A Fog Surrounds Amazon's 'Cloud Computing' Effort

For all of the success that Amazon (AMZN) enjoyed last year, one area of its business remains a mystery to investors. Amazon Web Services was launched in March 2006 in an effort to tap into the market for "cloud computing." In a stretch way beyond selling books or TVs, Amazon decided to rent out its computing infrastructure -- software services and hardware -- to other large corporations and to governments, leveraging an asset in which it had invested 12 years and $2 billion.Over the years the Web Services unit has attracted some well-known clients such as Nasdaq (NDAQ), Pfizer (PFE), Eli Lilly (LLY), Disney's ESPN (DIS), National Geographic and The New York Times Co. (NYT), which use it to requisition computing power, storage and other applications.

Nearly four years later, the financial story behind AWS is anyone's guess.
Amazon's recent earnings report, issued Jan. 28, offers no insight into how the unit has fared. Overall, Amazon reported impressive revenue growth of 28% for full-year year, ending 2009 with $24.5 billion in sales. But sales from AWS are reported in a category called "other," a catch-all bucket of nonretail revenue that includes AWS, sites that belong to other sellers and the Amazon credit card business.

"We Are Very Pleased"

The "other" bucket grew 22% last year to $653 million, after accounting for foreign currency fluctuations. How much of that revenue came from credit card transactions and how came from corporate clients is impossible to determine. "We've not broken out numbers for Wall Street at this point, but I can tell you that we are very pleased with the number of businesses and developers leveraging the services," says Kay Kinton, an Amazon spokeswoman.

Instead of offering a revenue breakdown, Amazon tells investors that AWS has grown very rapidly and that its traffic exceeds those of all Amazon websites combined by 30%.

Even if Amazon did break out sales for AWS, it's not clear how valuable the figure would be. That's because AWS sales include revenue from regular clients as well as from partners such as IBM (IBM), Oracle (ORCL) and Red Hat. Those partners may have the option of paying for AWS products with services-in-kind. (RHT)

Kinton says the Amazon "cloud" is among the most reliable, scalable and cost-efficient around.

Relatively Modest Tech Spending

It had better be cost-efficient, because Amazon is awfully careful about the amount of money it spends on its infrastructure.
It's not very forthcoming on the cost of its tech spending, either. The closest it gets to revealing this figure is "content and technology," which accounted for $1.24 billion, or 5.1%, of net sales in 2009. That isn't much compared to Google (GOOG), which spends about 12% of revenue on technology and media costs. Overall, Amazon's capital spending for 2009 was $373 million, a relatively modest sum for a firm of its size.

Wall Street is happy, of course, with the cost controls. "Amazon again demonstrated its ability to expand margins, this time off well-controlled tech and content spending," Goldman Sachs analysts led by James Mitchell said Friday in a report. Goldman has a buy rating on the stock. Shares of Amazon, which closed at $118 on Feb. 2, have more than doubled over the last 52 weeks, beating the market in a good year.

Still, Amazon might be taking a big long-term risk by scrimping on tech spending. A limited tech infrastructure led to problems for Amazon during the 2005 Christmas shopping season, when the company couldn't keep pace with demand for Microsoft Xbox 360 orders, and customers had to wait months for their gaming consoles to arrive. That's the same network that's the backbone of AWS. And that makes at least one analyst wonder if Amazon isn't courting trouble in the enterprise market, where it competes with Oracle and IBM.

"Amazon does everything on an shoe string. It appears to be underspending on its network compared to Google," says Stephen Arnold, managing partner of ArnoldIt.com, a consultancy in Harrod's Creek, Ky. Arnold says he has no idea how much revenue Amazon derives from its network, either. " I don't have any hard value data and I don't think anyone else does."

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