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SHOCK and AWS: The fall of Amazon's deflationary cloud

Just as Jeff Bezos did to books and CDs, Amazon's rivals are now doing to it

Internet Security Threat Report 2014

Analysis It's tough being a victim of your own business strategy, especially if you're Amazon founder and CEO Jeff Bezos.

After spending twenty years applying a combination of price cuts, smart logistics, and ruthless efficiency to the publishing and music industries, Bezos' Amazon has grown into a vast company.

But now the company's Amazon Web Services (AWS) cloud division is coming under attack from competitors who are using Bezos' own cost-cutting tactics against it, and it's starting to show in Amazon's financial results.

"Together we are resetting the price curve in the cloud to where it should be," explained Google's cloud king Urs Hölzle on March 25. "This is a philosophy. The price curve of virtual hardware should follow the price curve of real hardware."

That day, Google cut cloud prices by up to 53 per cent across parts of its Google Compute Engine infrastructure, undercutting Amazon.

Google's move was "the price cut that made a difference," Ben Uretsky, chief executive for cloud startup Digital Ocean, told The Register recently. "We all use the same type of data center, same type of hardware more or less, there's definitely margin on the cogs of operating those goods."

After spending years carefully cultivating a (somewhat false) public perception of its cloud as the lowest of low-cost clouds, Amazon had no choice. It had to respond. Days later, it halved some of its own prices to keep up with Google. Then Microsoft did the same. This all happened in less than a month, and it's representative of the brutal pace of the cloud industry.

Due to these price reductions, Amazon's AWS business saw the first Q1 to Q2 decline in revenues in its history, according to Amazon's most recent quarterly financials.

"We had very substantial price reductions for customers starting in the second quarter," Amazon CFO Tom Szkutak explained. "In Q2 [AWS] had usage growth of close to 90 percent year over year for the quarter".

This means that although Amazon still grew at a respectable rate, its actual revenues were clipped by the heightened competition. This is what happens when you sell goods with deflationary pricing, it seems.

Where this gets tricky for Amazon is that the margins from reselling computers and storage are likely far higher than those it extracts from its traditional retail operations.

This means that AWS is one of the divisions that Bezos can use to create profits for his company, should Wall Street demand it. Yet if Amazon's competitors go after AWS, the division's margins will come under pressure, and Bezos will be weakened.

After decades spent tormenting incumbent industries with low pricing, ruthless execution, and predatory behavior, Amazon is now facing the same torment from other firms. The startup has become the incumbent. Your move, Bezos. ®

Internet Security Threat Report 2014

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