Tuesday, April 2, 2013

More on Amazon's Margins

I'm not the only one doing the math to show the extortionate margins Amazon enjoys on its S3 cloud storage business. Over at The Register Simon Sharwood uses an announcement about Amazon's Cloud Drive service and a comparison with the competing Dropbox service, which runs on S3, to draw the same conclusion. He shows that, unless either Amazon or Dropbox are losing money, S3's costs must be much less than 3.7c/GB/mo:
5000 terabytes is 5,120,000 gigabytes. At $0.037 a gigabyte a month, Dropbox would have a bill of $189,440 a month. At $9.99 a month for 100 gigabytes of data, Dropbox needs 18,963 paying customers to meet that bill. 18,963 times 100 gigabytes is 1,896,296, which leaves 3,223,704 gigabytes of space Dropbox can dole out to its non-paying users. That's not 96 per cent of the capacity it pays for, but given Dropbox's customers at all levels probably don't use all their capacity it's not hard to see how Dropbox could get mighty close to a profit even if it pays AWS' published price, which we can't imagine it does.
So is Amazon making a profit on Cloud Drive's paid plans? AWS' genesis as Amazon's private cloud means it is sensible to assume Cloud Drive runs on S3 or something an awful lot like it, charged back between business units at low, low, mi casa es su casa prices. That could mean AWS can operate cloud storage space rather more cheaply than its advertised rates and almost certainly more cheaply than it charges even colossal customers like Dropbox.
Go read the whole piece.


  1. Amazon has cut the prices for HTTP requests:

    "in the US Standard Region, we are reducing the price of every 1,000 PUT requests from $0.01 to $0.005 and the price of every 10,000 GET requests from $0.01 to $0.004."

  2. In his letter to shareholders, Jeff Bezos explains:

    "We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to," Bezos wrote. "These investments are motivated by customer focus rather than by reaction to competition."

  3. As I've pointed out, one reason that Amazon enjoys such lavish margins is that the cloud isn't really a competitive business. Microsoft's recent announcement that they will match AWS prices shows this; a competitor would try to beat them. Jeff Bezos' comment above makes the same point indirectly.

    Everyone should read this New Yorker piece on oligopoly.

  4. Even cloud providers now admit that once you're paying them $10K/month you'd save money moving the base load in-house. They are talking about servers, but translating the number to storage it's a petabyte in Glacier, and a bit under 200TB in S3.

  5. Amazon's cloud business continues to be a cornucopia of cash, according to The Register it "contributed to over $1.6 billion in revenue in the e-retailer's nebulous "Other" category this year". Of course, fountains of cash at Amazon don't actually turn in to profits. As The Register reported: "the company reported a net loss in its second quarter and forecast problems in its third quarter, ... a reflection of the company's "retail attitude", which sees it pour its money into forward development rather than profits."

  6. Ben Thompson writes an interesting piece Amazon's Dominant Strategy and points out that:

    "AWS is ... a fraction – around 3% – of their total revenue"

    He doesn't note that it is growing at 66%/yr, nearly double Amazon's overall revenue growth. "Technology and content" are about 6% of Amazon's operating expenses, and growing 68%/yr.

    As Amazon says, "Our financial focus is on long-term, sustainable growth in free cash flow per share." Not making a profit in the short term.

  7. Yet another piece, this time by Cade Metz at Wired making the point I've made before that cloud is only economic for variable loads; for base-load computing and storage it is way too expensive.

  8. Here's an actual competitor pointing out that S3's margins are excessive. Serguei Beloussov, CEO of backup company Acronis Storage, provided his cost of ownership numbers to The Register.

    Of course, just because it is possible for a competitor to undercut Amazon doesn't make it a good business strategy to do so. Remember what happened to diapers.com.

  9. A very insightful piece by a former Amazon insider pointing out that the reason Amazon as a whole doesn't make a profit despite running many profitable businesses (such as AWS) is the scale of its investment in the future.

  10. Paul Kunert at The Register has a piece on a report from Synergy Research Group that claims that AWS has more of the market than the next 4 players combined. Those players would be salesforce.com, Microsoft, IBM, Google.

    The report claims that everyone, including AWS, is losing money. The Register appears to support that claim with a link, but the link goes to a story that doesn't say AWS loses money. That story does link to another story that points out that Amazon as a whole lost money in Q2 but that doesn't show that AWS did.

    In any case, Synergy Research Group seems to have missed the big picture. Amazon's goal isn't to make money in the short term, it is to end up owning the market in the long term. The stock market understands this. AMZN stands at almost $400, thus financing investment in the long-term goal. AWS follows the same strategy as the rest of the company.

  11. Jack Clark at The Register has some interesting graphs comparing the pricing of virtual machines from leading cloud providers. They tend to show prices converging on the market leader, Amazon.