Amazon’s next billion-dollar business eyed

Amazon.com Inc’s cloud com­put­ing unit may be its next bil­lion-dol­lar busi­ness and ana­lysts will be watch­ing for clues on how fast this secre­tive unit is grow­ing when the Inter­net retail­er reports results next week. Ama­zon Web Ser­vices start­ed small in 2006 by sell­ing com­put­ing pow­er and data stor­age to emerg­ing tech­nol­o­gy com­pa­nies, blogs and web­sites. Now the unit, known as AWS, counts NASA, the US Depart­ment of State, Siemens, Pfiz­er and Nas­daq as cus­tomers.

“AWS has the poten­tial to be very large,” RJ Hot­tovy, an equi­ty ana­lyst at Morn­ingstar said yes­ter­day. “Any indi­ca­tion that growth rates are pro­gress­ing will be well received by the mar­ket.”

Ama­zon doesn’t dis­close AWS results. How­ev­er, a spokes­woman said the busi­ness has hun­dreds of thou­sands of cus­tomers in more than 190 coun­tries.

Ana­lysts and investors get a sense of how fast AWS is grow­ing by look­ing at how many pieces of data, or objects, are stored by the unit’s S3 ser­vice, which sells stor­age on off-site servers, which is known as the cloud. At the end of the sec­ond quar­ter, S3 held more than 449 bil­lion objects, up 71 per cent from the end of last year, accord­ing to the offi­cial AWS blog.

Ama­zon EC2 is the oth­er main part of AWS which sup­plies com­put­ing pow­er from the cloud. This ser­vice was used by 3,674 of the top 500,000 web­sites in Jan­u­ary, up almost 50 per cent year over year, accord­ing to a sur­vey by cloud com­put­ing expert Guy Rosen. That put Ama­zon just ahead of Rack­space Host­ing as the largest cloud provider, he not­ed.

“I’m amazed by how fast it’s grow­ing and it’s clear­ly accel­er­at­ing,” said Bernard Gold­en, chief exec­u­tive of cloud con­sult­ing firm Hyper­Stra­tus. “Com­pa­nies are build­ing whole busi­ness­es around AWS.”

Despite such growth, AWS remains a small part of Ama­zon. On Tues­day, the world’s largest retail­er is expect­ed to report sec­ond-quar­ter earn­ings of 35 cents per share on rev­enue of US$9.373 bil­lion, accord­ing to Thom­son Reuters I/B/E/S.

AWS gen­er­at­ed about US$500 mil­lion in rev­enue for last year, accord­ing to esti­mates by Morningstar’s Hot­tovy and ana­lysts at J.P. Mor­gan, UBS and Cit­i­group.

Cit­i­group Inter­net ana­lysts, led by Mark Mahaney, attend­ed an AWS con­fer­ence in San Fran­cis­co in June, where Amazon’s Chief Tech­nol­o­gy Offi­cer Wern­er Vogels spoke and cus­tomers includ­ing Adobe, Autodesk and NASA turned up.

“While still very small for Ama­zon (like­ly about US$750 mil­lion rev­enue run rate), giv­en the size of the mar­ket oppor­tu­ni­ty and Amazon’s strong com­pet­i­tive posi­tion­ing, we believe that this could soon be a US$1 bil­lion rev­enue seg­ment,” Mahaney wrote in a note to investors this week.

Doug Anmuth, an ana­lyst at J.P. Mor­gan, believes AWS rev­enue will reach US$2.6 bil­lion by 2015 as com­pa­nies out­source more of their data cen­tre needs.

AWS can win more cus­tomers because it charges fees based on how much its ser­vices are used, so there are no upfront costs to deter adop­tion, Anmuth also said this month.

“Most com­peti­tors want to sell white-glove treat­ment and lock you in for long con­tracts,” said Bri­an Fitzger­ald, an ana­lyst at UBS. “Ama­zon was unique in that they came to the mar­ket and made it very easy to dial up or down the com­put­ing pow­er based on cus­tomer need,” he said yes­ter­day.

He expects AWS by next year to become Amazon’s next bil­lion dol­lar busi­ness.

Ama­zon has been spend­ing a lot of mon­ey to improve AWS’s abil­i­ty to offer more com­put­ing pow­er and data stor­age.

Ana­lysts see the busi­ness as a micro­cosm of Ama­zon as a whole.

In the first quar­ter of 2011, Amazon’s rev­enue surged, but prof­its missed Wall Street esti­mates. That was part­ly because of heavy spend­ing on ful­fill­ment cen­tres to sup­port Amazon’s main online retail busi­ness. But a lot of the spend­ing was also on servers and dat­a­cen­ters to sup­port AWS expan­sion.

Ana­lysts expect a sim­i­lar pat­tern in the sec­ond quar­ter.

“We expect top-line momen­tum to con­tin­ue, but the sec­ond quar­ter could be the low point for prof­it mar­gins,” Morningstar’s Hot­tovy said.

Amazon’s oper­at­ing mar­gin was 4.1 per cent last year, but Hot­tovy expects that to fall close to 3 per cent for 2011 as a whole.

Still, Hot­tovy says AWS prof­it mar­gins could rise in com­ing years as more cus­tomers are added.

Citigroup’s Mahaney said AWS gross mar­gins may be up to four times high­er than Amazon’s over­all mar­gins.

“We’ll be lis­ten­ing on the earn­ings call for any details on new trac­tion for this seg­ment,” the ana­lyst wrote in a recent note to investors