Amazon Rivals Have Big Clouds to Fill
February 17 2017 - 01:13PM
Dow Jones News
By Dan Gallagher
Some things, even huge piles of money can't buy.
One of those things might be the ability to unseat Amazon.com
Inc.'s AWS as the king of the cloud computing market. Not that
others haven't made a game effort. The two largest challengers --
Microsoft Corp. and Google parent Alphabet Inc. -- have dropped
about $52 billion combined in capital expenditures over the past
three years, much of which goes toward their massive networks of
data centers and related equipment. That's double what the two
spent over the previous three-year period.
It's not been without results. Microsoft's Azure cloud service
more than doubled its revenue in 2016 to about $2.7 billion,
according to estimates from J.P. Morgan. Google's Cloud Platform
surpassed $1 billion in revenue in 2016, estimates Aaron Kessler of
Raymond James.
The latter is particularly of note, given that it's been barely
a year since Google brought in former VMware chief Diane Greene to
run the cloud division and focus on enterprise customers. It took
AWS at least five years to hit the $1 billion mark, judging from
Amazon's limited disclosures at the time.
But Amazon has only gained momentum since. AWS generated $12.2
billion in revenue in 2016. That's a gain of 55% from the previous
year. Google Cloud could double revenue this year to $2 billion,
especially since $400 million is already effectively guaranteed
from a five-year deal with Snapchat's parent company. But even if
it did, Google Cloud would still be generating less than 12% of the
$17 billion in revenue Wall Street expects from AWS in 2017.
That speaks distinctly to Amazon's first-mover advantage. The
company launched its first cloud offerings 11 years ago, long
before it was clear why an online retailer would want into the
expensive business of IT services. Investors at the time worried
the ambitious company had found a new money pit. Free cash flow --
Amazon's favorite indicator of financial performance -- fell in
2006, after being positive and growing for four years.
But Amazon has now had the time to leverage that investment --
and billions more -- into a very profitable business. Operating
income for AWS doubled to $3.1 billion in 2016, producing a margin
of 25%. By contrast, Amazon's combined retail business generated
operating margins of just over 2% for the year. Free cash flow,
adjusted for capital leases and principal repayments, jumped 55% to
$3.9 billion by the end of 2016.
This isn't to say Google and Microsoft are wrong to target the
cloud. Brent Bracelin of Pacific Crest estimates that the top 30
cloud providers now account for only about 5% of annual corporate
spending on enterprise technology. A big portion of that spending
will move to the cloud. So there's plenty of market up for grabs --
provided one can get around Amazon's rather large mitts.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
February 17, 2017 12:58 ET (17:58 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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