Why Is Amazon.com Launching Zocalo?

Learn why the online retail giant, Amazon.com, is launching a new cloud service called Zocalo, and how this could affect its rivals.

Jul 16, 2014 at 3:00PM

In its aim to expand in the cloud service industry, Amazon.com (NASDAQ:AMZN) is launching Zocalo, a data storage and sharing service for enterprises. This feature will form part of Amazon Web Services (AWS), the largest public cloud in the market. Besides contributing to a leading position over competitors like Box and Dropbox, the new added value in AWS puts pressure on tech giants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), which are lately focusing on growing their own cloud services. 

Screen Shot Source: Amazon Web Services Video

Adding value to Amazon Web Services
Amazon.com has reported consistent and significant expansion in the cloud service market. In its latest quarter, the company showed 60% year-over-year growth in its "other" revenue, which includes the financial performance of AWS.

Through Zocalo, AWS can now provide 200GB of data storage to users for $5 per month. Amazon.com states that its newly launched service is designed to increase enterprise productivity through administrative controls and feedback capabilities. Plus, users who have Amazon WorkSpace have free access to Zocalo, as both services are integrated. In that sense, AWS satisfies the existing demand for a cloud storage service that includes enterprise solutions.

Maintaining leadership in the market
AWS operates with very low operating margins, which is a major contributor to Amazon.com's overall unprofitability. Yet, as it appears like the public cloud is still in its early stages, the company foresees greater margins and revenue in future years. Given that Amazon.com presents constant net losses, it focuses strongly on revenue growth, which drives its stock price up.

For these reasons, the organization prioritizes maintaining its leadership in the public cloud market, as this also increases its top-line year after year, and could imply significant financial success in the future. As more businesses look to move their data to the public cloud, the company could benefit considerably from its leading position in the market. That said, its current struggle with margins could also result from the constant competition with other tech giants, which requires Amazon.com to invest and spend heavily in low pricing strategies.

Giant competitors moving forward
Microsoft recently stepped up in the market by offering 1 TB of cloud storage for all of its Office 365 subscribers. It has also increased free storage in OneDrive to 15 GB. In addition, the company keeps investing in Azure -- a platform that comprises cloud computing services for developers -- as it plans to launch new arrays and so improve its current features.

In its most recent quarter, Microsoft reported a 150% revenue growth for Azure, and a doubling of Office 365 revenue. These results led to a net profit of $5.66 billion, beating analysts expectations of $5.26 billion. As a profitable company with remarkable growth in its cloud portfolio, Microsoft poses a threat for Amazon.com's AWS.

Google also offers several cloud services, which make up Google Cloud Platform. Recently, the organization formed an alliance with a California-based storage start-up called Panzura. Both companies have agreed to provide users with 2TB of free cloud storage for 12 months.

This move is part of Google's broader goal to increase its market share in the public cloud industry, adding differentiation to its ecosystem in order to better compete with AWS and Microsoft. With $11.3 billion of free cash flow in 2013 plus growth in both top and bottom lines, the company could pose a greater threat to Amazon.com and Microsoft in the future, as it invests in bettering its own enterprise cloud services.

Final Foolish takeaway
Amazon.com's launch of Zocalo furthers AWS differentiation, creating an ecosystem able to attract and engage customers. Moreover, Amazon.com attempts to maintain its leadership in the market, which in turn increases its top line, upping its stock price despite net losses. As giant competitors, Microsoft and Google, take action to increase their respective shares in the cloud services market, Amazon.com counterattacks with Zocalo. Consequently, it aims to secure its position in the growing cloud industry in order to reap the long-term benefits.

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Alvaro Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Google (A shares), 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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