Amazon Sees Sunshine in a Cloudy Play; Opportunity in Cloud Computing Is Big Enough for Both Google and Amazon.com
December 4, 2013 Leave a comment
Amazon Sees Sunshine in a Cloudy Play
Opportunity in Cloud Computing Is Big Enough for Both Google and Amazon.com.
DAN GALLAGHER
Dec. 3, 2013 3:28 p.m. ET
Amazon.com AMZN -1.95% investors shouldn’t sweat Google‘s GOOG -0.12% stepped-up efforts in cloud computing—yet. Google has formally launched its Compute Engine, a cloud-based service that effectively rents out to businesses large and small the Web search giant’s huge network infrastructure. This is similar to the efforts Amazon has made with its own Web-services business known as AWS.The enormous scale both companies have with their networks allows them to offer pay-as-you-go services to customers at cut-rate prices. Illustrating this point, Google chopped its Compute Engine pricing by 10% as it took the program out of beta testing.
Google already has a formidable cloud business; it reported more than 300,000 enterprise customers on its last earnings call. But that includes items such as corporate use of services such as Gmail.
Amazon’s AWS business is well ahead of the curve, both in terms of an established customer base and pricing. A recent study from RBC Capital found that Amazon has already cut prices on its so-called EC2 service—which competes directly with Google’s Compute Engine—by 26% in some areas during the year, while slashing prices on another tier of the service as much as 80%.
Colin Sebastian of Robert W. Baird estimates that Google’s cloud business is generating about $1 billion in annual revenue now, while AWS generates about $2 billion a year and is expanding at least 50% annually. Neither company discloses financial details about their cloud businesses.
Given Amazon’s high valuation of more than 150 times forward earnings, with Google at a far more modest 20 times, it is tempting to see price pressure from Google as a big negative for the fast-growing AWS business. But this business is still nascent with large growth opportunities; 451 Research predicts the so-called infrastructure-as-a-service market will more than double to $10.2 billion by 2016.
And it isn’t winner-take-all at this point. Customers can easily use cloud-based services from multiple providers without being exclusive. Gains made by Google won’t necessarily come at the expense of Amazon, though heavy competition may cap profit margins.
Amazon shares are priced to perfection, but even Google may have trouble knocking it off its cloud.
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