If you were to ask anyone what Amazon.com's (AMZN +0.97%) core business was, I'd wager that 10 out of 10 times the answer would be "e-commerce." That's undoubtedly true today, but it might not be true forever.
It turns out that the company's Amazon Web Services division, which is currently the No. 1 cloud computing vendor by a healthy margin, could very well become Amazon's most important business.
It depends on how you define "largest"
To be clear, Amazon will most certainly always be an e-commerce heavyweight; but at a recent media event in Las Vegas, AWS chief Andy Jassy outlined Amazon's future plans for its cloud computing business. Amazon wants to take over the cloud world.
Amazon intends to build data centers in "virtually every large country" in the world, and has no problem with investing "as much as it takes to grow the business." Furthermore, Jassy predicts that AWS will become the largest part of Amazon's business. That's a pretty bold claim considering the sheer scale of Amazon's e-commerce operations as well as its revenue base.
|
Revenue |
2014 YTD |
Percentage of Sales |
|---|---|---|
|
Media |
$15.6 billion |
26% |
|
Electronics and other merchandise |
$40.2 billion |
67% |
|
Other |
$3.9 billion |
6% |
|
Total |
$59.7 billion |
100% |
Source: 10-Q. Other includes AWS. Percentages do not add up to 100% due to rounding.
But perhaps Jassy doesn't mean "largest" in terms of revenue. After all, it's hard to fathom AWS sales eclipsing e-commerce revenue in the foreseeable future. However, given the thin margins associated with its e-commerce business, it wouldn't be a far stretch to think that AWS could surpass e-commerce in operating income at some point.
Naturally, it's hard to really know how profitable AWS is since Amazon is something of an investor's nightmare when it comes to transparently reporting its financial results. Amazon's consolidating operating margin right now over the past four quarters is a measly 0.1%, which wouldn't be hard to beat. Once infrastructure investments are made, AWS will scale readily.
Analysts estimate that AWS currently generates about $5 billion in revenue per year at a gross margin of 90% to 95%.
A long and cloudy road
Jassy has even grander plans for Amazon, and wants to continue adding even more services to the platform to broaden its relationships with customers. That includes analytics, administration, security, and app services, among others. Some services will inevitably be commoditized and be susceptible to pricing pressures, but the overall portfolio of services will also include higher-margin offerings. Simply put, AWS could one day become a one-stop cloud shop.
AWS currently operates in numerous different geographical regions (even though it includes AWS results in its North America segment): the U.S., Brazil, Ireland, Singapore, Japan, and Australia. If the company is truly intent on expanding to "virtually every large country," it still has a long way to go.
