After rough year for Amazon stock, will AWS feel the pain?

People who watch Amazon Web Services tend to be cloud oriented and don’t necessarily pay a ton of attention to the Amazon Inc. mothership. Maybe they should broaden their focus a bit.

In 2014, that mothership had a rough year  — Amazon’s stock price fell 18 percent over a period during which the Nasdaq overall was up 14 percent. That put [company]Amazon[/company] founder and CEO Jeff Bezos on the receiving end of a $7.4 billion paper loss for that period. (His 18 percent ownership is still worth just north of $26 billion.)

The company’s third quarter was particularly worrisome. For the period ending September 30, 2014, Amazon posted a $544 million loss on revenue of $20 billion, provoking much consternation on Wall Street, which appeared to be losing patience with Bezos’ growth-at-all-costs strategy. At that time, I wondered whether, given all that angst,  the company would keep investing in AWS to the degree it had previously. I’ve reached out to Amazon for comment and will update this post as needed.

Some people see AWS as a profit generator for Amazon Inc. Despite the steady drumbeat of price cuts, it’s been clear for some time that AWS isn’t the loss leader most experts once deemed it to be. But as of 2014, AWS was no longer the sole arbiter of public cloud IaaS pricing. Google and Microsoft sliced the prices of public cloud services on their own, sometimes beating AWS to the punch — which means that even as AWS adds scale and features, it is in a much more competitive market than it was for the first seven years of its existence.

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More big fish in the pond

Over the past year or so, big competitors have come online with many comparable services for the first time. And two of those competitors — [company]Microsoft[/company] and [company]Google[/company] — seem prepared to spend what it takes to keep scaling up, cutting prices and adding higher-level services.

The thinking seems to be that AWS (and Amazon itself) sacrifices profits for market share growth, and then, when the growth spurt stops, it can start reaping the rewards.

That strategy worked well for Amazon’s retail operations a decade ago.  But at that time, there weren’t e-commerce competitors capable of competing at Amazon scale. That’s changed. Now there’s Chinese retail giant Alibaba, Target.com and Walmart.com. While Bezos’s net worth got a haircut in 2014, Alibaba Group co-founder Jack Ma added another $25.1 billion  to his stockpile, thanks to his company’s September IPO.

Just as those retail competitors got with the program, tech competitors have gotten the cloud memo. Microsoft now fields Azure, Google has Google Cloud Platform, [company]IBM[/company] has SoftLayer.

No one doubts Bezos’ financial acumen, and he isn’t standing still. In early December, the company sold $6 billion in a debt offering, a move that met mixed reviews by various bond rating agencies. Moody’s pretty much immediately downgraded its outlook on Amazon to negative; Standard & Poor’s, on the other hand, reaffirmed its positive AA rating on the debt.

In November, AWS SVP Andy Jassy was asked whether Amazon’s cloud could compete with cash-rich rivals and he expressed confidence that the company can continue to “fund this business to its potential” and reiterated that with its head-start it still offers far more services than anyone else.

Still, it helps to remember that even companies that dominate markets can’t hold the top slot forever. The public cloud marketplace has been validated, so competitors flooded in. The niche players won’t all be able to play at mass scale IaaS, but it’s clear that Microsoft and Google are here to stay. AWS isn’t alone anymore.

Note: This story was updated at 10:13 a.m. to include Andy Jassy’s comments from November for context.