It is true that Amazon (AMZN, Financial) is struggling with its bottom line and for a good period of time, it has just been assuring investors that the time would soon come when it revives its growth trajectory. In the third quarter as well, Amazon missed the Street forecast and the shares plunged 9 percent after the company provided lackluster guidance for its fourth quarter. The guidance was more disappointing because the fourth quarter is the holiday season in the U.S. and European markets as well and therefore, investors were hoping to get favorable assertions from the management.
Looking back
Over the past two years, Amazon has been running in different directions including experimenting with smartphones but most of these initiatives have not yielded expected results. In the third quarter, net loss widened to $437 million or 95 cents per share in the third quarter, from $41 million or 9 cents a year ago. That came in larger than forecasts for a loss of 74 cents a share. Revenue also fell short of expectations. Net sales rose to $20.58 billion, but that lagged forecasts for $20.84 billion, according to Thomson Reuters I/B/E/S. So, now that I have given you an overview of the results, let me get to the main topic of discussion in this article.
Amazon is behaving like a jack of all trades for now and while most of its strategies have failed to produce praiseworthy results, one high growth area that stands out (apart from its core marketplaces and third-party sales segment) is the Cloud services. Yes, Amazon web services, the Cloud portal of Amazon, has seen phenomenal performance in the past year because of its simplified infrastructure as well as affordable pricing. In its last quarter earnings call, Amazon did provide a small update about AWS besides all of the Prime, Kindle, Fire and even Xbox collaboration news. AWS experienced usage growth "close" to 90 percent year-over-year in Q3 following a routine round of price cuts back in Q2. AWS has seen more than 350 significant service and feature releases this year, most recently including the debuts of the AWS Directory Service for managing on-premises access control and security.
As per this report released by Synergy Research team, Amazon has been the leader of the cloud service providers pack and in absolute terms, the growth achieved by the online retail giant in this segment, is ahead of Microsoft (MSFT, Financial) and IBM’s (IBM, Financial) growth. Amazon Web Services has close to 30 percent of the entire cloud services market which includesIaaS, PaaS and private and hybrid cloud. Therefore, it is amply clear that Amazon has maintained its dominance in the Cloud computing market using efficient pricing mechanism and building a robust infrastructure. However, the challenge is that Amazon’s cage is being rattled and investors need to be aware that tech giants including Microsoft, IBM and Google (GOOG, Financial) (GOOGL, Financial) are making rapid progress in this space.
Detailing on peers
Microsoft, which markets its Cloud services under the Azure brand, has been the highest growth getter as its revenue has increased approximately 136 percent on a rolling annualized basis and which has catapulted its market share to around 10%, just behind Amazon. The amazing efficient team at Microsoft’s Azure division has been rolling our new services and features at an accelerated speed focused on both IaaS and PaaS. To be honest, Microsoft has been focusing quite hard on rolling out new services for its “Infrastructure-as-a-service” segment (IaaS) even though it was originally born as “Platform-as-a-service” (PaaS) wherein new applications could be written from scratch.
However, this does not mean that the company has completely overlooked PaaS and the same was pointed out by Mr. Mark Russinovich, the CTO of Microsoft Azure. He highlighted that the Azure team is moving toward a world where apps can be “decomposed into tiny pieces, with each piece becoming a declarative model.” This implies that the company is looking extensively at a microservice model which will be achieved with a support layer that it internally calls “Windows Fabric.” It is expected that, with the new PaaS model, the different parts of a single app will be able to scale independently. To relieve you of the technicality involved, let me simply put across the point that Microsoft has not forgotten PaaS and is now working on this new model so as to simplify it before it's publicly launched.
The reason I drilled a bit deeper into Microsoft’s cloud strategy and actions is to give you an idea of the pace with which the company is working on cloud and which is translating into a big threat for Amazon. And while Microsoft is investing credible efforts into Azure, Google and other runners are also working on it big time. Though Google is a late entrant to the party, it has settled on renewing its efforts in the Cloud computing space, and it is definitely not cheerful news for Amazon’s investors.
Hurdles for Google include the cost and complexity of switching providers. Cloud users say the larger, more developed ecosystem of consultants and developers around Amazon’s offerings is a big advantage. However, the launch of Compute Engine last year has brought the internet giant back into the game as this service is quite similar to that of Amazon. Definitely, this has yielded results as some early-stage and mid-sized companies have switched to Google for their websites and mobile apps.
Conclusion
Amazon has secured the first mover advantage in Cloud business and truth be told, it has sustained its dominance and reaped major gains out of it. However, businesses are meant to be challenged and as such, Amazon Web Services are being threatened in a big way by the upcoming players mentioned above. Though the management did not cover its strategies related to the Cloud in the earnings call, investors can definitely expect Amazon to make some big moves to secure its share in the market. Therefore, investors need to watch out!
