Amazon.com, Inc. (NASDAQ:AMZN) has become a classic “category killer.”
Most investors see it as killing the category of online retail, which it absolutely dominates. It’s almost five times larger than the number two in this market, according to Netonomy.
But there’s a second category Amazon.com, Inc. (NASDAQ:AMZN) is killing, the cloud.
A year ago cloud companies were booming. By creating virtual operating systems, using commodity PCs instead of specialized servers, and scaling out huge data centers, cloud companies like Rackspace Hosting, Inc. (NYSE:RAX) and Red Hat Inc (NYSE:RHT) promised to revolutionize how business is done, quickly analyzing huge amounts of data for patterns or needles of opportunity, cutting costs dramatically.
But yesterday’s cloud stars are today’s cloud duds. And there is one reason – Amazon.Com.
Amazon.Com killing it in the cloud
Cloud has been around for a decade. Google developed many of its techniques to handle internal operations. Yahoo! developed the Hadoop software that allows “big data” to be analyzed quickly.
But Amazon.com, Inc. (NASDAQ:AMZN) was the first company to offer its cloud technology for rent. Its Elastic Computing Cloud, or EC2, was the first to be offered at an hourly rate, in 2006. While Amazon developed its technology to serve its stores, it found it had a hit with renting that infrastructure, and has been going full-bore ever since.
As with online retailing, Amazon.com, Inc. (NASDAQ:AMZN)’s strategy is to put every dollar it gets back into the business, forgoing sales for growth. It barely broke even on $61 billion in sales last year, but that figure was 267% better than 2009’s $24 billion, and growth investors are willing to pay a premium to be part of that. Since the market’s bottom in late 2008, the value of Amazon.com shares have risen six-fold, and despite bearish articles from writers who don’t like growth without profit, they’re still going higher, 18.5% this year alone.
Amazon.com, Inc. (NASDAQ:AMZN) took out its first long-term debt in 2012, $3.1 billion worth, and is paying it off slowly. The money is being plowed back into infrastructure, not just for its retail operations but for its EC2 cloud. Netcraft, which does a regular automated census of Internet servers, estimated the company had 158,000 servers online last month, mostly in an immense Virginia data center. But the company is increasingly dispersed, with centers in England, Japan, Singapore and the United Kingdom.
Of greater concern to investors in cloud is its pricing. Gigaom.com this week reported what it called an “80% price cut” on some Amazon cloud services, although it later backtracked partially, writing that cuts of 37-57% on other services were more applicable.
The company is also broadening its line. What was once base infrastructure is now available in flavors for Red Hat Enterprise Linux and Microsoft Windows as well. Still, there is no price that’s higher than $2/hour, even for the largest storage clusters, although there are up-front and reservation fees on those prices.
Amazon does not break out its cloud revenues, clustering them into something called “other,” but Macquarie Capital thinks it’s worth $19 billion and that will double by 2015. That means investors are paying a little over $2 for every $1 in Amazon.com, Inc. (NASDAQ:AMZN) retail sales – still a high figure, but with growth this fast not unreasonable.
Who Amazon is killing
Amazon is doing the most damage to companies that sought to create alternatives to its infrastructure and platform.
Rackspace, for instance, has seen its stock price cut nearly in half during 2013. The San Antonio-based company, which pioneered the development of Open Stack, an open-source cloud infrastructure, has seen its growth stop nearly dead in its tracks, growing just $10 million quarter-to-quarter. The balance sheet isn’t growing, and cash flow has been cut.
