As the largest online retailer, Amazon.com (NASDAQ:AMZN) has the ability to take extremely low margins on products which typically allows it to become one of the leaders in the market. This is exactly what it is doing with Amazon Web Services. Amazon has quickly become the largest supplier of cloud services and it has done so by using the same strategy as it does its retailing; offer a large quantity of products and services for the lowest price. Also similar to its retailing business, competition will not be dethroning it anytime soon.
There is no better place to find this than the recent price drop in its Amazon Web Services support. This price drop is pretty comprehensive as it expands the free services offered to basic users while dropping the prices on every other tier of users. Users who get free service have access to 24 hour customer service, as well as many other options. The specifics are very complicated, but as a company that strives in customer service I expect users to be very happy about this announcement. Amazon can more readily offer these services as it already has a huge customer service team due to the retailing side of its company. Don't expect Google (NASDAQ:GOOG) or Microsoft (NASDAQ:MSFT) to be able to match this.
Also welcomed is the addition of MapR Hadoop services. Hadoop is becoming more common as businesses move to big data analytics. The barriers to entry are pretty high as Hadoop requires very solid computer programming experience as well as an advanced understanding of math and statistics. The addition of MapR will lower these barriers to entry because it does not require users to create their own clusters. This essentially takes much of the advanced programming out of the equation. Not surprisingly the biggest sticking point is the price. As companies such as IBM (NYSE:IBM) market big data projects as a new aspect of its business, Amazon saves the cost for companies that have the technical and analytic personnel in house. This will save many companies a lot of money.
One happy convert to Amazon Web Services is NASA. According to space agency, switching from its previous service company to Amazon has saved it millions of dollars per year. I think this is emblematic of many businesses. Instead of working with IBM or Hewlett-Packard (NYSE:HPQ) to develop its own OpenStack, many companies are deciding to outsource its IT and cloud computing to Amazon. Overall, this has the potential to save a lot of money for these companies.
One of the main hurdles that will hold Amazon Web Services is itself. Just recently portions of its Web Services suffered an outage. As anybody who works in IT knows, outages are bound to happen and are a headache. The real problem arises when you serve as many customers as Amazon Web Service does, meaning even a small outage affects a huge amount of customers. According to Amazon, the outage occurred due to a power outage, but I don't expect customers to care: an outage is an outage. Not surprisingly, Amazon's competition will continue to pounce on any outage in an attempt to convert customers to its own services. Given how risk averse some enterprise customers are, this might work to some extent.
As mentioned, the recent price decreases by Amazon target its competition. Some estimates peg it to be in control of 80% of the market, with expected revenues to hit about $2 billion this year. Its competition will need to step up its game and fast.
Specifically, Microsoft has put a lot of time and effort into its own cloud services. To better compete with Amazon it has recently added IaaS services. This directly targets Amazon, as its Web Services are IaaS, which has been a substantial driver of its success. In addition, to increase its user base, Microsoft has also added support for Linux and hybrid clouds. Microsoft believes that the limited acceptance of its cloud services is due to small line of services so this expansion is huge for them. Personally, I don't expect it to do much to increase its user base. Amazon offers such a wide variety of services at such a low cost that competing will truly be difficult.
Amazon has also left competitor Hewlett Packard in the dust. HP has been struggling after it invested heavily in OpenStack data centers. In a bid to gain traction regionally, HP is investing $200 million in data centers in Sydney, Australia. According to HP, the investment is only a beginning and it intends to invest more into Australia. I don't expect this to give it a hold on the market but being the first mover will help as businesses are typically averse to switching servers after uploading so much information.
Don't expect Google to be much of a competitor either. In general, Google is attempting to best privately owned consumer cloud company DropBox at its own game. Google does not seem poised to offer any significant enterprise solutions but it instead opts for low margins on consumer storage. Google could still feasibly enter the enterprise market but the longer it waits the harder it will become. I suspect that if Google makes this attempt it will fail.
All of this brings us back to where we started. Amazon is the leader and it does not look like that is going to change, at least not anytime soon. Its competitors will have to innovate fast and for very low margins to unseat the retailing giant. With an expected revenue of $2 billion this year, Amazon Web Services is well on its way to becoming a mainstay. I think it is risky to bet against Amazon. I recommend buying Amazon now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.