- AWS is still ahead of the pack in the cloud services market.
- How does it manage to do this despite 51 price cuts since its launch?.
- And how does it help other parts of Amazon’s business, especially retail?.
Out of the top four cloud service providers Amazon.com Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), International Business Machines (NYSE:IBM) and Alphabet Inc's (NASDAQ:GOOG) Google, the retail giant remains the company to beat. For starters, Amazon’s cloud revenues have been growing at above 50% rate for the last several quarters and the company recently made a huge statement to all its rivals by signing up Salesforce.com (NYSE:CRM) as one of its customers. Let’s take a closer look at the impact of AWS on its rivals, as well as the online retailer who is threatening to become consistently profitable.
Sales growth has been on fire for the last two quarters and Amazon continues to set the pace, with sales growing above 50% range for the last four quarters. Microsoft is clocking triple-digit growth with their Microsoft Azure platform, pushing its overall cloud sales growth above the 50% range for the last few quarters. IBM’s cloud business is growing at a strong 30%, with the as-a-Service component alone showing 50% growth. Google hasn’t yet started reporting standalone numbers, and they may only do so after the numbers are big enough.
It’s natural to grow in an industry that itself is growing at a fast pace, but with a four-way competition where the rivals have deep pockets and are ready to cut costs to win over customers, it is indeed difficult to keep up the lead. And to do so while also protecting your margins is an even bigger achievement, and Amazon has done exactly that, like a magician at work.
It is not that Amazon is shying away from cutting costs. Earlier this year, Amazon proudly announced that they have cut AWS prices for the 51st time since its launch.
But I wanted to make sure that they were indeed the lowest-priced option so I compared one particular cloud service offered by Microsoft as well as Amazon. I looked at their content delivery network (CDN) offerings, a service that web properties need in order to reduce the latency at the user end. To put it simply, this is one of the things a website needs to increase the speed at which its pages load when a user visits them. While Microsoft has priced this service at $0.087 per GB in the North American zone, Amazon asks $0.085 for the same service. Service after service showed the same trend, with only a few exceptions.
So at a practical level, it’s clear that Amazon is willing to keep its end up in the price war for cloud customers. But how did they increase sales and improve margins at the same time if they were competing aggressively on the price front? Amazon does this by constantly adding to their portfolio of products and services on the cloud. During their annual keynote conference, Amazon typically reveals a long new list of new offerings and features, every year. Rolling out some new service or other seems to have become almost like a monthly ritual.
The Buyer's Mindset
A buyer’s mind works in strange ways, so the initial cheap cost to get onto AWS services looks inviting, but they keep offering so many high-value propositions to the customer once he’s in that he eventually starts using more and more of them.
Let’s use a restaurant analogy to explain how this typically works. Imagine your favorite fancy restaurant - the biggest one in town - keeps cutting prices on its delicious entrees every month, but also keeps adding two new desserts to the menu each month. So now, a regular customer comes in each month and is pleased by the price cuts, but may end up paying more for the entire meal because of the desserts. The point is, he still goes away thinking “wow, they’ve cut entree prices yet again.”
Also read: Amazon Stock Will Surpass $1000 A Share
And that’s how Amazon Web Services has modeled its offerings. Cutting prices at the entry points but continually adding value-enhancing services increases average spend per client, thereby effectively balancing out the pricing pressure. It’s been working well for them so far.
The Key Benefit of AWS for Amazon
But there’s an additional benefit of having a strong technology business: it has a cascading effect on the rest of the company, especially the retail segment. With almost 1/3rd of their AWS sales filtering down straight to their operating income, AWS can singlehandedly carry the burden of keeping Amazon.com in the profitable column. With the bottom line taken care of, Amazon can continue to re-invest more money into operations and keep pushing for higher sales in the United States as well as international markets.
Amazon is already a bold company that doesn’t shy away from taking risks, and AWS's bottom line is only going to push them to take even more risks. The payoff can be very handsome in the long run.