4 IaaS Industry Consequences of the AWS Earnings Announcement

Amazon shares rallied over 14% after the company beat both profit and revenue expectations in its most recent quarterly announcement.  Perhaps most significant revelation was the long-awaited disclosure of AWS financials, which had been lumped into “other” in Amazons prior earnings reports.

As an avid follower of news and gossip about AWS I have long heard the skeptics speak of AWS’ flawed business model.  I have sat across from clients who do not see Amazon as a cloud technology company but rather as a money-losing retailer experimenting in yet another area they know nothing about.  More than one IT pro has decided to move his environment to another provider with a stronger brand in technology–even though currently that provider’s product is inferior–because they expect Amazon to exit the business and the traditional brand to be the long term winner.

Well, it turns out that those who thought AWS’ business model was flawed don’t know that much about business models after all.  AWS racked up $265 million in first quarter earnings on $1.57 billion in first quarter revenues, while achieving a 49% year-over-year growth rate.  Most analysts calculate AWS revenue to be on a run rate of $7 Billion for 2015 and value AWS at between $50 billion and $90 billion–not bad for a company that started a mere 9 years ago in a non-existent industry.

These revelations change the conversation about cloud on so many levels:

1.  Amazon is now viewed as a cloud company with a retail division rather than an experimenting retail company.  There is nothing like 49% growth, strong earnings on $7 Billion in revenue and more than 5 times the adoption of the next 14 competitors combined to make people believe you are serious about a business.  But even more importantly AWS has proven its technical prowess with a superior product that is winning in the marketplace and attracting the best technical talent.  This should lead to greater confidence in Amazon’s staying power and even greater adoption momentum for its platform.
2.  The land grab phase in the industry is over–expect consolidation.   The race is now for 2nd place–not 1st place–and the contenders will likely get even more aggressive to establish position just behind AWS as the cloud IaaS industry enters the consolidation phase.   Several analysts predict weak competitor, Rackspace, to be an acquisition target for its large but dwindling customer base.
3. Prices will continue to drop for cloud IaaS services.  This follows from item 1 above as competitors become more aggressive to establish 2nd place behind AWS.  This is good for customers who will adopt in even greater numbers so expect continued growth.
4.  Amazon’s “fly wheels” will continue to spin faster and faster.  Amazon’s much-maligned model is built on several “fly wheels” or “virtuous cycles.”   One important one is that continued success means rising share price which allows AWS to use stock compensation to attract the brightest talent which leads to even more market success.  Another one is continued price cuts will attract more and more customers to cloud IaaS services leading to greater economies of scale which allow for more price cuts.

Perhaps the last “fly wheel” is the one for which AWS has been most criticized by AWS skeptics who thought constant price lowering was leading to lower and lower earnings.  At least for now, AWS has proven that they did the math and made optimal decisions for scaling their fledgling IaaS business rapidly into a global powerhouse.   But at a much more simplistic level, AWS has been rewarded, primarily for doing what is best for the customer–providing a superior product while reducing prices and offering the best customer support in the industry.

Blue Sentry is an advanced-tier Amazon Web Services (AWS) consulting partner specializing in application and data migrations, expert managed services and virtual desktops. Blue Sentry serves clients globally, with operations in North Carolina and South Carolina.