A flood of rivals could burst Amazon's cloud

Agile new players from start-ups to telcos are impacting the profitability of Amazon Web Services. Its dominant position in cloud computing services may no longer be assured.

Amazon has been fighting two big rivals in the world of cloud computing. But that battle shows signs of becoming a free-for-all that threatens its profitability goals for the business.

Large telecoms and small start-ups have been forging into or expanding services that let companies rent computing cycles rather than operate their own servers and data centres. The broader competition comes amid a continuing price war in the business among Amazon, Google and Microsoft.

Those pressures were underscored when the online retailer reported a wider loss for its second quarter. Part of the reason: its Amazon Web Services, or AWS, recently cut prices by between 28 per cent and 51 per cent for various services as gains at AWS and similar businesses slowed to 38 per cent from 60 per cent in its first quarter.

The developments point to the possibility that profit margins in Amazon's cloud unit -- believed to be much higher than its online retailing business -- face a long-term squeeze that add to investor concerns about the company's profitability.

In addition to the second-quarter loss, Amazon forecast more red ink in the current quarter. Its share price dropped nearly 10 per cent on Friday to $US324.01, off $US34.60.

The AWS disclosures add to a widening perception that rivals -- and new strategies for handling corporate computing tasks -- could reduce Amazon's dominant share in a business it pioneered.

"For the first time, people don't think Amazon has the market all sewn up," said Sinclair Schuller, chief executive of Apprenda, which offers software and services to help companies modernise their computing resources.

Cloud competition reflects a flood of offerings from such deep-pocketed companies as Verizon Communications, Cisco Systems, IBM, VMware and others.

Meanwhile, start-ups Digital Ocean, Joyent and Contegix are finding success in niche markets, stressing innovations in areas such as server hardware or software.

"Amazon offers everything under the sun," said Ben Uretsky, chief executive of DigitalOcean, which has 150,000 active customers and is profitable. "We are the exact opposite."

Eric Singleton, chief information officer of Chico's FAS, said the retailer is shifting to Contegix from AWS for an application that allows store associates to look up information about customers from a tablet. Contegix also would allow Chico's to pick and choose from among servers to run the app.

"We need faster performance and more control over configuring our environment," said Mr Singleton, though he said he hasn't asked AWS if it could provide that flexibility.

Another potent challenge, industry executives say, comes from potential customers themselves. Many companies -- particularly banks and others with heightened needs for data security -- aren't inclined to outsource those operations.

So many are using new cloud-style technologies to keep all or at least some computing on premises, a model called a hybrid cloud. Some companies offering cloud services -- including Microsoft, VMware and Joyent -- also are offering software to help enterprises that want to keep some computing operations on their own premises.

AWS believes "that any enterprise that continues on-premise computing is a walking dinosaur", said Bryan Cantrill, Joyent's chief technology officer. "We just don't believe that."

"We have many very large companies who run AWS alongside their existing (owned) IT, and we have the tools and services to help these customers be successful as they grow their usage of AWS," said Ariel Kelman, vice president of marketing for AWS.

And tougher competition doesn't mean outsourcing services won't see growth. Amazon doesn't disclose revenue or operating profits for AWS, but analysts generally expect the business to generate between $US5 billion and $US6bn in annual revenue by next year.

Tom Szkutak, Amazon's chief financial officer, said that AWS is "doing great" and usage in the second quarter was up 90 per cent, though he didn't explain how that was measured.

Researcher Gartner estimates about $US12.6bn will be spent this year on pay-as-you-go computing horsepower from Amazon and others. That is a 36 per cent jump from 2013 levels.

"Most enterprises no longer look at cloud as an ‘if’," said Tom Kershaw, director of Google's cloud platform. "They look at it as a ‘when’."

On the other hand, the Gartner figure is less than 1 per cent of the roughly $US2 trillion that companies are forecast to shell out this year on computers, software and all their other internally-owned technology, excluding telecommunications services.

Managing servers internally can save money under some circumstances. Industry executives that work with AWS and the others say that, as a rule of thumb, companies that spend at least $US1 million a month on outsourced computing are better off owning rather than renting.

But in other cases customers see benefits to the cloud. Joe Simon, chief technology officer of Condé Nast, said the publisher just moved its entire data centre and saved 40 per cent over the previous data centre it ran.

Cloud adoption by enterprises "is only just starting to take hold", Mr Simon said.

Don Clark, Steven Norton and Greg Bensinger contributed to this article. Write to Shira Ovide at shira.ovide@wsj.com.

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