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No Crocodile Tears for AWS Just Yet

Carol Wilson

If you were one of the folks in the cloud computing industry who spent the weekend celebrating the downturn in Amazon's financial results and their reflection on Amazon Web Services, this is Hangover Monday. And here's your real headache: It turns out Amazon isn't doing all that badly after all.

The company admitted to sinking margins in reporting a second-quarter loss of $126 million, and a big chunk of that is attributed to price wars in the cloud computing segment. Amazon Web Services Inc. has cut its prices between 28% and 51%, due to competitive pressures, and that is helping squeeze its margins. Some folks are saying this amounts to an AWS crisis and are questioning the company's ability to respond, given all the things that parent Amazon.com Inc. (Nasdaq: AMZN) is currently attempting to tackle.

John Dinsdale, chief analyst and research director at Synergy Research Group Inc. , issued his quarterly report today, and admitted Amazon is no longer as dominant in the cloud computing space as it has been. But in a follow-up email exchange, Dinsdale characterized Amazon's woes as "champagne problems" that most companies would love to have.

"It is continuing to invest and to roll out new services and is building increasing levels of credibility within the enterprise market," Dinsdale notes. "In its earnings material, it pointed to 90% growth in AWS usage over the last twelve months, so there is plenty of customer momentum behind AWS."

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Dinsdale's research shows Microsoft Corp. (Nasdaq: MSFT) and IBM Corp. (NYSE: IBM) are the two companies gaining the most against Amazon. But Google (Nasdaq: GOOG) is not quite keeping up, largely because it doesn't have the enterprise connections that Microsoft and IBM have by virtue of their software, computing and integration businesses.

"I think the biggest issue that Google has to face is that it does not have an established presence and credibility in the enterprise/business sector," Dinsdale says. "IBM and Microsoft do and they can leverage that. Amazon didn't but it is benefiting from being the first to market and staying in front of the pack – so it has built the scale and now has credibility with enterprise customers."

Synergy is estimating that the cloud infrastructure service market hit $3.7 billion in revenues in the past quarter, with the total market growing at greater than 45%. AWS and Google have about the same market share they had a year ago, while both Microsoft and IBM have increased market share, as shown below.

Amazon is definitely facing some tougher competition, Dinsdale notes, and can no longer claim to be bigger than its four largest competitors.

But where does all of this leave the telecom cloud players? Many of them have taken aim at AWS in particular. Synergy shows they are growing but still lack the scale to be among the market leaders. They are also having problems moving outside their traditional network footprints into a position of global reach. (See Verizon Looks to Bridge Amazon, CenturyLink Cuts Cloud Prices, Touts Power.)

"The leading telcos are still, in essence, national players that have a hard time growing substantial business beyond their home country or companies that are headquartered in their home country," Dinsdale comments in his email.

Synergy shows NTT Group (NYSE: NTT) as the leading telco cloud provider, ranked eighth overall in the market, with Deutsche Telekom AG (NYSE: DT), AT&T Inc. (NYSE: T), Verizon Enterprise Solutions , Salt SA , BT Group plc (NYSE: BT; London: BTA), and CenturyLink Inc. (NYSE: CTL) making the top 100 list.

— Carol Wilson, Editor-at-Large, Light Reading

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Joe Stanganelli
Joe Stanganelli,
User Rank: Light Sabre
7/29/2014 | 11:13:02 PM
Re: Microsoft Margins
I don't even understand the "rooting" for Google.  Google already controls so much of our lives and invades our privacy in ways that make Facebook look like Diaspora.  Do we really want them to dominate the cloud market too?

Rather, I'm rooting for someone to come out with a search engine that is better than Google's.
Joe Stanganelli
Joe Stanganelli,
User Rank: Light Sabre
7/29/2014 | 11:09:53 PM
BAA BAA, black sheep.
Word on the street at a conference I attended a few months ago in Boston is that part of the issue is that Google still isn't offering BAAs for many of its services, which makes it less palatable to customers in markets with burdensome data compliance issues (e.g., healthcare, finance, etc.).
Liz Greenberg
Liz Greenberg,
User Rank: Light Sabre
7/29/2014 | 1:33:12 PM
Re: Microsoft Margins
@burn0500, Google and IBM really aren't paying for their software either.  Realistically, it shows that there is a lot of room from growth in the cloud market and that those who can give great service and great prices will have customers.  Customers will probably choose not just based on price but on SLA, distribution and other metrics that make sense to each company.  It is good to see the competition here.  Keeps everybody honest and gives the customer a lot of choice.
User Rank: Light Sabre
7/29/2014 | 1:30:59 PM
Re: Microsoft Margins
Even if the competition gets fierce Amazon is still in a great position. Whether Amazon can survive it's retail side without profit is another matter. But, as pointed out, AWS is ready for our sympathy quite yet.
User Rank: Light Bulb
7/29/2014 | 10:48:24 AM
Microsoft Margins
Looks like when you don't have to pay for licenses for your own software, it makes cloud very profitable!
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