Amazon: How Much Can It Profit From The Cloud?

| About:, Inc. (AMZN)

For large Internet-based companies like Amazon (NASDAQ:AMZN), building and using its own cloud service just makes sense. Not only does this cut back on the added expense of outsourcing, it also gives the company total control over how to manage the service. In a very short amount of time, cloud computing has redefined how companies work with each other and with customers. Since 2006, Amazon has offered its cloud service, Amazon Web Services, to the public. Now the company has plans for expansion, which could increase profits and allow Amazon to make its mark in yet another high-profile arena.

Cloud-Based Services

Providing cloud-based services to other businesses seems like a natural progression for companies like Amazon. And while other well known companies like Google (NASDAQ:GOOG), Hewlett-Packard (NYSE:HPQ), and Microsoft (NASDAQ:MSFT) offer cloud services, Amazon has built a reputation for customer satisfaction that's difficult to beat - even for a search engine superpower like Google. This means that Amazon doesn't have to advertise its cloud services on a regular basis like other companies. If a business already relies on one of the company's other services, it will probably sign up for AWS at some point or vice versa.

In addition, Amazon intends to provide up to 600 new jobs, much needed in a growing, but still weak U.S. economy. The company has plans to build operating plants in Virginia, California, and Oregon - and plans to open several overseas plants in Ireland and Singapore. Generating yearly revenues of roughly $1 billion, AWS has turned into a profitable side-business for the company.

Recently, the company launched a new AWS service, Glacier Storage, which provides business with online space to store important documents, records, and other information - for a very long period amount of time. The company already provides several short-term storage options for businesses to access certain documents from time to time - Simple Storage Service (S3) and Elastic Block Storage (NYSE:EBS). Glacier provides long-term storage options for documents a business may not need to review often.

Competitors including EMC (EMC) have tried to offer non-cloud based long-term storage services to businesses in the past, but with many businesses still relying on older data storage methods such as tape, interest in moving to a new system has not been a popular option - until now. Businesses already using AWS may find it easier to take advantage of Glacier and other storage options offered by Amazon.

But AWS has not survived without its fair share of operating issues and criticism. Suffering a series of data center outages a few months ago, Amazon faced scrutiny over how reliable and efficient AWS actually was. Unfortunately, outages and other incidents happen. In the meantime, businesses, especially those run exclusively online, lose profits. Competitors including Microsoft's Azure cloud platform also suffered outages as well. The lesson here is that operational issues can happen at any time, even on the cloud.

The Cloud Computing Market

The cloud computing market is expected to grow into a $150 billion market by 2020. But even as this market continues to grow, concerns about standing out from the competition have increased as well. With increased demand from businesses and more and more companies offering cloud services, companies that currently provide cloud computing services may find the competition to steep to survive. All in all, cloud computing remains a dedicated space that businesses 'rent' to post and store information to share with others.

And while this technology has helped streamline business operations, there are few ways to innovate or improve upon the product other than making it easier to use (creative interfaces), offering unlimited storage and other fantastic deals, or providing expert help in moving from a traditional desktop or Intranet setup to a cloud-based environment.

In the near future, price wars may become more prevalent as companies try to maintain their customer base. With little else to compare one cloud service to another, price may be what separates the winners from the losers.

For companies like Amazon that provide cloud computing services, having brand name recognition certainly help the company stand out from the competition - having ample amounts of money to offer lower prices for cloud computing services also gives the company an edge. And given that the company also uses its cloud services for its IT needs, the company can easily convince potential customers that its service is reliable and stable. After all, with $50 billion in revenue for 2011, the company certainly won't fold anytime soon.

But even with its reputation and established brand, it remains to be seen how much profit Amazon will earn from cloud computing - and how this part of the company's business will affect its overall earnings. For now, Amazon seems to have a strong hold on what it's willing to spend for expansion and maintenance of its cloud computing services. And since the company has many other business ventures, even if it doesn't remain a competitor in this market forever, losses from this service probably won't affect the stock price too much.

But even with so much at stake, Amazon has managed to carve another niche for itself in Internet history. Reinventing itself by introducing new products and services only helps the company maintain its impressive status among other established companies in the long run. Since there are still many unexplored markets and uses for the Internet, investors can bet Amazon will be at the forefront of many upcoming explorations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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