Amazon cloud disclosure marks maturity of the market

Amazon broke out its cloud revenue for the first time yesterday, and the news immediately took me back four years to what then seemed like a bold prediction for the company – that cloud services would be bigger than retail for the company.

Yesterday, Amazon CEO Jeff Bezos described Amazon Web Services as a $5 billion business. So, it’s not as big as retail yet. Overall, the company’s 2014 revenue stood at $89 billion.

Back in 2011, in a Bloomberg Businessweek article that featured an interview with Amazon vice president and cloud architect James Hamilton said that the expectation was that the cloud would be as important to the company as book sales and other retail operations.

At the time, the cloud revenue, which Amazon until now has lumped into the “other” category of its earnings disclosures, stood at about $500 million, while overall revenue was $34.2 billion. In its quarterly report released Thursday, Amazon said AWS brought in $1.57 billion for the quarter, a 50 percent increase from 2014 and an annual run-rate of $6.3 billion.

Without a doubt, AWS is the fastest growing part of its business, since it has gone from $500 million to $6.3 billion in five years. It’s also the most profitable part of the company. An analysis by ZDnet.com described Amazon’s cloud profits this way: “All the margin power within Amazon resides with AWS. In terms of profit potential, Amazon is a cloud infrastructure provider disguised as an e-tailer.”

While Amazon doesn’t break out its government revenue, it’s been an important market for the company.

It won a $600 million contract to build the CIA’s cloud infrastructure, and it’s been actively partnering with various companies since at least 2010 when it hired Teresa Carlson away from Microsoft to lead its global government business.

An interesting sidelight to Amazon’s disclosure of cloud revenue is the reaction of its closest competitors, namely IBM.

IBM was quick to claim the mantle of largest cloud provider with $7.7 billion in annual revenue, according to the Wall Street Journal. But IBM included public, private and hybrid cloud work. Amazon countered that it doesn’t offer private cloud so when the Journal back out that work, IBM’s cloud revenue stood at $3.8 billion.

ZDnet goes through several of the major providers describing their results. These include Amazon, IBM and Microsoft, but also Google, Oracle, SAP and Salesforce.com. In their analysis, there is no leader that is head and shoulders above the others. Amazon, Microsoft and Google are all in the $6 billion range. IBM is either $3.8 billion or $7.7 billion range, depending on what you want to count. It should be noted that Google doesn’t break out cloud revenue but has $6.9 billion in the “other” category.

Salesforce comes in at $5 billion, and Oracle and SAP are both just over $2 billion.

Going forward, I’d expect more disclosures by the major cloud providers. As those businesses grow for the individual companies, I wouldn’t be surprised if we see some structural changes at these companies that highlight the value of the cloud businesses more than they currently do.

For example, Amazon overall struggles with losses, but the disclosure of its cloud revenue sent its shares soaring. Retail also has low margins in the 5 percent or less range, so anything they can do to highlight the much more profitable cloud business will only help them.

In the government market, the usage of the cloud will continue to grow so understanding market leaders and growth will be important to customers and to partners. Greater transparency also increases the rivalry and competition between these providers, which also will benefit customers and partners.

In many ways, Amazon’s disclosure of its cloud revenue is another sign that the cloud is a maturing market segment and needs to be treated that way.