Amazon has pulled off a pretty amazing trick over the past decade. It's invented and then built a nearly $5 billion cloud computing business catering to fickle software developers and put the rest of the technology industry on the defensive. Big enterprise software companies such as IBM and HP and even Google are playing catchup, even as they acknowledge that cloud computing is the tech industry's future.
But what kind of a future is that to be? Yesterday Amazon said that while its cloud business grew by 90 percent last year, it was significantly less profitable. Amazon's AWS cloud business makes up the majority of a balance sheet item it labels as "other" (along with its credit card and advertising revenue) and that revenue from that line of business grew by 38 percent. Last quarter, revenue grew by 60 percent. In other words, Amazon is piling on customers faster than it's adding dollars to its bottom line.
The company's chief financial officer, Tom Szkutak, blamed the drop on "substantial" price reductions the company has made to products such as its core EC2, storage and database services. "They ranged from 28 percent to 51 percent depending on the service," he said on a conference call with analysts.
To a certain extent, Moore's Law and the growing economies of scale automatically build cost savings into Amazon's giant cloud. After all, if chipmakers deliver more and more transistors every two years, Amazon should be able to do more computing for less.
But it's facing increased competition from Google and Microsoft. And IBM and HP want in on the game too.
The thing is that even as Amazon's business matures to the size of a company like VMware, its worrying to investors to see profitability slipping. That's pretty much the meta-narrative of Amazon as a whole, though, which says it could lose as much as $810 million in the current quarter. The company is taking losses to invest in the future, and Amazon's 10 percent stock drop today shows that some investors are uncomfortable with that.
Not Amazon's management, though. "We love that business," Szkutak said, referring to AWS. "It's doing great and we're very pleased to have the opportunity to invest in it."
The question is, when will Szkutak have the opportunity to cash in? Surely the company's growing legion of AWS users hope that day never comes.
