Introduction and monster growth

When Amazon first appeared, it rode the wave of e-commerce, tempting millions of consumers into buying goods online and having them delivered the next day. In those earlier days, there was no inkling that Amazon Web Services (AWS) would be a hit for the company.

The basis of AWS, according to Brad Stone’s book ‘The Everything Store’, was to help internal Amazon teams to host apps, files, and so on. The actual idea for growing it beyond that was not thought of for some time and, at least initially, was viewed sceptically by senior management.

While Amazon blazed the trail in terms of online retail, back then, its tech credentials were – at least to the outside world – not on the same level as Google or other made-for-the-internet giants.

The decision to try and make a go of Amazon Web Services, though, turned out to be a masterstroke by CEO Jeff Bezos who, Stone writes, is responsible for most high-level decision-making within the company.

Monster growth

According to company filings and various analyst projections, AWS is a monsterthat is growing faster than even the company can comprehend.

“Amazon’s introduction of Amazon Web Services in 2006 marked the launch of a notable shift in the market for outsourced enterprise computing,” wrote Gartner, a leading research firm, in a report. “As a result, IT vendors of all kinds … have all felt significant impacts on their businesses, and many are now quickly adjusting their product strategies to deal with the new market landscape.”

In the fourth quarter of 2015, AWS generated over $2.5 billion (around £1.9 billion, AU$3.4 billion) in revenue, of which over $650 million (around £500 million, AU$870 million) was profit. These figures are up over 50% from the previous year. Amazon is notoriously a company that is extremely tight on profits, seeking out every last dollar to spend on investment.

Ben Thompson, an independent analyst at Stratechery, argued in a note that: “AWS is simply spinning off more cash than Amazon knows what to do with.” The company’s new division, which has existed for 10 years, is just too profitable.

Indeed, Amazon’s recent quarter-to-quarter results have been unusually profitable for the company. The firm announced in its Q1 2016 report, which covers the three months leading up to April, that its net income was $513 million (around £395 million, AU$685 million), up from a loss of $57 million (around £44 million, AU$76 million) in the previous year.

Could AWS eclipse Amazon's retail side?

Cloud first?

It’s clear from this that AWS is a monster business that could, in the future, overtake its retail counterpart.

“If, in the long run, Amazon shifts from being an e-commerce company with a cloud services business on the side to a cloud services company with an e-commerce business on the side, then their potential as a money-making entity should shift dramatically as well,” says Thompson.

It’s hard to see from this perspective that Amazon would need to do anything differently, especially as the addressable market for cloud services is virtually infinite as more and more companies of all sizes move online.

The street battle with Microsoft

Microsoft, the company that is likely Amazon’s biggest headache, is now settling down for what one analyst described as a “street battle”.

“We continue to believe 2016 will be a ‘206 area code street battle for the cloud,’ with Microsoft firmly best positioned as the vendor to compete with AWS on the enterprise cloud front for years to come,” wrote FBR Capital earlier this year.

“We believe Microsoft and Azure have a long runway to cross-sell into their massive enterprise customer bases with a broad platform of cloud offerings for the next few years,” the note continued. “We believe its best cloud days are ahead given our positive checks from the field around solid uptake of key cloud products (e.g. Office 365, Azure) heading into 2016.”

It’s true that Microsoft under CEO Satya Nadella has been much more open about working with competitors and that does, to an extent, include Amazon. But Microsoft has several key advantages over Amazon.

Office is a big part of Microsoft's overall strategy

Office advantage

The first, and likely most obvious, is Office 365. Providing hosting, as Amazon does, is all very well but it exists in the background, away from the actual employees of the company who get stuff done. There isn’t currently, and has never been, anything to rival Microsoft’s comprehensive productivity suite out of Amazon and this could be a disadvantage going forward.

AWS is wildly successful, and will continue to be so, but Microsoft is making a real business out of selling enterprise clients – and consumers, but mainly businesses – subscriptions to Office 365, which includes Word, PowerPoint, Excel, and so on.

According to Microsoft’s most recent earnings report, the company has over 22 million subscribers and revenue is growing 60% to 70% every year. The company does not break out revenue specifically for Office 365, but the overall segment it is in – Productivity and Business Processes – grew to $6.5 billion (around £5 billion, AU$8.7 billion).

The flipside of this, beyond the fact that you get products in front of employees, is that Microsoft has many more offerings to sell than Amazon. Office 365 could, for example, be bundled in with Azure, the equivalent to AWS, and Windows. At a discount, this could be hugely attractive and it’s a package Amazon can’t match.

These two companies have always had strengths in different areas of the market – Amazon with startups, Microsoft with big businesses – and this is exactly the way Amazon should hope it doesn’t go. If Microsoft can persuade even a fraction of its customer base to go with Azure plus Office plus Windows, because of the convenience and discounts, then there isn’t much AWS can do.

Cause for concern

That isn’t, of course, to say that AWS will fail or even stop growing. It’s trajectory at the moment is very much upwards, but the lack of anything SaaS-wise should be a cause for concern.

Amazon has always been a company with a 50-year plan and, it seems, AWS is good to go for that long. Businesses, especially small ones, swear by it and Microsoft’s relatively slow start in the infrastructure space has given AWS a big head-start – but that isn’t to say it’s a done deal and there are some key areas of weakness Amazon must address.

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