Watch out IBM, HP, and Dell, Amazon wants to be corporate America's data center. Aivars Lode avantce

Amazon to Offer Window Into Web Services Business

By Robert Mcmillan

April 22, 2015 8:17 p.m. ET

When Amazon.com Inc. reports its quarterly earnings Thursday, it will, for the first time, provide financial information on an important division: Amazon Web Services.

AWS has grown over the past decade into a front-runner in the race to build a big business in cloud-computing services. It offers to replace traditional corporate computing—a complex assemblage of hardware and software housed in a company data center—with a la carte services over the Internet. 

That innovation set in motion an information-technology shift that is squeezing the sales and margins of vendors of hardware, such as Dell, EMC Corp., and Cisco Systems Inc.,and of software, including Oracle Corp. and VMware Inc. Along the way, it attracted direct competition from Google Inc., Hewlett-Packard Co., International Business Machines Corp. and Microsoft Corp. that, by all accounts, it is winning handily.

Companies spend more than $300 billion on servers, software and IT services each year, but growth in those markets is flat, said Richard Villars, an analyst at IDC. 

The infrastructure-services market, which Amazon dominates, doubled in 2014 to more than $9 billion, and is expected to expand to $16 billion in 2016. “It’s clearly where companies are spending money to transform their business,” said Mr. Villars.

“AWS is a multibillion-dollar business today, and the company certainly feels that it has extremely strong growth potential,” said Adam Selipsky, who heads the AWS’s marketing. 

AWS and its rivals sharply lowered barriers to entry for Internet startups by relieving the risk of deciding how much computing infrastructure to build, along with the cost of building it. AWS’s Simple Storage Service, one of 45 such offerings, provides data storage on tap to cloud-storage company Dropbox Inc. Another service balances the traffic load on home-rental service Airbnb Inc., and yet another holds the startup’s database of rental units.

To live up to Amazon’s high expectations, though, AWS will need to win over American business. “Deep adoption by large enterprises is an absolutely central part of that growth,” said Mr. Selipsky.

Nobody knows for sure just how big AWS is and how fast it is growing. Amazon has said that every day it adds computing capacity equivalent to its entire capacity in 2004. 

Amazon so far has lumped AWS into the “other” line of its financial statements, along with co-branded credit cards and advertising. According to Amazon, AWS makes up the bulk of that category, which accounted for $1.67 billion in net sales during the fourth quarter of 2014, and $4.5 billion for the year.

That figure dwarfs the service’s closest cloud rival, Microsoft Azure, whose revenue Deutsche Bank estimates at between $500 million and $700 million last year. It puts AWS in the same league as VMware, the EMC subsidiary that makes software for data centers. VMware reported quarterly revenue of $1.70 billion for the same period.

AWS makes it relatively cheap and easy for anyone to fire up Internet-connected servers and storage gear in Amazon’s world-wide network of data centers. Customers save the upfront expense of server hardware, along with labor and maintenance costs. Instead, they pay for access to Amazon’s equipment by the hour.

Cloud fans say this leads to faster, more flexible software development at a significant savings, since customers pay only for what they use. Moreover, they can scale computing resources up and down as needed. Detractors say public cloud computing like the kind provided by AWS is too expensive for heavy users and that it’s too risky to put valuable corporate data under Amazon’s control, and potentially exposed to hackers through the Internet.

Amazon itself was the original AWS customer. The online retailer built out huge computing and storage capacity to present product information, deliver recommendations and process transactions for millions of customers. In 2006, it launched a business providing that capacity to paying customers.

The initial AWS offering was a bare-bones service that appealed to cost-sensitive startups. But it wasn’t a good fit for more demanding corporate clients, said Adrian Cockcroft, a technology fellow at Battery Ventures, a venture investment firm. “It didn’t have all the features that you would need or you would want in your data center.”

Before he moved to venture capital, Mr. Cockcroft built Netflix Inc.’s website on AWS in 2010. 

Amazon has since rolled out an impressive array of auditing, data-processing, networking and security features that transformed the service a serious enterprise competitor, he said.

Corporate IT managers are starting to take notice.

The 21st floor of the Time Life Building in New York is a half city-block of servers and networking gear, but it will be empty by the end of the year, said Time Inc. Chief Information Officer Colin Bodell, who is shifting his company’s data-center operations to AWS. 

He said the change will save Time between $5 million and $6 million a year. He was spending about $70,000 a month on Internet hosting and data-center costs, but AWS has helped slash that expense to $17,000. “We’re a media company,” he said. “We shouldn’t be in the business of running data centers.”

Time is an outlier with its all-in approach to cloud computing. Most of Amazon’s corporate clients use AWS to run websites or develop new online services, but they keep their databases and their older applications on their own hardware. 

Some rivals say most customers don’t want to put sensitive customer information or company secrets on systems they don’t control.

That’s why Dell has focused on helping companies set up cloud-style systems on their own premises, said Jim Ganthier, the general manager of Dell’s Solutions and Cloud group.

Customers face a “concentration of risk” as they rely more heavily on the cloud, and that puts pressure on Amazon, Mr. Cockcroft said. “They can’t screw up. You can’t have a security breach on AWS.”

But AWS has built a solid track record. It has gone more than two years without a major outage and has never suffered a serious security breach. That’s making corporate users like Mr. Bodell more comfortable.

Amazon’s enterprise push began in earnest two years ago, when the company hired former VMware sales chief Mike Clayville to build a sales force that could woo big customers. Since then, it has hired about 160 salespeople a year, according to an analysis of LinkedIn profiles by TheLions, a sales recruitment firm.

AWS doesn’t offer customers a way to host cloud software in their own data centers, and that’s a key distinction between AWS and Microsoft Azure. 

While Microsoft was late to the cloud game, Azure is picking up speed as the cloud choice for companies that are already using Windows in their data centers; AWS is popular with companies using the Linux operating system.

One trend working in Amazon’s favor is the move toward breaking corporate applications into collections of small, independent programs. This programming style focuses on rapid development, making it a natural fit with the cloud, where it isn’t necessary to spend time wiring servers or installing operating software.

It’s a nimble software-development model that attracted Time. “This is not only a technological change,” Mr. Bodell said. “It’s very much a cultural change for big organizations.”