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Amazon is right to grow AWS at the expense of profits

David Linthicum | July 30, 2014
Claims that Amazon is hurting investors by gaining market share instead of profits from the cloud miss the long-term payoff.

Last week, said its cloud business grew by 90 percent last year, but the company was significantly less profitable than the year before. Its AWS (Amazon Web Services) business makes up the majority of a balance sheet item that labels as "other." In the latest quarter, the "other" revenue from that line of business grew by 38 percent, its lowest rate in at least three years.

Wired magazine notes: "The thing is that even as Amazon's business matures to the size of a company like VMware, it's worrying to investors to see profitability slipping. That's pretty much the meta-narrative of Amazon as a whole, though, which says it could lose as much as $810 million in the current quarter. The company is taking losses to invest in the future, and Amazon's 10 percent stock drop today shows that some investors are uncomfortable with that."

Despite such fears, I encourage those who invest in Amazon (and AWS) to double down on the company. I understand that the company's approach to growing AWS's customer base will drive profitability -- and the stock price -- down. But now is the time for Amazon to favor market share over profits, as the market is rapidly growing and AWS has a lead it must maintain in the face ofstronger competition from Google and Microsoft.

The goal right now should be to gather market share rather than cash. The cash will come later, without a doubt.

AWS's world is changing all the time. Formidable competitors, such as Google and Microsoft, are beginning to come on strong. It makes perfect sense that AWS should push harder into the market, perhaps even increase its spending and reduce prices -- whatever it takes to get more traction.

Back in my CTO days, the smartest decisions I made were to go faster and forsake profits for a time. These were certainly not popular decisions with many of my fellow executives or stockholders. But if you believe that what you're doing drives the greater good of the company, you'll ultimately return much more than expected to all involved: employees, stockholders, and, most important, customers.

Amazon is doing the right thing.

Source: InfoWorld


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