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Should Amazon Be Worried By This Google Move?

 February 13, 2013 10:45 AM

(By Mani) Amazon Web Services from Amazon.com, Inc. (NASDAQ: AMZN) is the leader in public cloud having dominated developer relationships. However, it faces the biggest threat from Google, Inc. (NASDAQ: GOOG), which is well positioned to enter the public cloud market, but time is of the essence, legacy IT companies are facing substantial deflationary forces.

Amazon Web Service, or AWS, has hundreds of thousands of customers in 190 different countries, in nine separate operating regions, in 30 or so data centers. Better known users of the platform include NASA JPL, Heroku, Pinterest and Netflix, Inc. (NASDAQ: NFLX) which would be the largest user behind Amazon retail next year.

[Related -Amazon.com, Inc. (AMZN) Q4 Earnings Preview: Will Amazon's EPS Top Street?]

"We estimate it generated $2.1B in revenue in 2012, up over 77% from 2011 and accounting for 3.3% of total Amazon revenue, up from 2.8% in 2011," Oppenheimer analyst Timothy Horan wrote in a note to clients.

While it provides users with a wide variety of options, the AWS menu offers few customization opportunities, a common criticism of the platform by larger enterprises.

However, a 77 percent growth rate is giving AWS the revenues to improve services. Further, the underlying technology is likely to become more efficient, which will further improve economies of scale, also driving the cycle faster and increasing barriers to entry.

[Related -Google Inc (GOOG) Q4 Earnings Preview: What To Watch?]

"By 2016, we expect AWS's cloud business will grow to $10B, or a CAGR of ~50%, and represent 7% of AMZN's revenues," Horan noted.

This compares more favorably to the only other pure play, Rackspace, which has a much smaller presence in public cloud at about $300 million of revenue in 2012, and $1.3 billion overall.

This indicates that AWS has almost no competitors in many of its segments of the market, with the closest being Google Compute Engine. While still in beta, it looks like Google is also looking to leverage its existing infrastructure.

AWS has reduced prices four times a year on average and generally by at least 10 percent each time. Its peers have been matching these cuts, with Google currently as the least expensive in storage. In November, Google cut the price of standard Google Cloud Storage by over 20 percent. Given processing productivity improvements of 30 percent per year and storage of 50 percent these declines will continue.

"We expect more cuts as cloud storage is essentially a commodity. We expect prices to continue to fall, mostly in line with the underlying technology, or by more than 20% per year," Horan said.

While AWS maintains a sizable lead over the rest of the field and has the optimal cloud model in the long term, it does need to manage obvious conflicts of interest and new entrants such as Google.

Google will likely target a similar customer base and strategy as AWS, but consumer to be an important part of its offering looking to leverage its unique Android wireless presence.

Though Google Compute Engine is in the beta stage, the NASDAQ 100 member may launch its product much sooner than expected to gain advantage of the booming public cloud services market, which is expected to grow to $206.6 billion in 2016 from $91.4 billion in 2011, according to Gartner.



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