Amazon Web Services (AWS) has been the gold standard of public cloud computing ever since it began operations in 2006. But commodity cloud price wars, the maturing of the cloud market, the rise of hybrid cloud infrastructure and increased competition could be denting its lead.
By submitting your email address, you agree to receive emails regarding relevant topic offers from TechTarget and its partners. You can withdraw your consent at any time. Contact TechTarget at 275 Grove Street, Newton, MA.
Amazon announced its second-quarter revenue reporting a 23% rise in net sales to $19.34bn. But its net loss of $126m in the second quarter was lower than analyst expectations.
While Amazon does not give separate figures for the AWS business division, it falls under Amazon’s “North America – Other” segment. For the second quarter of 2014 ended 30 June, this segment too saw growth drop to 38% year-over-year after consistent growth rates between 50% and 60% over the past two years.
AWS also announced a new general purpose instance type for Amazon Elastic Compute Cloud (EC2). With On Demand Instance prices starting at $0.013 per hour, the new T2 instances are the lowest-cost Amazon EC2 instance option, the company said while reporting its earnings.
"For our AWS customers we launched several capabilities and we substantially reduced prices,” said Amazon founder and CEO Jeff Bezos.
To keep pace with this growth, AWS also hired “thousands of employees this past year” and expanded the “AWS infrastructure, enterprise and public sector sales capabilities”, it said while reporting earnings.
All this contributed to the overall $126m loss, compared to a loss of $7m in the same period last year.
“AWS is probably loss-making,” said Daniel Beazer, analyst from Cloudrfp.
Read more about Amazon Web Services
According to some analysts, when AWS started, it was a very lean business with little or no costs associated with advertising, employees and so on.
But now it is steering towards becoming a proper enterprise services company and has to bear the cost associated with that, said Janakiram MSV, cloud expert and principal analyst at Janakiram & Associates.
“Running a proper, traditional enterprise IT services company such as IBM, Microsoft or Oracle is expensive and it is affecting AWS’s operating costs,” Janakiram said.
In its bid to become a proper enterprise IT player, Amazon will be opening a cloud datacentre in Frankfurt, Germany to allay enterprise users’ concerns around data regulations.
AWS’s business model is based on very low margins so it has to keep operating costs low.
But that is just one aspect denting AWS’s profits. The rise of Microsoft Azure as a serious competitor is eating into AWS marketshare, analysts said.
“Azure is getting a good reception from enterprises. Lot of companies are seriously considering Azure every time they consider AWS,” Janakiram said.
Gartner’s cloud infrastructure as a service (IaaS) Magic Quadrant 2014 places AWS and Microsoft in the Leader quadrant, Google and IBM in the Visionaries quadrant, and HP, VMware and Rackspace in the niche players segment.
The rise of hybrid cloud is also affecting a pure infrastructure as a service (IaaS) player such as AWS, said experts. Hybrid IT is the new norm, according to Cloud Industry Forum’s chief executive Alex Hilton. Many organisations including BP, Cern and Notonthehighstreet.com have all adopted hybrid cloud models.
“Currently, VMware is not having too much of an impact in the cloud space but soon its hybrid cloud service vCHS will start making a dent in the enterprise cloud providers’ market shares,” Janakiram said.
"AWS is having to deal with two types of competitors," he said. “On one hand there are the giants such as Azure, IBM Softlayer and Google that can afford to engage in a price-war with AWS.
“And then there is a new breed of cloud players such as Digital Ocean, and German-based Profitbricks giving customers a wider choice.”
AWS has become too complex with more than 30 different types of services, complex pricing and a fragmented marketplace
Janakiram MSV, principal analyst at Janakiram & Associates
Clive Longbottom, services director of analyst Quocirca, was taken by surprise at the scale of Amazon's loss: “There are a lot more options out there now compared to what was seen as the stability of the 600 tonne gorilla of AWS.
“As Openstack gets its act together, as Azure matures and as XaaS [everything as a service] platforms spring up all over the place, AWS is having to fight on many more fronts than it did before,” he said.
Although the cloud market is still growing rapidly, AWS is finding that its share of the larger pie is under greater pressure, even while the number of organisations using its services is still growing, experts said. And AWS is now big enough to affect Amazon’s overall numbers.
The last price-war was in March, when AWS made a big price cut (up to 65%), to counter aggressive pricing from cloud arch-rival Google.
“AWS has had to chase pricing down – it is one of the things that it keeps impressing on us that it proactively lowers its costs. But my take is that this is only to pre-empt having to respond to the market reactively,” said Longbottom.
AWS customers love the price cuts considering usage is increasing 90% year-over-year, Amazon said on its earnings call. But revenue growth took a hit as a result.
“It’s an interesting world we are living in – for such a behemoth to be hit so hard shows how hard it still is out there, and how dynamic the market still is,” Longbottom said.
Going forward, AWS must simplify its offering to retain its position in the public cloud market, said Janakiram. “Currently, AWS has become too complex with more than 30 different types of services, complex pricing and a fragmented marketplace,” he said.
But it is estimated that AWS’s market share at 30% is greater than its four nearest rivals - Microsoft, IBM, Salesforce and Google - combined.
Janakiram said: “AWS still has an early-mover advantage and leads the pack of public cloud providers, but it has started facing serious competition and challenge now."