By Alistair Barr
LAS VEGAS, Nov 28 (Reuters) – Amazon.com Inc’s
cloud computing division is going after big corporate customers,
a new focus that will put the fast-growing unit into direct
competition with some of the world’s largest technology
companies.
Andy Jassy, head of Amazon Web Services or AWS, criticized
the hefty profit margins of what he called “old guard” tech
companies on Wednesday and unveiled a new data warehousing
service that he said will cost about a tenth of existing
solutions.
“The old world of technology has a pricing model which is to
charge as much as customers can pay. Customers are tired of it,”
Jassy said, during AWS’s first conference in Las Vegas, Nevada,
where more than 6,000 people attended.
He is banking on the division to take direct aim at tech
stalwarts Oracle Corp, International Business Machines
Corp and Hewlett-Packard Co, among others.
Shares of Teradata Corp., a leading independent
provider of data warehouse services, fell 3.7 percent to $59.27
on Wednesday on concern about competition from AWS.
“A new competitor is entering the space with significantly
lower price points,” said Derrick Wood, an analyst at
Susquehanna Financial Group. “That’s the essence of the
concern.”
AWS, which Amazon started more than six years ago, provides
data storage, computing power and other technology services from
remote locations, making it a pioneer in what is now known as
cloud computing.
AWS has grown fast because its services are cheap,
relatively easy to use and can be shut off or ramped up quickly,
depending on companies’ needs. Evercore analyst Ken Sena expects
AWS revenue to jump 45 percent a year, from about $2 billion
this year to $20 billion in 2018.
The division has traditionally been used by start-up tech
companies and other smaller businesses. Large corporations,
known as enterprises in the tech world, have dabbled with AWS,
but most shun cloud-based services for mission critical
applications. Jassy said on Wednesday that is changing.
“We expect enterprises to migrate their applications to
AWS,” he added. “The question isn’t if anymore, it’s how fast
it’s going to move and which ones will move first.”
Netflix, Royal Dutch Shell, Samsung
and InterContinental Hotels Group are a few
companies now using AWS, along with more than 300 government
agencies and over 1,500 academic organizations, Jassy noted.
“It’s increasingly less accurate to say only small companies
use AWS,” said Bernard Golden, Vice President, Enterprise
Solutions for enStratus Networks, a cloud management software
company.
AWS is targeting its new data warehouse service, called
Redshift, at small businesses and large enterprises.
Companies typically pay between $19,000 and $25,000 per
terabyte of storage per year for data warehouse solutions, Jassy
said.
Redshift, which launches in early 2013, will cost as little
as $1,000 per terabyte per year for companies that reserve the
service for long periods, such as a year or more. They can also
use it on-demand, which costs more, Jassy said.
Software tools that IT departments in big companies
currently use to analyze data in their warehouses will work on
the new Redshift service, potentially making it easier to
switch, Golden said.
“All that will change will be the pricing,” he added.
“Teradata will be effected and Oracle, IBM and HP too – although
this will impact a very small portion of the revenue for the
bigger players.”
Jassy said on Wednesday that AWS has the potential to be
Amazon’s biggest business, out-growing its original online
retail operation.
AWS will do this by taking the same low-margin, high-volume
approach that has turned Amazon into the world’s largest
Internet retailer, Jassy said.
Amazon does not disclose financial details of AWS, however,
Evercore’s Sena estimates profit margins below 10 percent on a
net income basis. Sena forecasts margins of 22 percent, based on
earnings before interest, tax, depreciation and amortization.
In contrast, Teradata has gross profit margins of about 70
percent on its data warehouse products, according to Susquehanna
analyst Wood.
“The economics of what we’re doing are extremely disruptive
for old guard technology companies,” Jassy said. “These are
companies that have lived on 60 to 80 percent margins for
years.”
Jassy showed quotations on big screens behind the conference
stage on Wednesday from executives at Oracle, IBM and
Hewlett-Packard all talking about their high-margin businesses.
“The vast majority of businesses will be moving to the cloud
in the next ten years,” Jassy said. “We think it’s a
high-volume, low-margin business.”
