Amazon Web Services is diversifying its portfolio to sustain a leadership position as the IaaS market becomes more crowded

By Jillian Mirandi, Analyst

AWS will be challenged to capitalize on strong demand for IaaS as it responds to new competitive threats and unplanned service outages

Amazon Web Services (AWS) is the clear leader in the public Infrastructure as a Service (IaaS) market. TBR estimates that AWS’ revenue grew approximately 65% year-to-year to $413 million in 3Q12. Sustained high double-digit growth is driven by increasing demand for public IaaS and cross-selling AWS’ expanding portfolio into its large customer base. AWS’ primary ammunition for securing its dominance is its ability to cut prices. We maintain that if any vendor can compete with AWS on price, it is Google, as both companies have other large and successful business units to support profitability and revenue stability. TBR expects price cuts from AWS in response to the emergence of Google Compute Engine as an IaaS rival, but we maintain that continued price battles are not sustainable.

Furthermore, with a growing number of enterprise-focused cloud competitors, including Verizon, Rackspace, IBM and HP, along with recent and recurring outages, TBR anticipates AWS will face slower net-new customer adoption in coming quarters. Major vendors who run their entire businesses on AWS, such as Netflix, Foursquare, Pinterest and Salesforce.com’s Heroku platform, were affected by the outage in October. If major companies such as these continue to experience outages, they will be tempted to move services onto competing IaaS products. TBR believes that the market spotlight is on AWS when it comes to outages as it is the biggest IaaS vendor and supports well-known customers.

AWS strengthens its IaaS market foothold with cost-effect product launches

As the price maker in the market, AWS can capitalize on economies of scale that competitors such as IBM, Verizon and Rackspace are challenged to match. In August AWS released Amazon Glacier, which enables customers to store data that is not often used (such as administrative data) securely and cheaply. AWS is charging one cent per gigabyte per month, which is cost-competitive with both cloud and on-premises storage offerings. In September AWS announced its Reserved Instance Marketplace, which allows customers to sell their Amazon Elastic Compute Cloud (EC2) Reserved Instances to other businesses. Reserved Instances allows users to effectively reduce costs while using their EC2 by offering bulk discounts and reduced hourly rates. Both product launches are focused on helping customers cut costs.

AWS is driving sales success in the government sector — but will face challenges as competitors offer similarly tailored clouds

AWS is experiencing high adoption rates in the public sector with 300 government agencies using AWS GovCloud. Government organizations are turning to cloud-based infrastructure to improve efficiencies, increase visibility, cut costs and meet mandates for data center consolidation. AWS initially launched GovCloud in August 2011 (a month before Verizon launched its federal cloud portfolio) making both vendors early-to-market IaaS vendors in the government space. AWS added capabilities announced Oct. 10 to increase adoption, including more memory, increased regulatory integration and compliance-ready storage capabilities.

TBR expects AWS GovCloud’s customer base to continue growing in coming quarters as government agencies looking to cut costs become more comfortable with the cloud (using the 300 current customers as proof points). However, adoption may slow over the next four quarters, as competitors like IBM, HP, Dell and vendors from the service provider segment expand their ability to support the government sector with competing solutions. Moreover, we believe that CY4Q12 and CY1Q13 may show particular slowdowns as AWS responds to recent outages. We project that any additional near-term outages will elevate IaaS adoption barriers and extend purchasing cycles across the segment — with AWS as the leader feeling the particular brunt of customers’ fear.

Please feel free to use this content or call/email Jillian Mirandi (603-929-1166) for additional commentary.

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