Amazon Web Services (AWS) is the gift that keeps on giving to Amazon. Reporting on quarterly earnings Thursday, Amazon reported $2.89 billion in AWS revenue, up from $1.8 billion last year, putting AWS on track to top $10 billion for the year. More importantly to Amazon’s overall business, however, AWS drove 56% of all Amazon profits, gifting the company $1.78 in earnings per share—a massive jump from $0.19 last year.
To quote Accenture managing director Mark Sullivan, the forecast for AWS is “cloudy with a chance of extreme revenue.” Not to mention ever-improving profitability for the retail giant.
This revenue—and profitability—should continue as companies centralize more of their spending in the cloud leader. According to Amazon CFO Brian Olsavsky, there are several reasons to expect enterprises to do just that.
Why enterprises want more
During the question-and-answer period of the Amazon earnings call, Oppenheimer analyst Ray McDonough asked about media reports suggesting that while “larger customers tend to use AWS, they might [also] use Google and Microsoft Azure in tandem in sort of a multi-cloud kind of architecture.” If AWS ends up as just one of several clouds, how does the current cloud leader fit “in the overall ecosystem” longer term?
Olsavsky, like AWS cloud chief Andy Jassy before him, thinks a multi-cloud strategy is a short-term sop to existing infrastructure and server-hugging IT culture. It’s not a long-term winning strategy. According to Olsavsky, customers “choose AWS primarily for three factors: The functionality and pace of innovation that we bring to the table, our partner and customer ecosystem, and our experience.”
Three simple things, but they create all sorts of complexity for those who hope to cloud hop.
Sure, Olsavsky admits that “there’s plenty of room for multiple vendors in this business,” given the billions upon billions of dollars at stake. But let’s be clear—he sees AWS eating up the majority of the total available cloud market, largely driven by innovation:
You can see us continue to invest in things like new application services, higher up the stack, additional technologies that will make integrating with AWS seamless for those companies that have a hybrid IT environment and then continuing to add functionality for data analytics, mobile, Internet of Things, machine learning offerings, things like that, that will add greater and greater value for AWS customers.
And I would say the rapid pace of innovation continues to stretch our lead in that dimension. We have had 422 new significant services and features added in the first half of this year. That’s a faster pace than last year when we added 722 services and features. So, we feel good about the business position we’re in and our position with customers.
Importantly, when AWS (or, really, any vendor) talks about “seamless” integration with third-party IT environments, they’re really talking about the on-ramp. Olsavsky says as much, noting that AWS is “work[ing] on things that will make it easier and easier for customers to work with us with their hybrid data centers or transfer their volume to us.”
The off-ramp, due to differences in architecture, is always going to be riddled with potholes. This isn’t some nefarious plot to lock in customers, but simply a fact of software or cloud: Every provider comes with its own different technologies. Once you build on that platform, shifting workloads to a differently architected cloud is non-trivia,l and generally not worth the cost and bother. Multi-cloud portability is, as Eric Knorr declares, a “pipe dream.”
All aboard the AWS profit train
Customers aren’t complaining, and neither is Amazon. With over half the company’s profit coming from AWS, Amazon relies on AWS more and more. While AWS revenue is still just 10% of overall Amazon revenue, it keeps growing at a rapid clip, up 58% year-over-year to $2.9 billion. AWS operating income more than doubled to $718 million (from $305 million last year), a 24.9% operating margin.
Those aren’t the margins of Microsoft in its heyday, but they’re pretty plump for the so-called razor-thin margins cloud was supposed to give us.
And, guess what? They’re almost certainly going to keep getting fatter. Though Olsavsky warned that AWS profits would wax and wane from quarter to quarter, as enterprises come to depend more on AWS due to its innovation, ecosystem, and experience, AWS revenue will keep growing, and will grow more profitable.