Credit: Steve Jurvetson/Flickr

AWS: Can the cloud make Amazon the world's biggest company?

Jeff Bezos's 'other business' is growing at a ferocious pace - and it makes a profit. Watch out world.

by Adam Gale
Last Updated: 03 Jun 2016

Amazon is the Terminator of disruptors. One of the early names Jeff Bezos considered for his business was, which says all you need to know about its ethos. For 20 years, Amazon has pursued retail market share with ruthless efficiency and unwavering determination, transforming it from a novelty bookseller into one of the biggest companies in the world.

Yet in Bezos’s world, one of the biggest won’t cut it. Amazon’s mission is to be the biggest, the best. It’s got a way to go on that front. By market cap ($314bn, or £221bn), it’s just about in the top ten. By revenues ($107bn in 2015, $29bn in the first quarter of 2016), it’s somewhere between 50 and 70. Both of these are rising fast. But on one key measure, it’s nowhere close.

Profitability is the conveniently located mechanical press to Amazon’s Terminator. It’s the ultimate high volume, low margin business, which means the vast returns seen by the likes of Apple ($39bn last year) are a world away. In 2015, Amazon made only $596m – its biggest profit for years.  

Enter the cloud. Amazon Web Services (AWS) is Bezos’s secret weapon. Ten years old, it’s already reaching annualised revenues of over $10bn (taking $2.6bn in the first quarter of 2016), and makes 60% of the firm's operating profit. This isn’t just a nice little money spinner on the side. AWS is bigger than was at the same age, it’s growing faster (revenues were up 70% last year, while operating profits tripled), and it will eventually become, Bezos says, larger than the retail business.

The cloud vs the world

That’s a pretty big claim, but how justified is it? This much is known: cloud computing itself is a serious growth market, but estimations of exactly how big it will eventually get vary. Goldman Sachs –a firm with a pretty good nose for where the money’s going - predicts the cloud infrastructure and platform market will more than double to $43bn by 2018. Looking much beyond that is crystal ball territory.

Nonetheless, AWS UK chief executive Gavin Jackson is optimistic. ‘When you think about what AWS provides, the market for these individual constituent parts is in the trillions. Despite the rapid growth we’re seeing, we think we’ve just crossed the chasm,’ he says. And why not? Effectively the outsourcing of the capital-intensive elements of the world’s combined IT departments, cloud computing fits perfectly with the 21st century trend towards agility.

Jackson gives the example of Lebara, which branched out of SIM cards to launch a video on demand service last year. ‘In the old days, they’d have had to build all that with their own capital and guess how big it would get,’ he says. ‘With AWS you can pick businesses that have a one in ten chance of being successful but with a hundred times the payback because the risk and cost of failure are a lot less.’

AWS vs the cloud

If the cloud is the big party for the next decade, AWS is definitely on the guest list. Bezos effectively invented the cloud when he set up AWS, and it remains the largest and most experienced operator. There are now only six ‘global megacloud providers’, says Forrester analyst John Rymer – AWS, Microsoft, Salesforce, IBM and Google are there already, while Oracle is aspiring to catch up. ‘All other cloud providers must find niches if they hope to survive, much less thrive,’ Rymer says, somewhat ominously.

Judging its position within that group isn’t straightforward, as unlike AWS the other firms don’t separate true cloud revenues from legacy business segments like servers and software. (Microsoft’s cloud computing division Azure grew by 120% last quarter, yet the larger ‘Intelligent Cloud’ segment within which it sits only grew by 3% - the name may be a touch optimistic.)

Nonetheless, it is widely agreed by cloud-watching analysts that AWS is the clear leader. Gartner estimated that for 2015 it provided more computing power to customers than the next 14 competitors combined. Rightscale’s 2015 State of the Cloud report, meanwhile, said its adoption was four times that of Azure, its nearest rival.

To an extent, this lead comes from AWS’s greater experience and scale. Most of its competitors only really got going five or six years ago, when AWS already had a great deal of experience and a growing customer base.

Now, there’s a million customers, which allows AWS to keep its finger on the market pulse. ‘When you’ve got a million customers and active feedback loops, you’re able to make some very good decisions on what they’re looking for,’ Jackson explains, pointing to his company’s rapid pace of innovation – 722 new services and features last year alone.

It’s a virtuous circle – the more customers you serve, the better you’re able to serve customers and the more customers you get. Of course, AWS doesn’t have everything its own way. Rymer points to the absence of on-premise versions of its platform and the very size and complexity of its catalogue as weaknesses. It’s also far from the lead in the immense software as a service (SaaS) market, which Forrester predicts will hit $130bn by 2020.

But then who needs to be big in SaaS when you’re the platform for Saas? ‘You could draw comparisons to the 90s, when the PC became prevalent. All the usual suspects were there, IBM, HP, Dell, but the company that made the market was Intel. We play the role effectively of powering a number of the software companies that are reinventing themselves,’ says Jackson. 

AWS vs Amazon

It is this platform mentality that has led to AWS powering both Netflix and Spotify, the major rivals to Amazon’s Prime video and music services. Doesn’t that create a tension within the company? ‘Amazon’s retail business, its Kindle business, Echo - they are all customers of AWS. They are not the same entity. We share the same founder and CEO but... there’s complete separation of business lines,’ says Jackson.

This leads some to wonder whether AWS and Amazon really should be the same company at all. Does it make sense for a higher-margin cloud business and a razor-thin-margin online retail business to be joined at the hip? Arguably, it serves the Terminator’s objectives to keep profits from getting too high so that it can focus on growth instead (heaven forbid shareholders might ask for a dividend). Keeping Amazon retail and AWS combined effectively lessens that risk by diluting the cloud division’s profits.

Really, though, they’re still together because they’re both Bezos’s – splitting his world-conquest machine in two won’t be easy. But if shareholders start to believe the link with Amazon is hampering AWS's growth, it could become a serious pressure point. Look what happened to PayPal and eBay - the latter claimed PayPal was separate as well, but not every potential client agreed.

Ultimately, shareholders could override Bezos, but given how dramatically Amazon’s share price has grown under his leadership (it just soared 10% after Amazon's Q1 results revealed a 28% growth in revenues to $29bn and a $513 profit from a $53m loss), there'll surely be a lot who'll give him the benefit of the doubt.

And if they do stay together? Amazon may have some tough competition from the likes of Google, Facebook and Apple if it wants to be the biggest company in the world, but it already has one big advantage. While they all spend a fortune searching for the Next Big Thing, a product to rival their core business, be it driverless cars or VR or wearables, Amazon has already found it. 


Find this article useful?

Get more great articles like this in your inbox every lunchtime