Amazon and Salesforce.com Have a New Threat: Google

For the last decade, Google (NASDAQ: GOOGL  ) and Amazon (NASDAQ: AMZN  ) have been two of the most disruptive companies in the world, forcing widespread changes in just about every area of business each company pursues. Surprisingly, neither company has really taken aim at the other -- that is, until now, in the lucrative and highly valuable cloud. Recent moves by Google could significantly impact Amazon and peer Salesforce.com (NYSE: CRM  )

Amazon running away with the cloud business?
Amazon is best-known as a giant online retailer, but outside that business lies a fast-growing and enormous cloud business. Amazon's cloud segment is conveniently called Amazon Web Services, or AWS. It provides services for cloud infrastructure, laaS, and app platforms, PaaS.

According to Synergy Research, AWS grew 55% in the bottom half of last year in an overall laaS/PaaS market that grew 46%. Combined, the laaS/PaaS market generated more than $2.5 billion in the third quarter of last year, with laaS accounting for 64% of the total market. It is this arena where Amazon dominates its peers.

 

laaS market share

laaS Q3 revenue

PaaS market share

PaaS Q3 revenue

Amazon

35%

$560 million

17%

$153 million

Salesforce.com

3%

$48 million

18%

$162 million

Google

3%

$48 million

13%

$117 million

Amazon and Google are not dependent upon the cloud to maintain the growth of their overall business. However, Salesforce.com is a pure cloud play, and it's lagging Amazon by a significant margin. Furthermore, given Amazon's 55% growth in laaS/PaaS, we know that it is gaining even more share on its peers, which might surprise some, given Google's strong grasp on the Internet as a whole.

It appears that Amazon is ready to run away with this market, leaving Google and Salesforce.com in the dust.

Google: "Not so fast"
On Tuesday, Google threw a curveball into the equation: It slashed its laaS and PaaS prices by 32% and 30%, respectively, clearly trying to gain market share and to spark growth. Back in November 2012, Amazon made similar cuts to its own prices, and it was at this time that growth really took off and AWS began to steal market share.

This move by Google might have a similar effect, stealing share from smaller competitors and making it a real threat to Amazon. However, the bigger threat is companies like Salesforce.com and Rackspace.

Salesforce.com earns about a quarter of its revenue in this space, and up until now has been able to spend aggressively on research and development, as well as sales, general, and administrative expenses. With Amazon and Google having lower prices, Salesforce.com might have to lower costs, thus limiting its spending, which could hamper growth. At 80 times next year's earnings, this is quite a risk for investors of Salesforce.com.

Final thoughts
Late last year, Macquarie's Ben Schachter estimated that AWS brought in $3.8 billion in 2013, and that it would generate $6.2 billion and $8.8 billion in 2014 and 2015, respectively. Other analysts agree, such as Evercore, which sees AWS accounting for 13% of Amazon's total business by 2015. Thus, valuations for AWS alone are estimated at $50 billion, or 30% of Amazon's market capitalization.

For Google, mirroring or exceeding AWS could be very lucrative for shareholders, perhaps adding another $50 billion to its $390 billion market capitalization. Of course, Google must have the same level of growth, and it must also gain market share. In retrospect, there is plenty of room for Amazon and Google to grow in this business, but the big question for these two disruptive giants is which has the most to gain? Given AWS's current share and Google's recent price cuts, conventional wisdom suggests Google, which bodes well for its investors.

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  • Report this Comment On March 27, 2014, at 10:04 PM, banmate7 wrote:

    Can you discuss exactly what IAAS and PAAS is offered by SalesForce?

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