Amazon is definitely still playing the dangerous game called 'race to zero'
AWS sales surged 81% over the year-ago quarter, brought in revenue of $1.82 billion for the quarter and dropped $391 million of profit to the bottom line, an operating margin of 21.4%, CFO Brian Olsavsky told analysts on the quarterly conference call.
So analysts couldn't resist the question: with AWS contributing so much to Amazon's new-found profits, will the company keep cutting prices in what the tech industry calls the "race to zero"?
Short answer: Yes.
The race to zero is still on, Olsavsky says, because it's part of AWS's "business model."
The "race to zero" is a term for the dangerous price-war game that the biggest cloud computing companies are playing especially Amazon, Microsoft and Google.
This race refers to cutting prices so low that eventually they'll be nothing - absolutely zip - for them. For instance, in May, Google announced that its new Photo app would be free and come with unlimited storage. Cost for unlimited storage = $0.
It's a dangerous game because providing cloud services is an expensive business. Companies in this market are spending billions building and maintaining data centers to host everyone's apps and data. If they blow it with their pricing strategy, those facilities don't just disappear.
LinkedIn/Brian OlsavskyAmazon CFO Brian OlsavskyThe price war also means only the biggest tech companies can get into the market.
Amazon is not only convinced it can win this game, it's the one that invented it. As Amazon grows its cloud, its costs have decreased and it passes those savings along to the customer.
Amazon has cuts prices 49 times since it launched AWS in 2006, Olsavsky says, including several price cuts this year.
The goal is to treat cloud computing like retail, something that Amazon knows a bit about. Customers are likely to fill their baskets up with more stuff when every item seems affordable, so Amazon makes more money on each customer.
Here's what Olsavsky said when Goldman Sachs' Heath Terry asked about price cuts vs. margins vs. investment.
By the way, Heath Terry seemed satisfied enough with the answer. He reiterated a "buy" rating for the stock in his research note this morning, as did just about everyone else.