Amazon's (NASDAQ:AMZN) cloud computing unit -- Amazon Web Services (AWS) -- is its biggest money spinner, as it accounted for nearly 73% of the company's total operating profit last quarter. This allowed the company to post a massive jump in its net income despite brutal margins in the e-commerce business.
More importantly, the company gave investors a lot to be happy about when CEO Jeff Bezos said that AWS enjoys "the unusual advantage of a seven-year head start before facing like-minded competition." Given that Amazon holds a third of the cloud infrastructure market, according to the Synergy Research Group, it is not surprising to see why Bezos claims that "AWS services are by far the most evolved and most functionality-rich."
But a closer look indicates that cracks have started appearing in Amazon's cloud computing dominance. Slowly but surely, rival cloud services from Microsoft (NASDAQ:MSFT) and Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) have started eating away at Amazon's lead.
Rivals are catching up
Microsoft's share of the cloud infrastructure market increased to 13% in the first quarter of 2018 from 10% in the prior-year period. Google, on the other hand, saw a 1 percentage-point increase in its market share, to 6%. Amazon's market share, meanwhile, was flat year over year and fell 1 percentage point sequentially.
Microsoft's Azure public cloud revenue increased a massive 93% year over year last quarter, pulling in about $2 billion in revenue, according to some estimates. This was better than AWS' year-over-year growth of 49% during the first quarter, with revenue coming in at $5.44 billion. Clearly, Microsoft is rapidly cutting into Amazon's cloud computing lead.
Google, meanwhile, is still a bit behind, as its quarterly cloud revenue surpassed $1 billion for the first time in late 2017. However, its strategy of offering its cloud computing solutions at a cheap price point has started bearing fruit, as evident from the small gain it logged last quarter.
Microsoft and Google are stepping up their game
Microsoft and Google have used a combination of smart pricing and cutting-edge features as weapons to fight Amazon's cloud computing dominance. For instance, the monthly subscription of Google's cloud platform costs around $215 a month, while an identical solution on AWS goes for nearly $300.
As it turns out, pricing is the most important factor that a company's chief information officer (CIO) considers when opting for a service. Cloud management services provider RightScale found out in a poll of 1,000 CIOs that 53% of them prioritize cost savings while deployment is ongoing. The number rose to 64% in case of those who have already been using the cloud for some time, but want more cost savings.
Clearly, Google is making a play to capitalize on this trend by offering much lower prices than Amazon, but there's more to it than that. For instance, Google's cloud platform has faster disk read/write times to provide quick memory access and runs on faster networks. Additionally, the company is trying to address the key challenges in the way of cloud adoption, such as security.
A Google-sponsored survey of 509 information technology executives at midsize and large enterprises last year revealed that 71% of the respondents hold data security as their top requirement while deploying in the cloud. Not surprisingly, Google has been shoring up security on its cloud computing platform, announcing as many as 20 security enhancements in March this year.
So Google is trying to get the basics right -- offering secure services at affordable costs -- and the good part is that the company seems to be making some progress thanks to this strategy. Microsoft, on the other hand, is making a more aggressive play. It has been incorporating advanced features into its cloud ecosystem, such as artificial intelligence (AI), to attack AWS in areas in which it's lacking.
Investment research firm KeyBanc recently found out that Microsoft's cloud platform offers more pre-built AI tools than any other public cloud vendor. Now, AI is going to play a major role in driving cloud adoption. In fact, half of the 300 respondents in a survey by LogicMonitor forecast that 67% of cloud growth through 2020 will be driven by AI.
This is why Microsoft is busy adding more AI tools to its Azure cloud platform. The software giant recently announced the preview launch of its Project Brainwave, which will allow clients to deploy real-time AI processing in the cloud. Not surprisingly, the adoption rates of Microsoft Azure are now picking up pace when compared to AWS.
Moreover, data from RightScale shows that Azure adoption has increased 11 percentage points this year, while AWS adoption has increased 7 percentage points.
How the competition could hurt AWS
Looking ahead, Microsoft and Google can narrow AWS' lead further by deploying their services in more regions across the globe, and also by adding new services and features.
If that happens, AWS' margins could take a hit as Amazon will be forced to lower prices to maintain its market share, as it has done in the past in response to rivals. What's more, it might have to take such a step soon after Microsoft slashed the support fee of its Azure cloud service to a third of the original price in January 2018.
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. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Amazon. The Motley Fool has a disclosure policy.