Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Amazon's cloud business was born on a spring day just more than 10 years ago. Even though little Amazon Web Services is still in grade school, it is increasingly clear that the business has reshaped the trajectory of the technology industry and changed the fortunes of its parent company.

Now it's time for AWS to hit the next stage of maturity -- and we still can't be sure if AWS will be an awkward teen or a superstar. 

The company said Thursday that AWS -- which lets businesses rent Amazon's computing power to run their digital networks or stow data -- posted $2.57 billion in sales in the first quarter, 64 percent higher than a year ago. AWS generates less than 9 percent of Amazon's total sales but 43 percent of the company's total segment operating income. That is a measure of profit that excludes stock compensation for employees and some other corporate costs. 

Powered by the Cloud
The Amazon Web Services cloud division has been generating one-third or more of Amazon's total segment operating profit
Source: Amazon
Note: The figures are for segment operating income, which excludes stock compensation costs.

The retail part of the company was surprisingly profitable in the first quarter -- helping drive a 12 percent jump in Amazon's stock after the release of its earnings report -- but at Amazon "surprisingly profitable" doesn't mean much. The segment operating profit margin for Amazon's retail businesses was 3.6 percent in the first quarter. At AWS, the operating profit margin was 28 percent.  Amazon's rump of a cloud computing operation is outdoing Amazon's e-commerce machine.

Now comes the even harder part for AWS. Amazon grabs the vast majority of a still-nascent market for the kinds of cloud services that can replace or complement companies' own computing data centers. But for most corporate computing functions, AWS is a fringe -- something for the wild-haired software developers to use to try out new projects.

Those wild hairs have built AWS into a huge success, but for AWS to be the successful grown-up that CEO Jeff Bezos wants it to be, it needs now to go after a much bigger slice of the roughly $2 trillion that companies spend each year on computer equipment, software and much, much more. 

Growing Fast, Less Puny Profits
In the March quarter, Amazon's sales growth accelerated to its fastest pace in years
Source: Bloomberg

Big companies have been a much tougher nut for Amazon and other cloud-computing companies to crack. But there are signs they're warming to AWS. 

In a recent survey of more than 200 corporate technology officials, JPMorgan Chase found respondents were using cloud services like Amazon's for an average of 16 percent of their computing chores. The bulk of the rest, presumably, was handled by computing networks owned or controlled by the companies. The biggest chunk of respondents, nearly four in 10 of the corporate executives, said zero to 5 percent of their computing workloads were in Amazon or similar cloud services. But over the next five years, the survey respondents on average expected the cloud share to increase to 41 percent. 

JPMorgan said the survey findings were good news for Amazon and for Microsoft -- which has done impressive work to catch up to AWS -- and bad news for companies including IBM and Oracle that have built empires by selling technology to companies. Survey responses don't always translate into reality, however, and the executives responsible for technology purchases may be more enthusiastic about AWS than their bosses.

That's the crux of the problem in predicting the ultimate size of AWS. We’re entering the next, mainstreaming phase of cloud computing, and no one can accurately predict how quickly or how much the conventional companies (read: not Silicon Valley tech firms or early tech adopters) will take to AWS and similar services. It’s an unknown unknown.

The Beauty of Disclosure
Amazon's stock price fell 22% in 2014 because of worries about slowing sales growth. Then the company said it would begin to disclose some financial results for AWS, which helped spark a 2015 rally.
Source: Bloomberg

The biggest limits on both AWS and Amazon's retail business are no longer competitors like Wal-Mart in e-commerce or Google on the AWS end, but rather Amazon's own ability to keep expanding its boundaries. In e-commerce, can Amazon muster the logistics power and change consumer habits enough to grab the more than 90 percent of shopping still happening in stores? And in computing, can AWS successfully persuade more big companies to ditch their own computing data centers and outsource nearly everything to Amazon? 

For AWS, it's not simply a philosophical question. Amazon pulled off a trick of investor sorcery in January 2015, when it said it would start to dribble out some AWS financial details for the first time. Since then, investment enthusiasm about Amazon has in large measure emanated from a 10-year-old business that few nontechnologists even know exists.

AWS is the most amazing grade-schooler the tech world has ever seen. We still don't know how big it can be in adulthood. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Excluding stock compensation and some other costs. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net