Amazon.com is Taking Over the World… of Cloud Computing

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Cloud computing has gained a lot of attention in recent years on its growth to $77 billion in revenue in 2011; this growth is continuing to accelerate, with the opportunity for a $240 billion market by 2016.  That impressive growth rate is the result of how disruptive cloud computing services are; through the convenience of outsourcing scalable IT solutions, companies are rapidly replacing traditional IT infrastructure with cloud computing solutions that provide efficient solutions to demands that were previously more difficult to satisfy.  

With such a large market opportunity, it is probably no surprise that mega caps such as Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) are investing heavily in the development of cloud computing solutions.  What may be more surprising is the company that frequently tops the list of most influential cloud computing players (such as Business Insider and Silcon India's top 10 lists for 2012).  That company is Amazon (NASDAQ: AMZN).  

Amazon Web Services... A Startup Mentality

Amazon.com has taken a lead in the infrastructure as a service (or "IaaS") aspect of cloud computing since its creation of Amazon Web Services ("AWS") in 2006.  The model is simple: provide IT infrastructure that is completely scalable and usage-based.  The result is a service that is free to sign up for and allows companies to pay for only what they use.  The appeal is tremendous for startups that no longer need up-front capital to invest in IT infrastructure.  Instead, businesses can outsource the vast majority of their IT needs to Amazon, pay only for what they need, and have the infrastructure grow seamlessly with the business' needs over time.  There's no need to plan to acquire servers and other hardware months in advance; within minutes, a customer has access to thousands of servers.  In addition, AWS has expanded to a complete suite of application hosting, backup/storage, content delivery network ("CDN"), web hosting and enterprise IT solutions.

The scalability of these solutions makes sense for a wide range of customers.  Examples range from startups such as app developers Shazam and Flipboard, Netflix's CDN needs for its streaming business, and even the computing demands of highly cyclical projects such as NASA's Mars landing.   The last on the list is of particular note, since cloud computing is so often associated with startups and tech companies; however, Amazon has over 300 government and 1,500 educational clients that use AWS to leverage its scalability and minimal capital requirements. The results have already been tremendous; while not broken out in more detail, the "Other" component of Amazon.com's revenue (which is primarily AWS) reached $648 million in Amazon.com's most recent quarterly results.   The future potential is even greater.  In an article on cloud computing in the New York Times this summer, AWS head Andrew Jassy said “we believe at the highest level that A.W.S. can be at least as big as our other businesses” and that he thinks "A.W.S. is probably less than 10 percent of its eventual size."  So, this is just the beginning for AWS.

To meet both current and future demand, Amazon.com has invested heavily in the creation and expansion of data centers.  What were originally limited to three data centers in Virginia, Oregon, and California have now expanded to include Japan, Ireland, Singapore, Brazil, and most recently, Australia.  This expansion is important to highlight for several reasons.  First, this worldwide network of data centers consists of thousands of servers capable of delivering AWS to customers, which creates a significant competitive advantage given the capital intensity of such projects.  

The second point is crucial for investors, who often take note of Amazon's relatively low free cash flow compared to other retailers and do not factor in the impact of the tremendous investments that Amazon is making to meet growing demand in high-growth areas such as AWS.  The ability to maintain positive free cash flow, maintain a debt-free balance sheet and make investments in worldwide data centers and fulfillment centers is truly impressive.  

The Cloud is for Consumers Too!

While the focus of AWS is on consumers, Amazon has also launched limited cloud computing offerings for consumers as a means to enhance the stickiness of Amazon's digital media products and the company's Kindle devices.  Amazon Cloud Drive provides consumers with 5 GB of free cloud-based storage of any files that the consumer chooses; additional storage can be purchased by consumers. Expect more features and functionality to be added to Cloud Drive in the near future.

Amazon.com Is Not Alone in the Cloud

While Amazon has created a comprehensive cloud offering that has high customer satisfaction, there is a crowded field of competitors.  On the consumer side, essentially all of Google's apps are cloud-based, including a Google Drive that essentially replicates Amazon Cloud Drive's functionality and then goes a step further by integrating free applications that can read and edit files directly in the cloud.  It is impossible to forget Apple in this conversation, with its iCloud offering.  Right now Amazon is behind in this race given the integration of Google's other apps (mail, calendars, tasks, etc.) into a single cloud platform.

The business side of the cloud is even more crowded given the fact that IaaS isn't even the only cloud-based solution being marketed.  Here are just a few of the companies fighting for market share in the corporate world of cloud computing:

  • Google has a business-oriented cloud offering, which provides a range of storage, web hosting, and app hosting services (know as platform as a service or "PaaS") that support not only the development of Android-based applications but other startups as well. 
  • Microsoft's Windows Azure has a full suite of website and application hosting solutions that are combined with an IaaS model that is similar to AWS.  Microsoft uses its existing relationships with large corporations and its corporate software as a service ("SaaS") products as a foot in the door that can be used to cross sell Windows Azure services.
  • Rackspace Hosting (NYSE: RAX) provides highly customizable hosting solutions, whether cloud based or managed hosting, and SaaS products that allow customers to rent just about all of their IT requirements.  What makes Rackspace unique is its flexibility and focus on support; this business proposition has resulted in reaching 190,000 customers, including many large corporations in the Fortune 500.  
  • VWware (NYSE: VMW) has taken another approach to cloud computing by leveraging its dominance in virtualization software to provide not only PaaS solutions, but also assist in the creation of public, private and hybrid cloud architectures within companies. 

A separate detailed article can easily be written on each of these competitors' cloud-based offerings.  However, the key takeaway is that each of these companies (and others, including Salesforce.com) successfully offers a slightly different approach to addressing IT demands with cloud solutions.  For AWS to remain successful, Amazon.com will need to continue to take a startup mentality by focusing on innovation.

So What Does This Mean for Amazon.com?

Consistent with other blogs in this series, which range from discussions of pet supplies to daily deals, there are a few common themes.  First, there's a tremendous market opportunity of $77 billion in 2011 growing to $240 billion per year in 2016.  Second, Amazon has taken steps to gain a meaningful foothold in the market through AWS' services and the construction of numerous data centers.  When combined with Amazon's long term vision, this market opportunity and suite of products can lead to a sizable business in the magnitude.  In fact, it appears that AWS is already contributing over $1 billion to Amazon's revenue per year.  With the market growth and AWS chief Jassy's thought that AWS is less than 10% of what it will be in the future, it is not unreasonable to think that cloud computing could contribute $10+ billion to Amazon's revenue by 2020.


BrewCrewFool owns shares of Amazon.com and Google. The Motley Fool owns shares of Amazon.com, Google, Microsoft, Rackspace Hosting, and VMware. Motley Fool newsletter services recommend Amazon.com, Google, Microsoft, Rackspace Hosting, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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