Is Amazon's Cloud Profitable?

clouds

As Amazon Web Services continues to grow, this question is bound to become more pressing, as noted by TechFlash and InformationWeek. Financial analysts are keen on more information. The first question in last week's earnings conference call was about the web services unit, and CEO Jeff Bezos said only that there is a "significant and meaningful opportunity over time for enterprise level customers with our web services business." (See this summary of the cloud-relevant section of the Q&A).

Why does this  matter? Amazon's success is clearly beginning to impact the rest of the hosting ecosystem, as Gartner's Lydia Leong noted in her post about new discount pricing for high-volume customers on Amazon's new CloudFront content delivery network.

"Amazon’s volume pricing play ought to put to an end anyone’s hope that the elimination of some of the financially weaker CDN players is going to do anything significant to alleviate pricing pressure where it’s most severe — the entirely commoditized portion of the market," Lydia writes. "In fact, this explicit, transparent pricing is probably going to provide a nice bargaining chip. Even if a major media conglomerate isn’t going to use Amazon to deliver their video, it won’t stop its purchasing people from using these published prices to hammer CDNs during negotiations."

Over the years, many hosting companies have expressed fears that a huge player would enter the web hosting market in a way that would bust their business models. But those fears almost always focused on Microsoft or Google subsidizing free competing services.

Amazon has said that AWS requires its own infrastructure, and is no longer running exclusively on spare computing capacity from Amazon's retail operation. Data centers are expensive. Given the scope of Amazon's operation, a major data center could easily cost $100 million or more. That's some serious capital overhead. 

What about the return? Hybrid providers like Rackspace say cloud computing will be a "higher growth, higher margin business" than traditional dedicated or managed hosting, allowing a better return on moneys pent on servers and data center infrastructure. For Rackspace, that server monetization math includes a “larger use of recycled equipment” as used equipment gets a second life as part of a cloud cluster. That's an option that would also be available to Amazon, which can repurpose servers from its retail operation to AWS. 

At the infrastructure level, does cloud computing boil down to a server utilization play, allowing providers to squeeze longer life and more revenue out of each server? That prospect may be why some cloud technologists predict the emergence of specialized clouds built around specific apps or industry verticals.  

Where does that leave Amazon? Will it remain a pure infrastructure player, leasing out its platform as a utility offering? Or will it seek fatter margins by moving up the cloud computing value chain as opportunities emerge, perhaps creating conflicts with companies building tools and services atop AWS? That's an issue that came up with the recent release of the EC2 management console.

There are more questions than answers about the profitability and strategy of Amazon Web Services. Life will get interesting when Amazon begins to fill in the blanks.