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Is Amazon Web Services really down and out?

Bernard Golden | Aug. 8, 2014
It's daft to say that AWS is in trouble just because it may have had one bad quarter. If anything, the ongoing price war between Amazon, Google and Microsoft reflects broader changes in the future of IT infrastructure. If anyone should be worried, it's traditional vendors, not Amazon.

Two weeks ago, Amazon announced its quarterly earnings, reporting a much larger net loss than expected. There was much speculation by pundits about the reasons for the scale of the loss (including me in a CNBC segment). Many commentators placed responsibility for size of the loss on Amazon Web Services — after AWS responded to an approximately 30 percent price cut by Google, the size of the "other" AWS category, in which Amazon places AWS revenues, fell 3 percent from the previous quarter.

After the announcement, a number of tech commentators discussed the implications of this 3 percent revenue drop:

Quentin Hardy of The New York Times says that, despite the quarter "other" category being up 35 percent over the previous year, AWS growth may be slowing. Now that it faces additional competition from Google and Microsoft, along with the need to do more handholding of potential enterprise customers, it may confront tough times ahead.

Barb Darrow of GigaOM agrees that AWS faces competition from Google and Microsoft, but notes that these companies are coming from way behind AWS; the potential for harm is prospective, not something that's happening today. Implied in her commentary is the fact that steep price cuts triggered by actions by Google and Microsoft have much more of an impact on AWS than on thsose companies exactly because their revenue base is so much smaller.

CRN UK notes that, with increased competition from Google and Microsoft, AWS can no longer maintain it has more deployed infrastructure than its nearest four competitors combined.

Beyond these assessments, one well-known venture capitalist says AWS is overpriced. Beyond a certain amount of monthly spending, users are better off building out their own infrastructure. Moreover, he states, AWS offers terrible support and mediocre service offerings. Because of Amazon's inability to change its low-cost, low-touch nature, which he refers to as Amazon's "Scorpion Problem," Google and Microsoft have a tremendous opportunity.

According to these commenters, Amazon faces a watershed moment. Before this quarter, effectively unopposed, it ran wild and built a huge business; however, from now on it faces unending competition, relentless pricing pressure that will lead to dropping revenues and abandonment by customers seeking better quality solutions who also feel AWS is overpriced.

AWS Not Likely to Worry About One Quarter of Revenue Drop
While all of these reactions to Amazon's most recent quarter are, no doubt, well considered, they're guilty of analyzing one quarter's results and assuming they predict serious long-term trouble for AWS. Instead of foreseeing trouble on the horizon, you could have taken this quarter's Amazon results and interpreted them this way:

Taking a 30 percent price cut and suffering only a 3 percent drop in revenues implies, to my mind, around 25 percent quarter-over-quarter growth in usage. Annualized, that implies about a 100 percent usage growth rate and, assuming that each quarter doesn't see a 30 percent price cut, an increase in revenues of around 40 percent. This doesn't include any additional growth due to price elasticity — of which, as this memo regarding its ebook pricing dispute with Hachette indicates, Amazon is keenly aware. So the AWS usage growth rate might actually increase as a result of this price cut.


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