Amazon Web Services (AWS) is a series of cloud computing services offered by e-commerce giant Amazon.com, Inc. (NASDAQ: AMZN). It features cloud storage centralized in 12 geographic regions of the world, spread across five continents. AWS, through its cloud platform, offers storing, computing, networking and development services to customers.
Cloud computing represents the latest megatrend to evolve from a rapidly transforming technology landscape. It is popular in the tech sphere now that the storage space and raw computing horsepower demanded by game and app developers exceeds the capabilities of standalone computer hardware and software. With products such as Amazon Glacier and Amazon Simple Storage Service (S3) for storage, and Amazon Route 53 for networking, AWS is leading the way for customers who wish to harness the power of the cloud to propel their applications and development.
As one might expect, several competitors have emerged to claim a share of this potentially huge market. Microsoft (NASDAQ: MSFT) is pouring research and development (R&D) into its cloud product, Microsoft Azure, which offers a similar suite of products focused on storage, networking and infrastructure. Other competitors include Rackspace Hosting, Inc. (RAX) and Softlayer, which was acquired by IBM (NYSE: IBM) in 2013.
While competitors have stepped up to the plate, they have yet to score a true hit, with AWS besting them all in terms of market share, revenue growth and margins, as of 2016. Amazon’s aggressive pricing strategy -- the company has slashed AWS’s prices nearly 50 times since its inception in 2006 -- has allowed it to gobble up market share and establish a massive customer base for upsells as technology continues to emerge.
Despite repeatedly slashing prices in a competitive move known in the tech sphere as the “race to zero,” Amazon has not only enjoyed healthy margins with AWS but has seen the segment’s margins grow robustly. Its first-quarter 2015 margin was 16.9% as a percentage of net sales, and by the first quarter of 2016, it was 27.9%. From the beginning of 2015 to the beginning of 2016, its trailing 12-month margin nearly doubled from 13.2% to 26.1%. This was despite Amazon rolling out free products such as Amazon Lumberyard, a cross-platform game development engine, to get new customers on board. Clearly, the segment has employed, to great success, a strategy of offering a host of free and low-priced products and services to build a huge customer base, and then it leverages that base by upselling additional products and services.
No competitor as of 2016 can compete with AWS’s margins. Microsoft Azure’s quarterly margins have dropped by over 14% year over year, with company executives acknowledging in a 2016 quarterly earnings call that AWS has presented the model to follow for claiming margins and acquiring market share. Rackspace’s quarterly margin stands at 10%, though like Azure, its year-over-year quarterly profits have declined since early 2015.
As of 2016, the public cloud market share battle is a fight for second place. AWS dominates this category with 31% market share. Its closest competitor, Microsoft Azure, stands at 9%. Softlayer comes in third at 7%. AWS not only boasts a seemingly insurmountable lead but is growing faster than any of its rivals in terms of raw dollars. Azure is creating separation from Softlayer but is simultaneously managing to fall further behind AWS.
AWS already claims very healthy margins as of 2016. As technology inevitably advances, with more sophisticated products and services coming down the pike, AWS is much better positioned than its competitors. It has a vast customer base from which to profit with its technological advancements.
The Bottom Line
AWS is the Google (NASDAQ: GOOGL) of the cloud computing niche. In 1998, when Internet search was a nascent industry, Google quickly distanced itself from its early competitors, such as AltaVista and Lycos, and claimed major market share. At the time, Google survived mainly on venture capital investment and had few ways to monetize its service, but that would come later. By the time Google developed and refined its ad platform, the search engine was so dominant and ubiquitous that its name had become a verb in the common lexicon.
AWS is employing a similar strategy of focusing on establishing market share during the early years of a new industry, though it has the added benefit -- which Google did not have -- of logging strong margins while doing so. These should only improve as the segment rolls out bigger and better products to its customer base. AWS is really outgrowing its competitors, with no end to that growth in sight.