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Marketplace

Amazon’s cloud services rain profits

Apr 24, 2015
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Amazon released first-quarter earnings Thursday,  and made it clear that,  for now, it owns the cloud and it’s raining profits.

Amazon Web Services, which offers data storage and other tech services,  took in revenues of $1.57 billion during the first three months of the year.  Profits topped $265 million. 

“Yeah, I mean, [it’s] really firing on all cylinders,” says Colin Sebastian, senior research analyst at Robert Baird. 

Amazon’s success in the cloud can be credited to one very smart move, says Sebastion.  It got there first. 

“The reason they dominate is they created this market,” he says 

Amazon started as an online marketplace for everything. To be that marketplace, it had to build more and more servers. The company built  to peak capacity, which means often times it was left with more capacity than it needed. 

“They woke up one day and realized they could sell that same service to other companies.”

Amazon Web Service’s profit margin is 17 percent. The company’s overall profit margin is 2 percent. “Think of it as accounting for a third of overall profits, a tremendous amount of operating income” says Gene Munster, senior research analyst at Piper Jaffray.  

Cloud services are still a nascent industry. “There are literally tens if not hundreds of billions of dollars at stake,” says Sebastian.

And AWS is still seven times larger than Microsoft’s cloud services — it’s nearest competitor, says Munster.  But Google, IBM and HP are all racing to catch up by offering more than simple data storage, which has become a commodity. 

Munster says it’s going to be hard for competitors to gain market share. AWS already has more than a million customers including Netflix and NASA, “and now what we’re seeing now, is businesses are standardizing on Amazon Web Service, building applications that are optimized for AWS, that just creates more stickiness.”

Amazon CEO Jeff Bezos has said web services could one day outsize Amazon’s retail business. That day  may not come soon enough. As it has done many times, the retail side posted a loss last quarter. 

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