Is CenturyLink a Real Threat to Amazon’s Cloud Business?

CenturyLink is making strides to compete against Amazon in the cloud business, but will this plan succeed?

May 8, 2014 at 9:30AM

CenturyLink (NYSE:CTL) is taking aim at the fast-growing cloud infrastructure business, and believes it has a good shot to become a market leader. Unfortunately, CenturyLink will be joining a long list of technology giants like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL) (NASDAQ:GOOG), but also the undisputed leader, Amazon (NASDAQ:AMZN). So, while CenturyLink is bullish in its prospects, should you be?

Why is cloud infrastructure so crowded?
By now, you've likely heard the term "cloud" referenced many times, and it's in the cloud where big-time technology companies are laying the groundwork for future growth. The industry itself is separated into cloud infrastructure, or laaS, and app platforms, or PaaS.

In total, this is a market that grew 52% in the fourth quarter of last year, with revenue exceeding $3 billion and falling just shy of $10 billion for the last year. Therefore, if companies such as Microsoft or Google can maintain their 7% and 5%, respectively, total market share, both companies could have a long-term growth segment.

However, 5%-7% market share is not the goal. The ultimate goal is to become Amazon Web Services, which saw year-over-year growth of 60% in its first quarter report and commands more than 30% of the total market. With that said, AWS is estimated to be worth $50 billion today, making this business very important for $20 billion CenturyLink.

What is CenturyLink doing?
CenturyLink is planning to tackle the laaS market, hoping to become a market leader after implementing significant price cuts to its small existing laaS business, combined with a beefed up service plan. CenturyLink also has an enormous network of 56 global data centers, which it believes will allow the company to keep outbound pricing significantly cheaper than AWS's service.

Clearly, CenturyLink is hoping to maximize its large network with recent cloud infrastructure services acquisitions like Tier 3 to create better cost synergies with more services. All in all, it's a good plan, but will it work?

Let's get realistic
If CenturyLink's cost-cutting and boosted services plan was to work, and it could gain ground on Amazon. Then, CenturyLink's stock could soar, as AWS is more than twice as valuable as CenturyLink. However, recent history implies that CenturyLink will not be successful, and that it's approaching the cloud in the wrong way.

Amazon has the largest network, and by far, the most customers and product offerings. As we've seen in the mobile space, larger infrastructure and having the most applications on operating systems are golden in attracting consumers, or in this case, attracting customers.

The laaS market, which is where CenturyLink is hoping to make its mark, is highly dominated by Amazon, as it controls more than one-third of the market. The rest of the market is scattered, with no company owning more than 3% of the share, which includes Google and Microsoft.

With that said, Microsoft and Google have tried diligently to cut into Amazon's share. Microsoft has cut costs and has also boosted features for Azure, while Google recently announced price cuts of 30% in laaS on top of price cuts in quarters prior. So far, nothing has worked.

Instead, companies have tried their luck in the PaaS market, which has been successful, as it's more fragmented. In PaaS, Amazon owns a 17% share, while Microsoft and Google own 14% and 13% of the market, respectively. Therefore, with PaaS also growing fast, and creating more than $100 million in quarterly revenue for those with a 10% share plus, this is the segment where CenturyLink should be focusing its cloud business. But, it's not, and to this point, there's no reason to believe that a beefed up services offering and price cuts will cut into the mighty Amazon's laaS business.

Final thoughts
Admittedly, if CenturyLink can experience success in this business, its stock, revenue, and net income could soar. However, Amazon is on a different level and has such a grasp on the industry that it's hard to imagine CenturyLink being the company to cut into its share. Instead, if you're going to bet on a company to take down Amazon, Microsoft and Google make much more sense.

Albeit, with Amazon 25% off its 52-week highs, and nearly one-third of its valuation tied to the fast-growing and highly valuable AWS, it looks like a golden investment opportunity.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends and Google (C shares). The Motley Fool owns shares of, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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