Amazon Reveals an Impressive Performance in Cloud Computing

24 April 2015 - 13:07 By DAVID STREITFELD and NICK WINGFIELD

Amazon unveiled its secret growth engine for the first time, and it sure looked pretty - especially compared to big companies like Microsoft and Google that are chasing it. For years, the online retailer’s revenue and its stock market returns have been energised by an entirely different kind of commerce: renting processing power to startups and, increasingly, established businesses.Amazon helped popularise the field - known as cloud computing - and largely had it to itself for years, an enormous advantage in an industry where rivals usually watch each other closely.But the other tech powerhouses have since awakened to the fact that they were nowhere in a market that could soon be worth hundreds of billions of dollars. Microsoft, Amazon’s crosstown rival, is especially committed to the challenge, and is in furious pursuit.At the moment, there is no contest: Amazon is dominant and might even be extending its lead. Its resources, however, are fewer than most of its competitors, who have tens of billions of dollars stashed away. And if there is one thing that cloud computing demands, it is heavy investment to set up enormous data centers around the globe.Amazon said in its first quarter earnings report that its cloud division, Amazon Web Services, had revenue of $1.57 billion during the first three months of the year. What is more unusual at a company that often reports losses, the cloud business is generating substantial profits. The company said its operating income from AWS was $265 million.That was more than many analysts had expected, and it drove Amazon shares up in after-hours trading by more than 6 percent. After a rough 2014 and an exuberant 2015, the stock is hovering near its all-time high.Microsoft ranks a distant No. 2 in cloud computing. It is hard to precisely compare the two businesses because of how Microsoft reports its cloud results. Microsoft said Thursday that its annual revenue from its commercial cloud business would be $6.3 billion based on its recent performance, while Amazon said the comparable annual figure for AWS was $5.16 billion.Microsoft, though, also includes revenue from different online applications into that figure. Its revenue from a cloud business called Azure, which is more directly comparable to Amazon’s cloud services, was recently estimated by Deutsche Bank to be as little as one-tenth of that from AWS.“Microsoft is a credible player,” said Lydia Leong, an analyst at Gartner, the technology research firm. But, she added, “Amazon is the most common platform for startups.”AWS began about a decade ago as a way to provide computing power to various divisions of Amazon. It worked so well internally that Amazon began offering it to startups that were struggling to scale themselves.“You bought some box, waited weeks for someone to set it up and then started using it,” said Matt McIlwain, a venture capitalist with Madrona Venture Group in Seattle. “With AWS you took out your credit card, started doing what you needed to do and paid by the hour. That won over the startup community and the developer community.”Amazon concentrated, as it usually does, on expanding market share, which worked extremely well.Amazon executives have said they expect AWS to eventually rival the company’s other businesses in size. The cloud business has been growing at about 40 percent a year, more than twice the rate of the overall company. Many Wall Street analysts have been hoping for a spinoff.Over the past year, however, Google’s cloud-computing service has started pressing AWS on pricing, hurting profitability. Amazon said it had cut prices dozens of times, which threatened to trim its revenue growth.“If they just sell raw computing power, it’s a nightmare business,” said Tamim Saleh, a senior partner at the Boston Consulting Group.The solution has been a rush to provide other services, including database software, analytics and even remote operation of desktop computers. These have generally been slow-growing businesses. Amazon has also increased its network of resellers, hoping to rival the kind of strategies Microsoft employed to promote Windows for business.The really big battleground is going to be the systems run by the largest companies, which is also the largest potential cloud market.“Enterprise customers buy a certain way - they have compliance and contracting processes,” McIlwain said. “They don’t just adopt the newest, most innovative thing. And there are a whole bunch of incumbents, from IBM to HP, that already count those companies as customers.”Many big technology companies dozed through the early days of cloud computing, but most of them, especially Microsoft, have gotten religion by now. Microsoft’s chief executive, Satya Nadella, previously ran its Azure cloud business. He has made building the cloud business a top priority.Even though Microsoft’s cloud business is smaller than Amazon’s, it is still growing fast, more than doubling from last year. That is one of the brightest spots at a company still grappling with a slowdown in PC sales. On Thursday, Microsoft reported its net income for its most recent quarter fell about 12 percent, to $4.99 billion, while revenue rose 6 percent, to $21.73 billion.Analysts believe Microsoft has a better chance of convincing large businesses already using its software products to adopt its cloud services. Startups, though, could be more challenging. Many of them are too young to have invested heavily in Windows and other Microsoft products.For them, Amazon has become synonymous with cloud computing, even though Microsoft has narrowed the technological gap with its offerings.“I think they have an uphill battle because there’s this branding thing,” said Ari Steinberg, chief executive of Vamo, an online travel startup, referring to Microsoft. “It’s basically the same, but because it’s from Microsoft I kind of assumed it wouldn’t be relevant to us.”In a conference call with reporters Thursday, Amazon executives cited price cuts as crucial to AWS growth.“Our model long-term is to innovate and pass savings on to customers. Customers save a lot of money, but the primary motivator is for customers to move really quickly,” said Brian Olsavsky, Amazon’s incoming finance chief.Overall, however, Amazon showed little immediate signs of profitability, something investors have been searching for. The company swung to a loss of 12 cents a share in the quarter, about as predicted, from a profit of 23 cents a share last year.Revenue growth showed surprising strength, especially in light of the company’s robust size, which makes large percentage gains more difficult. Revenue rose 15 percent to $22.72 billion, about $300 million more than expected.As for Google, the cloud was barely mentioned in its earnings call Thursday. Nor did the search giant offer any numbers, making it impossible to gauge how well it is doing.But the enthusiasm of Eric Schmidt, Google’s executive chairman, was manifest when he spoke at an event for cloud software developers this week.“The entire world will be defined by smartphones, Android or Apple, a very fast network, and cloud computing,” he said, comparing the move to the cloud to the 20-year period in which Microsoft and Intel dominated computing, or the Web revolution that created Google. “The space is very large, very vast and no one is covering all of it.”--2015 New York Times News Service..

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