Credit: Joydeep/Wikipedia

Amazon's future is in the cloud

In Amazon Web Services, Jeff Bezos has finally found a way to grow and be profitable.

by Adam Gale
Last Updated: 03 Feb 2016

Jeff Bezos lost about $6bn (£4.2bn) from his personal wealth last night, when Amazon shares plunged 15% in after hours trading following the publication of the company’s 2015 results. He won’t care.

For a start, Bezos has no intention of course of selling his 15% or so stake in the company he founded 20 years ago, but he also knows the hysteria of Wall Street speculators has no impact whatever on Amazon’s inevitable rise.

In 2015, the tech giant grew sales by 20% (26% ignoring the effects of the strong dollar) to $107bn. That’s impressive, but growth has never been something Amazon found difficult. What was most impressive about 2015 was that the company was actually reasonably profitable. It made $596m, two and a half times what it made the year before. That may have been less than investors had expected (you can’t please some people) but it marks the start of a new, profitable era for Amazon.

Bezos’ obsession with growth at all costs is built into the very foundations of Amazon’s ecommerce business. It has to sell cheaper and faster than its rivals, or it loses its unique place in the market. It has to spend every penny of surplus income on expansion into new sectors (such as groceries), new countries or new technologies, or someone else will get there first.   

But none of this applies to the cloud. Bezos effectively invented the cloud ten years ago, giving it a serious first-mover advantage. As a result, Amazon Web Services (AWS) has established a commanding lead against rivals such as Microsoft, IBM and Google, in a sector that could be worth $113bn by 2018, according to Technology Business Research.

AWS has anything from a quarter to well over half of that market, depending on who you ask and how they measure it. Second place Microsoft may be catching up somewhat, but it’s still a long, long way behind.  

There are two reasons why this matters to Bezos. Firstly, AWS is growing at a phenomenal rate even for an Amazon business, with revenues up 70% last year to $7.9bn and showing no signs of slowing down. Secondly, it is far more profitable than Amazon’s e-commerce business. Despite its as yet modest size, AWS’s operating profits were $1.9bn in 2015 – 41% of the firm’s total.

If it keeps on growing at the same margins, AWS could be generating three times as much within two years, and fourteen times as much within five. Looking even further ahead, it’s possible it could become even bigger than Amazon’s e-commerce business.

Predicting anything further than about five minutes into the future is something of a fool’s errand, and much could happen to the cloud market over the next few years. Competition could slash the margins for instance, or growth might tail off earlier than expected. But the fundamental shift of Amazon from essentially a zero-profit company to one that makes big bucks is almost certain.  

The question then will be what Bezos will do with the surplus. Shareholders may want to see a dividend (heaven forbid), but it’s more likely the money will be used to subsidise and accelerate Amazon’s spread into new markets and sectors. A Kindle car anyone? Stranger things have happened.  

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