THE AMAZON CLOUD is a $4.6 billion business. That number might not seem big compared to the tens of billions in revenue Amazon generates through online retail. But in revealing the size of Amazon Web Services for the first time today, the company best known for e-commerce offered a glimpse into the business that might ultimately define its future.

In its latest financial earnings report, Amazon said AWS grew 49 percent in 2014, pulling in $4.6 billion in revenue. After reaching $1.57 billion in the first quarter of this year, AWS is on track for $6.23 billion in sales by year’s end, the company said. Though its cloud business still accounted for only 7 percent of the company’s overall quarterly revenue of $22.72 billion, AWS is growing at a much faster rate than the rest of Amazon (AWS grew 49 percent, while the company’s core North American business grew 22 percent). And contrary to what the company has indicated in the past, its margins are significantly higher with AWS.

These numbers are important. Though Amazon made its name selling consumer goods, its retail operation is covered in red ink. In the cloud, on the other hand, Amazon is both powerful and profitable. In the future, Amazon may be a cloud company with a retail site rather than the other way around.

Amazon’s Enormous Lead

Cloud operations like AWS provide instant access to computing power over the internet. Rather than setting up their own machines, businesses and developers can rent access to servers, storage systems, and all sorts of software that run atop these services. Amazon pioneered the idea about a decade ago, and Microsoft, Google, and others—so many others—have followed suit.

These cloud services have slowly eaten away at the businesses of tech giants like HP, Dell, EMC, and Oracle, which traditionally sold hardware and software that companies could set up in their own data centers. And this trend isn’t stopping. According to estimates from research firm Forrester, cloud computing will account for about 15 percent of all information technology spending within the next five years, and after their head start, Jeff Bezos and company have established an enormous lead in a market that will grow to $40 billion.

Prior to the release of its report, big name financial services firm Deutsche Bank pegged Amazon’s cloud revenues at $6 billion a year. That wasn’t far off. And the bank estimated that Amazon’s haul is about ten times that of its nearest cloud competitor, Microsoft Azure.

“They were there first, and they were fast,” say Tamim Selah, who oversees cloud computing strategies as a senior partner at Boston Consulting Group, a firm that provides technology consulting to multinationals. “Everyone else is now playing catch-up.”

The Battle in Seattle

Microsoft also raised the curtain on its cloud business today, claiming it’s on track for a $6.3 billion in revenues this year. But this includes Microsoft’s online email and document service Office 365 as well as its Dynamics customer relationship management service, which are different from the services offered by AWS and Microsoft Azure.

But Amazon can’t be too smug about its head start. The concern for Amazon is that its AWS margins, though high, are shrinking. This is due, in large part, to the company’s recent investment in new data centers. But competitive pressure from the likes of Google and Microsoft are also a factor. In some respects, cloud computing is a commodity business. Amazon, Microsoft, and Google all offer access to raw virtual machines and storage. As such, one of the chief ways to differentiate your company is on price.

At the same time, all three of these companies are expanding their offerings, providing tools for analyzing the massive amounts of data housed on their storage services. They’re also building sweeping online software applications atop their virtual machines. The only way for Amazon to stay ahead of competitors, Selah says, is to keep adding new services—to offer things that the others don’t. “They will try to avoid a scenario where it’s just a scale game, where they just compete on price,” Selah says, “because that is a not a great business model.”

Amazon may not stay ahead. But for now, it’s the clear leader—a lead that suggests the cloud, not shopping, is the business Amazon does best.

Source: wired