Amazon's true brilliance shone this week in a tale of three clouds
Shannon Stapleton / Reuters
This was earnings week in the tech industry, but the one report everybody was waiting for came out on Thursday.
That's when Amazon broke out detailed financial results from Amazon Web Services, its cloud computing business, for the first time.
That's when the world discovered that Amazon is making about $1 billion a year on more than $6 billion in revenue from its enterprise computing business - a business that not only did not exist 10 years ago, but that nobody in their right mind would have predicted 10 years ago.
Amazon? The online bookstore that turned into a kind of Best Buy/Wal-Mart online? A giant of enterprise computing? No way.
Amazon launched AWS in 2006 as a way for other companies to host their web applications on Amazon's machinery in Amazon's data centers, rather than having to buy a bunch of hardware and software and hire a huge IT staff to keep the whole mess working.
Anecdotally, the tech world knew AWS was a big deal starting around 2010 or so. Every trendy tech startup in Silicon Valley and New York seemingly used it to host their sites - as the rest of the world found out back when AWS used to have its occasional outages.
Benedict EvansHow Amazon was able to make AWS: It plows almost all profits right back into the business.
But nobody knew exactly how big a deal until Thursday, when Amazon revealed that AWS earned profits of $265 million on $1.57 billion in revenue during the first quarter. If nothing changes for the rest of the year, that means AWS will earn $1 billion on more than $6 billion in revenue.
Things will change. First, Amazon's been in a cloud price war with upstarts like Google. The healthy profit margin on AWS means the company has plenty of room to cut prices further to stay competitive if need be. So profits could go down.
Second, AWS revenue was up 49% from last year. So it seems very likely that growth will continue, and full year revenue will come in well above $6 billion.
Contenders or pretenders?
Two other companies who are betting big on the cloud reported earnings this week, and both trumpeted numbers that appeared bigger than Amazon's. On Monday, IBM said it had $7.7 billion in cloud revenues. But digging in a little deeper, IBM acknowledged that only $3.8 billion of that was "as-a-service" revenue.
Flickr/IBM/ibmphoto24Depends on how you slice it.In plain English? Most of what IBM counts as "cloud" is actually known as "hybrid cloud," which includes a lot of equipment that companies still run in house. It also includes a category known as "private cloud," which basically means the customer buys a bunch of hardware and software (and consulting expertise) from IBM and runs all that stuff itself, but uses certain new technology that is similar to the technology used by public cloud providers like Amazon, which makes these data centers more flexible and lower cost and so forth and so on.
When you strip all that stuff out, IBM is on track to earn $3.8 billion this year from the hosted services that customers pay for on a subscription basis.
That's not bad, but it's just a drop in IBM's annual revenue bucket: $92.8 billion last year.
Microsoft also reported earnings this week. It boasted that its cloud business is on track for revenue of $6.3 billion this year, and growing fast - it was $5.5 billion at the end of December.
But Microsoft's cloud business includes Office 365, a set of business applications that run in Microsoft's data centers. Those apps are more equivalent to Salesforce or Workday than to what Amazon is doing. Microsoft's closest equivalent to AWS is Azure, which is a smaller business.
Microsoft would argue that the "cloud" is kind of a nebulous and meaningless term anyway. A lot of Microsoft's big enterprise customers use a combination of Microsoft software running in their own data centers and in Microsoft's Azure cloud, and move workloads back and forth - that hybrid model again.
ScreenshotRepeat after me: Cloud is good.Really, to Microsoft, it's all the same business: Helping customers be more efficient with their technology. And that business - Commercial, as Microsoft calls it - is a juggernaut, earning $10.4 billion on $12.8 billion in revenue just last quarter. Also, revenue grew 5% from last year, off an absolutely enormous base. (Software is a really nice business once you reach scale.)
But this is exactly why Amazon's cloud business is so amazing.
When Amazon got into the cloud game, it had no enterprise business to leverage. It had no relationships with CIOs and IT departments or longstanding software licensing agreements with Fortune 500 companies. It had no salespeople. It had no enterprise support staff.
All it had was some really well-run infrastructure and a brainstorm to turn that into a working business.
Now that it's got those customers, they're not likely to leave. As CEO Jeff Bezos put it in his annual letter to shareholders on Friday, "We work hard - very hard - to make AWS as easy to use as possible. Even so, it's still a necessarily complex set of tools with rich functionality and a non-trivial learning curve. Once you've become proficient at building complex systems with AWS, you do not want to have to learn a new set of tools and APIs assuming the set you already understand works for you."
Amazon skeptics always point out how the company never shows a big profit, how it plows everything right back into the business. But it's exactly this kind of long-term thinking that allowed Amazon to create a huge business out of nowhere.
Amazon bulls believe the company can do this again, and again.