18 Comments

Summary:

Despite all the disruption caused by Amazon’s web services business, most want to know how much money Amazon makes from its cloud computing efforts. Two Wall Street analysts have come up with estimates that show AWS’ possible money making potential for its parent, Amazon.

It goes without saying that with its array of web services, Amazon has transformed the computing landscape and nurtured what is generically known as the cloud computing industry. By turning expensive storage and computing hardware into a billable service, it has opened up new vistas for entrepreneurs and made corporations rethink how they build and use their computing and storage resources. The question often people ask: How much money is Amazon making from these web services? I’ve heard some wild estimates.

Today, UBS Investment Research analysts Brian Pitz and Brian Fitzgerald released a report which projects revenue numbers against Amazon’s web services. The duo estimate that in 2010, AWS will generate about $500 million in revenues and will grow this number to $750 million by 2011. By 2014, it would bring in close to $2.54 billion in revenues.

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UBS analysts believe that the total market for AWS-type services will be between $5-to-$6 billion in 2010 and will eventually grow to $15-to-$20 billion in 2014. How they arrive at these numbers:

* IDC says the total global cloud market in 2010 will be $22 billion and $55 billion in 2014.
* IDC says the total servers and storage account for $5 billion-to-$6 billion in 2010 and $15-to-$20 billion in 2015.

Of the twelve AWS product lines, only two (EC2 and S3) compete in this subcategory. AWS essentially ‘rents out’ IT infrastructure to companies that seek to outsource IT needs such as Application Hosting, Web Hosting, High Performance Computing, Storage, E-Commerce, and more. Amazon was one of the first entrants (3Q06), and is a top player in the rapidly growing market. (UBS Research Report)

Amazon Web Services: Revenue Model (Click to enlarge)

They argue that while so far the AWS revenue has been small and immaterial when compared to the overall Amazon revenues (roughly $25 billion), that will change soon and AWS will contribute about 10 cents a share in earnings during 2010, and grow it to 22 cents in 2011. The UBS analysts value the AWS business at between $3.4 billion to $3.8 billion. According to their estimates, AWS business had a net income of $58.2 million in 2010 and will make $100.7 million in 2011. By 2014, that number will jump to $393 million, or 83 cents a share. The analysts estimate that gross margins of the web business will be around 50 percent versus Amazon’s gross margins of around 22 to 23 percent.

These are astounding numbers and, if accurate, will prove that Amazon was smart to bet early and bet big on the cloud computing opportunity. Perhaps one thing I should note (and caution) — so far, Amazon has not publicly broken down its revenues along various product categories.

Related Research from GigaOM Pro (subscription required): The Evolution of the Private Cloud

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By Om Malik

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  1. Antonio Rodriguez Tuesday, August 3, 2010

    Nice piece Om. One of the things I am most curious about is what the gross margins of Ec2 and S3 have been over time. Depending on how much of the total cost is affected by Moore’s law, they must be improving dramatically as Amazon has been relatively conservative in dropping the price over time.

    Do you know if anyone has done this particular piece of analysis?

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    1. If your read the analysts P&L statement, the margins are pretty steady at around 50 percent. My guess is that it is from scale, utilization and becoming more efficient. Take a look and let me know what you make of those numbers.

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  2. Hi,

    Nice article and analysis! Interesting to find out how much money Amazon currently makes with their cloud computing services and what the potential is for the near future.

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  3. Thanks for report coverage and feedback. We have a full P&L for the AWS business in our report on page 10 for anyone interested. Email me for a copy of the full report. -Brian

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    1. Brain – Be very interested to see the full report if your offer still stands. We’re doing a lot of work with client on both the supply and demand side for Cloud Services in Europe. Gary

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  4. These margin estimates are too low.

    Just look at the most discounted tier of S3, .055 cents/GB vs. the entry tier at .15 cents. The bottom price is not under water, and thus you can quickly see an over 50% margin on the .15 cent tier of S3.

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    1. James

      Interesting observation. I am trying to dig into this more — also I feel (after talking to a lot of people in the industry), the revenue numbers might be lighter than they actually are.

      Any thoughts on that?

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  5. Only one problem with the AWS world domination theory – competition. The lack of competition allowed Amazon to preserve its the August 2006 $0.10 per hr per ECU pricing. Amazon’s failure to pass along any of the benefits accrued via Moore’s Law over the last four years leaves the company’s offers vulnerable. Selling compute resources on an hourly basis means end users are not stuck with the outdated computer they purchased last year. Amazon will lose momentum unless it re-prices the ECU. The threat and implications of re-pricing is a fact of life in infotech and something authors Pitz and Fitzgerald seem to have ignored. The unstated assumption Amazon continues into the future without competition undermines the conclusions.

    Daniel Berninger
    CEO, FWD dan@danielberninger.com

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  6. Nice analysis. two questions. Where are the costs associated with the platform R&D and operations? I suspect they are in part shared with the e-commerce business so I may be hard to break out. Since there is no break-out for R&D below the line, are they factored into the G&A line? Also, what would you guess for capex for server, networking, storage, etc? Any thoughts much appreciated.

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  7. Good to see some numbers! But I am skeptical about their G&A. IF they are running the R&D and Ops for this as a separate business, its going to be higher than $23M. Also these numbers are going to grow faster (see job postings for AWS).

    Also related to costs, how much compute are they giving away to developers for free? And are these developers staying on instead of migrating to cheaper hosting providers once they enter production? If they hold the line on prices, they’ll be leaking ISVs.

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  8. Huge numbers but they prove to be real. Amazon is really one of the first companies to offer different web services. The only thing I can’t understand why the numbers of revenue grow so fast? Isn’t there some competetion to amazon?! Nevertheless amazon support useful and reliable services so the benefits must be also appropriate

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    1. I agree with you. Does anybody know who are the major competitors to Amazon’s web services?

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  9. Real good stuff. I was curious to know these details since long time.

    Couple of points
    I see the margin estimates are extremely low
    Missing or lack of competition allowed Amazon to dominate
    how real are the above numbers?

    Basharat

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  10. Om, you’ve piqued our curiosity so we prepared this report on AWS for you. Our analysis corroborates much of this, uses a few additional sources and also shows some data on the size of the operation. We also talk about the cloud computing scene in general. Our researcher spent 8 hours on this report and we welcome your comments!

    Interested readers can find our report (500k PDF warning) here: http://brainmaven.com/media/samples/GigaOm,CloudComputingalaAWS.pdf

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    1. Hey guys thanks for this and pouring through this. drop me an email if possible as well.

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      1. Pleasure, glad you enjoyed the report. I’ll drop you a line shortly by e-mail.

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  11. Sachin Nikumbh Monday, August 9, 2010

    Good insight Om. Is there any similar analysis or projections or case study for Indian market ? How would this market florish with existing limited bandwidth – product and reach scenerio in India – example for cloud storage / online storage or computing requires high bandwidth of 10 Mbps if not 100 Mbps and more. How would this market aid in development of high bandwidth market in India ?

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  12. Are the margins really only 50%? For a company the size of Amazon, $500 million, may not sound like a lot but most of that number should be pure profit. As an on-line retailer Amazon has to maintain its computing infrastructure as a cost of doing business. The excess computer capacity they sell after that should be pure gravy.

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