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

7 Comments

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.

AMZN Chart

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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.

7 Comments

Alex Jauch

The real question here is the viability of IaaS in the enterprise. We still have not seen significant penetration here. Tons of noise about OpenStack but no execution. Now the hot topic is Docker. Time will tell.

Today, the enterprise money is going to SaaS. Something like 20-30% of IT spend has moved to SaaS which is the real threat to traditional software companies.

So far, Public IaaS is just a rounding error for Enterprise IT spend.

Artem

Barb, it looks like you do not know the actual cloud products of Azure, Google, IBM and AWS, and cannot compare them.

How can you provide advice on financial decisions, say, in car manufacturing industry, if you do not know the difference between Chevrolet Corvette and Ford Focus? How do you assess company’s perspectives, if you have no required engineering knowledge?

Barb Darrow

@artem are you saying that Google, Amazon and Microsoft do not all offer public cloud IaaS? If so then you are mistaken. As for individual services, all offer basic storage compute and networking. For mere mortals that is enough basis for comparison. thanks for your comment but not all reporters are engineers. nor do they need to be.

Daniel Lopez

Where the heck do you deduce that Barb does not know the product offerings from cloud vendors from the above article? In general, Gigaom’s coverage of cloud in general (and Barb’s in particular) has been more in-depth / articulate than most other publications. Listen to some of their podcasts on the topic as well before you draw conclusions.

Andrew

Darrow is the most knowledgable tech journalist there is on AWS. None of the other reporters who cover cloud computing understand it to the depths that she does.

The reason that she takes Google/MS/IBM’s offerings more seriously than most engineers do is that she’s looking at the future, while customers are looking at the present. Sure today AWS is way ahead, and Google Cloud doesn’t have any big customers now. But all of the competition are investing massively and will catch up to some degree. It’s a lot easier to copy and improve on the Corvette when it’s already been out there.

David Mytton

The danger is with the commodity services – basic compute and storage. This is where the price war is and it’s possible that Microsoft and Google have more reserves to draw on to compete aggressively with AWS, particularly in the long run.

Where the profit is more likely to come from is the differentiated services, essential the SaaS products in the cloud vendor portfolio. These are things that can’t be replicated (easily) elsewhere, such as BigQuery, DynamoDB, MySQL Aurora, etc. Of course they use the underlying commodity services but the uniqueness is in the software, and that allows a very healthy profit margin.

For now, I think AWS are ahead with these services – they’ve been around longer and have had more time to invent and innovate (and sometimes copy/reimplement). Microsoft is very close though and I expect Google to catch up as they productise things they already have internally. When that happens, this will be where it becomes more difficult to AWS.

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