Amazon.com’s financial performance appears to be living up to investor expectations, who pegged 2016 as the year when the firm’s cloud arm would outstrip its retail business in profitability terms.
The company’s 2016 first quarter results revealed Amazon Web Services (AWS) accounted for more than half of Amazon’s total first quarter profit, cementing its position as the most profitable part of its parent business.
Having banked an operating income of $604m during the three months to 31 March 2016, AWS also saw its revenue rise, by 64% on the previous year, to $2.57bn.
To put that figure into context, Amazon.com reported an overall operating income of $1.1bn during the first quarter, while North American retail business posted an operating income of $588m during the same time period.
At the start of the year, investment bank RBC Capital declared in a research note that 2016 is “lining up to the year that AWS profitability starts to surpass retail”, and its first quarter results suggest its fortunes are heading in that direction.
For RBC, the growing maturity and scale of the AWS product portfolio will play an important role in this, with the cloud firm now pushing to introduce more than 200 features and services a quarter. A year ago, AWS was rolling out around 170 a quarter.
AWS a ‘force to be reckoned with’
Aside from the depth and breadth of its product portfolio, AWS also has made a concerted effort in recent years to win over the enterprise market, having established itself as the cloud services provider of choice for large parts of the startup community.
Kate Hanaghan, research director at IT analyst house TechMarketView, said in a post-results research note that the firm’s commitment to service innovation and its enterprise focus will stand it in good stead.
“AWS is growing because it is taking parts of the traditional hosting market, but it is also growing from deals in its ‘natural habitat’ of cloud-centric startups and smaller businesses,” she said.
“AWS has much to do to truly crack the large enterprise market, but its innovative approach to products and markets will make it an incredible force to be reckoned with as time goes on.”
Holding its own
According to Synergy Research Group’s latest take on the state of the cloud market, AWS continues to retain a stronghold on the off-premise infrastructure services sector.
The organisation’s Q1 2016 Cloud Infrastructure Services claims AWS’s share of the market stands at 31%, while Microsoft, IBM and Google collectively hold 22% of it.
While Microsoft and Google are “slowly gaining ground on the market leader”, there are a number of others outside of the big four who losing share and struggling to attain profitability, SRG’s findings show.
While that plays out, it seems AWS’s hold on the market is unlikely to start weakening any time soon, suggests John Dinsdale, chief analyst and research director at SRG.
“This is a market that is so big and is growing so rapidly that companies can be growing by 10 to 30% per year and might feel good about themselves, yet they’d still be losing marketshare,” said Dinsdale.
“The big question for them is whether or not they are building a sustainable and profitable business. This can be done by focusing on specific regions or specific services, but the bulk of the market demands huge scale, a broad footprint, very deep pockets and a long-term corporate focus.”
AWS datacentres opens possibilities
With the company’s UK datacentres set to come online later this year, this could endear AWS and its cloud offering to a new tranche of users.
Since the abolition of the Safe Harbour data transfer agreement between the US and Europe, the continent’s cloud service providers claim to have seen an uptick in interest for their services, as CIOs become increasingly wary of handing over their data to US providers.
Meanwhile, IT analyst house Kable recently shared its view of how the opening of UK datacentres by AWS, Microsoft and others is likely to open up business opportunities for these providers in the public sector.
“We know there are certain major buyers who are just waiting for those datacentres to come on stream. Some are actively planning so they will have everything ready to go the day those datacentres open,” said Jessica Figueras, chief analyst at Kable.
Speaking on an analyst conference call to discuss the first quarter 2016 results, AWS CFO Brian Olsavsky said the company’s portfolio of availability zones (datacentre regions) is set to increase by 11 over the coming year.
Olsavsky said these builds are being embarked on to handle the incremental growth in customers it is seeing, and ensure the firm retains its market-leading position.
“You should expect to see us continue to invest and support this business,” he said, according to a transcript from Seeking Alpha. “We have a leadership position, we intend to maintain it and we’re very excited about where we are.”
Read more about AWS
- The opening of Amazon and Microsoft’s UK datacentres could have a dampening effect on the number of small and medium-sized enterprises (SMEs) securing business through the G-Cloud framework, it has been claimed.
- Amazon Web Services (AWS) celebrated its 10th anniversary on 14 March, having devoted the past decade to popularising the cloud computing concept and – in turn – shaking up the IT industry.
Read more on Infrastructure-as-a-Service (IaaS)
Amazon CEO Jeff Bezos to step down as e-commerce giant celebrates first-ever $100bn revenue quarter
AWS growth rate slows in Q2, as Amazon retail's run of quarterly record profit growth ends
Amazon cautions against reading too much into slowdown in AWS revenue growth rate
AWS reports fourth quarter revenue growth of 45% as public cloud demand continues apace