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Amazon vs IBM: Big Blue meets match in battle for the cloud

Reuters/ AFR | July 22, 2013
The tech industry maxim that "no one ever got fired for buying IBM" is a testament to how Big Blue has been the gold standard in computing services for decades.

The tech industry maxim that "no one ever got fired for buying IBM" is a testament to how Big Blue has been the gold standard in computing services for decades.

But IBM faces an unlikely challenger in Amazon.com , the e-commerce retail giant that is becoming a force in the booming business of cloud computing, even winning backing from America's top spy agency.

After years of being dismissed as a supplier of online computer services to startups and small businesses, Amazon Web Services (AWS) beat out International Business Machines this year to snag a $US600 million contract with the Central Intelligence Agency.

IBM has successfully appealed its loss in the contest, stalling it for now. But the episode highlights how Amazon is evolving from an online retailer into a competitive provider of information technology and services to big companies, and government bodies.

That has helped push Amazon shares to a new record ahead of the company's second-quarter results due on Thursday. Amazon doesn't break out AWS results, but Wall Street believes it is expanding faster than the retail business and is more profitable.

"AWS is one of the main spokes of the bull case on Amazon shares," argues Ron Josey, an analyst at JMP Securities. "Software and IT investors are aware of and are trying to size AWS, and what the impact could be on their sector."

IBM is entrenched in corporations across the globe; and with one of the industry's biggest research budgets, is likely to remain so for some time. But it and other players like Oracle are taking note of AWS as cloud computing takes off.

Public cloud computing, which AWS pioneered in 2006, lets companies rent computing power, storage and other services from data centers shared with other customers - typically cheaper and more flexible than maintaining their own.

Amazon has begun to build a portfolio of significant clients, including Samsung, Pfizer, the Public Broadcasting Service and NASA, the US space agency.

That unexpected threat is rippling through the sector. After two quarters of falling sales, Oracle announced partnerships in June with former foes Microsoft and Salesforce.com , a response in part to AWS's expansion.

"AWS is having a really meaningful impact on IT and the big incumbent companies like IBM are reacting to that now," said Colby Synesael, an analyst at Cowen & Co, who covers Rackspace Hosting, one of Amazon's main rivals in the cloud.

FROM BOOKSTORE TO TECH
Amazon began life as an online bookseller, but in past years has expanded into everything from tablet computers to video. Critics say it is spending heavily with little regard for the bottom line.

But its stock hit a record $US309.39 on July 16 and is up more than 22 per cent this year. In contrast, Oracle is down 4 per cent in 2013. IBM, which reported a fifth straight quarterly sales fall on Wednesday, is up 1 per cent.

 

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