Don't count AWS out as a result of price competition from its newly energized competitors Microsoft and Google. While they undoubtedly have deep pockets, Amazon historically focuses on driving prices lower and has enormous skills in increasing efficiencies and reducing cost factors. It's unlikely that it was surprised by a competitor using price as a differentiator and has undoubtedly prepared for ongoing price competition.
The companies most damaged by this fierce price competition aren't the AWS, Google and Microsoft troika. It's everyone else. They view these low prices as an existential threat. (This piece, for example, bizarrely argues that low cloud computing prices are a disservice to users, instead of more honestly saying that brutal price competition merely exposes those unable to sustain their business absent high prices). You could view Rackspace's move to providing only managed cloud services as an admission that, like a Tour de France rider who falls back from a breakaway group to the peloton, it can no longer keep up with the tougher competition. The ongoing price war has turned this market into one that requires deep pockets, constant innovation, intense operational efficiency and steely competitive nerves. The biggest losers will be the would-be providers that find themselves in desperate financial condition as time goes by.
Little noticed amid all the wailing (or gloating) about Amazon's AWS prospects is a report released recently by Pacific Crest Securities. Far from predicting doom for AWS, it states that AWS will do $5 billion in revenues in 2014 and goes on to say, "AWS remains on a hypergrowth trajectory despite the law of large numbers and remains on pace to essentially double revenue every two years."
This is, in effect, an upgrade from previous AWS revenue estimates. Last year, I gathered all the estimates I could find for AWS revenues, drawing on numbers from GigaOm, MorganStanley, MacQuairie and RW Baird. The blue line in the chart below shows those estimates, which placed potential AWS revenues in 2020 at $20 billion.
Pacific Crest's numbers, identified by the red line, call for around 40 percent growth per year, in line with my previous point. They come out far larger — to around $40 billion, twice the previous estimates. This kind of increased opportunity for AWS (as noted by Gartner's Lydia Leong and InformationWeek's Charlie Babcock), to my mind, proves more persuasive than the threnodies described earlier.
Of course, these are estimates. Amazon refuses to break out actual AWS revenues, preferring to bury them in its "other" revenue category. However, given AWS revenue growth, we're probably only one or two years away from a time when financial regulations will force Amazon to report actual AWS revenues. At that time, all of this discussion will move from speculation to fact, and we'll know exactly how well AWS is doing — unlike some others in the space, who have had the SEC come after them about how they're accounting for what they dump into their cloud revenues.
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