Intel helped Amazon Web Services become a monster, and it could end up backfiring

Intel's chips are used in 95% of the server market, powering some of the world's largest data centers.

That includes most of the public cloud services, like Amazon Web Services and Microsoft Azure, who get highly customized chips from Intel.

Backed by Intel's high-performance chips, AWS is now generating $7 billion a year, while Azure is estimated to be at a revenue run rate of $1.4 billion, according to Deutsche Bank.

So as the world increasingly moves to the cloud, Intel's Data Center Group, the part of the company that makes server chips and generated $4.1 billion in revenue last quarter alone, should be in position to mint even more cash, right?

Not in the long run, according to some analysts. The growing share of the big public cloud providers could give them substantial buying power over Intel, potentially forcing steeper discounts.

The reasoning is simple: If more and more companies start shutting down their own data centers, in favor of renting server power and storage space from public cloud services, Intel's customer base will get concentrated to a handful of large customers, like AWS and Azure, giving them more leverage than ever.

In fact, according to Deutsche Bank, GE plans to close 30 of its 34 data centers by 2020, while Capital One is already taking steps to shutter 5 of its 8 data centers to move its "IT workload" to AWS. Azure is lagging behind, but Gartner estimates it's actually growing faster than AWS in some areas.

"If the big public players continue to get bigger, they will have more leverage over Intel," Patrick Moorhead, principal analyst at Moor Insights & Strategy, told Business Insider. "In a way, Intel helped create a monster with the massive help it has provided them."

Depends on what you mean by "cloud"

Intel has been trying to reduce its reliance on PC chip sales as the PC market continues to shrink, and now the Data Center Group is the fastest growing and most profitable unit within Intel.

Public cloud is still a small portion of the overall data center business, and it's perhaps years away from becoming the de facto solution for the world's largest companies. But public cloud vendors also represent the fastest growing portion of Intel's Data Center Group revenue, and Intel's been seeing 50% compound annual growth in CPU sales to public cloud vendors since 2009, according to Deutsche Bank.

That means an increasing share of that group's revenue wil come from fewer customers.

"There's risk to Intel when your customers have a great deal of market power. Intel has been wanting to encourage an ecosystem that's more diverse," Gartner's cloud analyst Lydia Leong told us.

Intel's head of Data Center Group Diane Bryant disagrees. She says it's not just the public cloud vendors growing the overall pie, but a long tail of customers that include lots of private cloud data centers as well.

"The top 10 cloud services continue to grow at a very nice clip, but the next 200 are growing at twice the rate of the top 10," Bryant told Business Insider.

On top of that, Bryant believes Intel's technology is still far ahead of its competitors that the customers will continue to stick to Intel's chips for a long time. AWS, for example, just announced last month that it would be using E7, Intel's most advanced Xeon processor, in the cloud.

"When you work with the cloud service providers, they are looking to deploy the best technology as fast as they possibly can. They're always looking for custom unique solutions," she said.

What about competition?

Intel's competitive advantage may not last long as competitors like ARM are starting to sign up big customers as well.

Jim McGregor, the principal analyst at TIRIAS Research, points out companies like PayPal have already adopted ARM-based chips in its data centers and seeing positive results. "They're basically saying, 'We're siding with ARM because we need a very customized solution, and they're going to do whatever we want to do,'" McGregor said.

On top of that, recent reports suggest companies like Amazon and Google could go completely in-house in the future, taking a more vertical approach to chip-making. Amazon, for example, spent over $350 million to acquire a chip design company called Annapurna Labs, earlier this year.

Bryant is aware of all the rising competition, but she believes Intel's Data Center business is in a good position. The group is growing 15% annually on average, and Intel is continuing to invest in its technology, as seen in its $16.7 billion acquisition of Altera this year.

"When you have 97% share of the market, you're always looking for where the competition may come in," Bryant said. "As long as I can give the cloud service providers the best technology, I believe they'll continue to rely on us based on the investment that we make."

Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.