Exclusive update by Demitrios Kalogeropoulos
The competition for cloud computing dollars is heading skyward-and for good reason. That market is expected to swell by 30% annually over the next few years, growing into a $70 billion industry by 2015.
With a huge head start over rivals, Amazon.com (Nasdaq: AMZN) is poised to capture a big chunk of the cloud services market. But despite its prime positioning, Amazon's Web services division, or AWS, isn't big enough yet to count as a significant part of the e-tailer's $60 billion business. Amazon sold $39 billion of electronics and other merchandise last year. And at less than $2.5 billion in sales, AWS is still just a footnote in the company's financial filings at this point. But you shouldn't expect that to be true for long.
Amazon is convinced
Particularly not if you've been following what management has to say about it. Amazon executives are about as bullish on the potential for AWS as it gets. Andy Jassy, the head of the division, recently put it this way: "At the highest levels of this company, we believe that it's quite possible that AWS ends up being the largest business in Amazon. We believe [that] passionately."
And there's every reason to believe that Amazon sees AWS as critical to its future. Consider that, until 2009, the company had listed "customers" and "sellers" in its corporate mission as the main groups that it existed to please.
But in an update to its mission statement for 2010 and beyond, Amazon has added two new names to that exclusive club. The first new group that the company now targets, "content creators," is a nod to the digital selling strategy that has led to the Kindle platform. And the second group, "enterprises," is a clear sign that Amazon sees AWS as a key pillar of its business moving forward.
Why Amazon could win
We're still in the early stages of this game, but even now it appears that Amazon is poised to dominate the cloud services industry. After all, the e-tailer has been working at it since 2006, which gives it a critical lead in experience and customers.
And more importantly, Amazon has crafted what many describe as the strongest portfolio of services around. But don't take my word for it. Here's what a Fortune 500 AWS customer recently told The Verge: "We've embraced Amazon as a robust solution for providing the high availability that we're looking for." This client went on to say that Amazon's AWS technology was "a very meaningful step ahead" of competitors like Google and Microsoft.
It's important to note that those words come from an executive at Netflix (Nasdaq: NFLX), the company that Amazon has targeted as a major competitor in the streaming video market. You know you're doing something right if you can convince bitter rivals in one industry to "embrace" your services in another.
The bumpy road ahead
Of course, Amazon has rivals in the cloud space, too. Microsoft has its competing service platform called Azure. And many other companies offer cloud services as part of their portfolios, including HPQ and IBM. The competitive threat should only grow from here. As the biggest tech companies build out their data infrastructure, its only natural that they look to offering cloud services as a way to make money by renting out parts of it.
But probably the main worry for Amazon is one of the newest entrants: Google. The gorilla of search is making a big push into the cloud business, snapping up office space and ramping up hiring for cloud tech engineers. Because it needs to quickly run billions of queries every day, Google has constructed some of the biggest and most powerful data centers in the world. And it is aiming to put those server farms to work for enterprises.
All this competition has contributed to falling prices for cloud services. Amazon has slashed prices 23 times since rolling out AWS in 2006. Sure, many of those cuts have been due to its costs plummeting over the years. But rival price cuts by Google, Microsoft, and others haven't eased the pressure on cloud services margins.
Foolish bottom line
Still, even as prices fall, AWS revenue continues to leap. Estimates peg the unit's sales at about $2.1 billion last year. And Wall Street analysts think it could jump to more than $15 billion by 2020.
At that pace of growth, AWS might even eclipse Amazon's general merchandise sales within the next decade. It's easy to see, then, why company executives are betting so heavily on AWS. The opportunity is huge.
Fool contributor Demitrios Kalogeropoulos owns shares of Apple, Netflix, and Costco Wholesale. The Motley Fool recommends Amazon.com, Apple, Costco Wholesale, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Costco Wholesale, and Netflix. 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.