Amazon.com, Inc. (NASDAQ:AMZN) is primarily known for the massive scale of its e-commerce operation and is the undisputed leader in the field. The company is also known for its Amazon Web Services (AWS) cloud computing, a concept the company pioneered back in 2006. What began as a way to monetize idle room on its servers has quickly grown to become the company's most profitable and fastest-growing business.
In Amazon's most recent quarter, net sales from AWS grew 55% over the prior-year quarter, generating 10% of its total revenue and all of the company's net income. Expansion in its e-commerce operation caused the segment to operate at a loss, with AWS helping subsidize that growth. AWS produced $4.6 billion in revenue and operating income of $1.17 billion. This resulted in operating margins of over 25%.
Competition from the likes of Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) is ramping up, and Amazon recently announced that it plans to use machine learning, an application of artificial intelligence (AI), to maintain its lead in this dynamic market.
Lots of demand, not enough supply
The field of AI has taken the world by storm and is increasingly becoming part of our everyday lives. From tagging photos on social media to powering the digital assistants on our smartphones, AI has taken center stage among big tech companies.
The size of the datasets currently required to take advantage of AI has limited its availability to only those companies with the largest stores of information, while a shortage of experts has resulted in quickly escalating wages. Those trained in the field can command salaries of between $300,000 and $500,000 per year, as there are currently fewer than 10,000 professionals worldwide with the necessary skills. These factors have conspired to keep large-scale adoption of AI out of the reach of most companies.
Cloud computing to the rescue
Most of the major cloud providers offer some level of AI to their customers in their cloud offerings. Unfortunately, most of their customers don't have the level of expertise necessary to take full advantage of the opportunity.
Amazon has announced the ML Solutions Lab, which will connect AWS customers with the company's own machine learnings experts and help them "identify practical uses of machine learning inside customers' businesses, and guide them in developing new machine learning-enabled features, products, and processes." The company says it will combine hands-on workshops and brainstorming sessions to help customers identify business challenges and to "develop machine learning-based solutions."
Amazon will have its own experts help customers prepare their data, build and train the machine learning models, and put them into production. This will allow AWS users to take what they have learned and apply it to other areas of their business.
Amazon announced in a press release that pharmaceutical giant Johnson & Johnson (NYSE:JNJ), daily newspaper The Washington Post, and World Bank Group would be among the first high-profile customers of its new service.
Why it matters
Microsoft announced plans earlier this year to turn its Azure into an "AI cloud" and provide AI services to customers sometime in 2018. Azure users will be able to recognize images from large datasets to predict the purchasing patterns of their customers.
Google Cloud already offers machine-learning services, with pre-trained models that can be tailored to the specific need of the user. Last year, the company announced The Machine Learning Advanced Solutions Lab, similar to Amazon's offering, which lets customers work with Google experts. The company also provides four-week courses to help customers improve their AI skills.
Cisco's Global Cloud Index report estimates that annual global cloud traffic will grow at a compound annual growth rate of 30% between 2015 and 2020 and more than more than quadruple during that time. The report also forecasts that over the same five years, 68% of all cloud workloads will be in the public cloud data centers, up from to 49% in 2015, representing 35% growth annually.
An opportunity of that scale is attracting the biggest players, and Amazon will need to up its game if it wants to remain the leader in this growing concept. Amazon believes the addition of the machine learning lab may be the advantage it needs to keep the competition at bay.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Danny Vena owns shares of Alphabet (A shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Johnson & Johnson. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.