negotiate an even better arrangement.

CLOUD RISES

There’s little doubt that the cloud-computing business will see significant growth over the next several years. Forrester Research estimates that so-called public cloud platforms, a segment of the market that Amazon leads, will post a compound annual growth rate of 38 percent from 2013 to 2020 as businesses shift from running their own computer servers to renting computing services from others.

“The interest in usage in the cloud is only going to increase,” said Forrester’s Sophia Vargas.

AWS is the market leader now. While the company doesn’t disclose the unit’s annual sales, some analysts believe AWS will generate $5 billion in revenue in 2014, more than 50 percent higher than estimated 2013 sales.

Amazon’s investments ratchet up the pressure on rivals, who need to make similar big bets if they hope to challenge the company lead.

“They put pressure on the market,” Vargas said.

Amazon isn’t the only company spending huge amounts to chase the business. Earlier this year, Microsoft announced plans for a $1.1 billion data center in West Des Moines, Iowa.

This article appeared in print in the September 17th, 2014 edition of Hamodia.