Don't Overlook Amazon's Web Services Business

Amazon’s (NASDAQ:AMZN) fourth quarter results had a little bit of everything for its various observers: Sales were impressive and the outlook wasn’t bad, but worries about profit margins are worrisome. But amid all the talk about consumer demand, growth abroad and adding third party sellers to Amazon’s platform the “other” line on the company’s breakdown of revenue is far more interesting.

Why focus on “other” revenue when the fourth quarter tally was a mere $111 million, up from $81 million a year ago? That other line, which includes Amazon’s Web services, is the future of Amazon. You won’t hear much about that grab bag of sales from Wall Streeters today (see Techmeme). Why would you? In the context of Amazon’s overall figures $111 million is a pimple on the back of an elephant. After all, Amazon reported fourth quarter net income of $207 million, or 48 cents a share, on revenue of $5.67 billion. For 2007, Amazon had sales of $14.84 billion and net income of $476 million, or $1.12 a share.

Amazon’s outlook wasn’t bad although the guidance did hint at lower profit margins and rattled Wall Street a bit. For the first quarter, Amazon is predicting net sales to be between $3.95 billion and $4.15 billion, up 31 percent to 38 percent from a year ago. Operating income is expected to be between $155 million and $220 million. For the 2008, Amazon is projecting sales to be between $18.75 billion and $19.75 billion with operating income between $785 million and $985 billion.

With those big numbers floating around it’s easy to overlook the “other” line. Don’t.

So what does this miscellaneous revenue line tell us? Amazon Web services are gaining some traction. Amazon CFO Thomas J. Szkutak said specifically that the other line includes Amazon’s Enterprise Solutions business. For 2007, Amazon’s other revenue was $326 million.

In 10 years, Amazon’s Web services business is going to be sizeable. And it’s not a stretch to predict that Amazon’s cloud computing effort will be the profit margin savior of the company. Today, Amazon’s retailing business bankrolls these fliers into cloud computing services. In a decade, Amazon’s cloud will subsidize the retailing business.

Is that a leap? Potentially. But Amazon’s cloud computing services have a ton of potential. To wit:

• The bandwidth utilized by the Amazon Elastic Compute Cloud (EC2) and Amazon Simple Storage Service (S3) in fourth quarter 2007 was greater than bandwidth utilized in the same period by all of Amazon.com’s global websites combined.
• SimpleDB, a structured data service, was well received at its launch.
• Amazon has 330,000 developers registered for Amazon Web Services.
• AWS has become more enterprisey and even has service level agreements.
• AWS will touch other Amazon businesses. Amazon CEO Jeff Bezos mentioned that one of the Kindle’s experimental features is called Now-Now, a question and answer built on Mechanical Turk, one of the company’s Web services.

But the real traction will come as startups and larger companies run their businesses on Amazon’s infrastructure. Amazon will take a few pennies from every byte used. Those pennies add up and as a business model Amazon Web Services looks a lot better than shipping a bunch of books to your door.