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Is Amazon really a low-margin cloud business?

Brandon Butler | Aug. 2, 2013
Competitor calls out Amazon on being a low-margin cloud provider.

ProfitBricks cut its prices this week by about half: dedicated, single-tenant, single-CPU core servers dropped from $0.05 per hour to $0.025 per hour. It's difficult to do an apples-to-apples comparison of ProfitBricks and AWS prices, but AWS's smallest instance size comes with 1.7GB of memory and 160GB of instant storage for $0.06 per hour.

Amazon Web Services would not comment publicly about its business strategy, or respond to claims about it not actually being a low-margin business.

But, the company proudly touts its price cuts and Jassy explained last year at the re:Invent conference a virtuous cycle in which the price cuts lead to higher volume of use by customers, which in turn lead to greater economies of scale for the company and allows it to continue to reduce prices. "High margin businesses have been around forever and in lots of industries and they're obviously a viable and successful business model. It's just not ours," Jassy said.

So what's really going on here between these disputing Amazon and ProfitBricks claims? Is AWS really a low-margin business? "No," says Carl Brooks and IaaS-watcher for the 451 Research Group.

"It is a high volume, high margin business, at least on the base cost." Running a virtual server should cost around $0.01/$0.02/hr., which would include a profit margin; some in the market, like Digital Ocean, offer dedicated servers for as little as $0.007/hour for a 512MB server, or $5 a month.

Analyst firm Technology Business Research estimates that Amazon and Microsoft have healthy operating margins of around 14% to 15% (meaning the amount of revenue left over after paying all costs, including production, taxes and wages).

That's much higher than Amazon.com the retailer's margins, notes Jillian Mirandi, who tracks the financials of cloud computing companies. "IaaS providers we believe are able to operate at higher margins as they have more of a 'build once sell a lot' business model" compared to SaaS providers and other non-cloud businesses, she notes. Those margins could be adversely impacted as AWS builds out its headcount in areas like enterprise sales, and continues to add features and tools, she adds.

Some other analysts are buying into ProfitBricks' claims too. After being briefed by the company, Ben Kepes, a blogger, consultant and investor, questions why Amazon virtual machine instance price reductions have not gone down at the same pace as compute performance increases and Moore's Law. "Moore's Law expected price economies really haven't been borne out in actuality," he writes about Amazon pricing.

The real answer is that Amazon does not release the financial details of its cloud computing division, so no one outside of the company really knows for sure what the margins are and how they've changed. But, if there wasn't a price war before, there sure is now.

 

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