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Amazon Is Facing A Cloud Crisis, As Microsoft Muscles In

This article is more than 9 years old.

After two decades of relative peace, the Seattle area's biggest tech companies -- Amazon and Microsoft -- have begun an all-out battle to see which one can dominate the high-stakes cloud-computing market. Amazon got there first. But Microsoft is muscling in so powerfully that Amazon may have a crisis on its hands.

The magnitude of this new battle became apparent late last week, when Amazon reported an overall quarterly loss that sent its stock skidding nearly 10%. Securities analysts zeroed in on signs that the cloud-computing sector has entered an all-out price war that's wrecking Amazon's profit margins in this sector.

When Amazon's chief financial officer, Tom Szkutak, briefed investors about the results in a conference call Thursday, July 24, he did his best to portray price cuts of 28% to 51% as a customer-friendly gesture by Amazon. In a transcript compiled by Seeking Alpha, Szkutak talked about how much money customers are saving, adding: "We love that business."

(Photo credit: The Consortium)

Really? Amazon's pioneering success in cloud computing, dating back to 2006, has now brought on the likes of Microsoft, Google, IBM and Hewlett-Packard as competitors. Everyone wants market share, even if that means rampant price cutting. In April, it was Google that cut prices 32% to 85% first, with Amazon and then Microsoft following soon afterward.

In most markets, Amazon thrives on low prices, thanks to its highly efficient culture and its ability to outlast its rivals. But in cloud computing, Amazon is up against much tougher competition. Consider Microsoft under the leadership of new chief executive officer, Satya Nadella, who made his mark in 2011-13 overseeing Microsoft's Azure cloud business, where he racked up triple-digit sales growth. A May report by Synergy Research indicates that Microsoft now ranks as the No. 2 cloud player, behind Amazon, and is gaining share.

What's more, Nadella in a recent strategy memo talked about "platforms" as one of Microsoft's two dominant business themes. That's a delicate but revealing use of words, elevating Azure and other newer initiatives into the same plane as the Microsoft Windows operating system.

Amazon has more than $7 billion in cash and short-term investments, which could bankroll a long price war against ordinary rivals. But Amazon is stuck with the short stack in a battle against Microsoft -- whose Redmond, Wash., headquarters are just 12 miles away from Amazon's downtown Seattle hub. Peek at Microsoft's balance sheet, and you'll see $85 billion of cash and short-term investments.

How long will investors in each company put up with the losses associated with an all-out price war? Traditionally, Amazon has enjoyed some of the most patient investors on the planet, allowing Jeff Bezos vast leeway to keep investing in growing the business, rather than booking earnings now. But last week's stock slump suggests that Amazon investors' patience isn't endless.

By contrast, Microsoft's new management is doing a lot to reposition Wall Street's expectations -- so that short-term earnings hits are easily forgiven as long as they prepare a path toward longer-term growth.

(UPDATE July 30: Amazon spokesperson Leah Bibbo says it's "unfair" to describe Amazon Web Services' current situation as a crisis, noting that AWS's latest quarterly performance looks much stronger by a metric that Amazon prefers: usage -- up 90%. She also notes that customers such as Conde Nast, Siemens and Novartis all spoke positively about their AWS experience at a July 10 user conference.

Gartner analyst Lydia Long  adds in a July 28 report that "With Microsoft and Google apparently now serious about this market, AWS finally has credible competitors. ... AWS is likely to continue to dominate this market for years, but the market direction is no longer as thoroughly in its control.")

If Bezos -- and the rest of Amazon -- were focused 100% on winning the cloud war, it might be very hard for even aggressive, well-financed challengers such as Microsoft and Google to dethrone the category's current leader. But Amazon's overall strategy these days is a blur of new initiatives.

It took Amazon CFO Tom Szkutak 579 words in last week's conference call to cover the breadth of Amazon's current expansion initiatives. In addition to pouring more money into Amazon Web Services, he said the online retailer also is spending money on the following:

  • six new warehouses (also known as "fulfillment centers")
  • 10  sortation centers (where Amazon  organizes packages so they get to the optimal post office or delivery truck)
  • $100 million of original video and other content
  • Geographic expansion in China, India, Italy and Spain.
  • Amazon's smartphone and Fire TV offerings.

Left unsaid -- but always present in investors' minds -- are other Bezos projects that may involve massive spending in years to come. These include home delivery of groceries and the development of drones that could deliver customers' orders faster and perhaps more cheaply than traditional trucks.

Amazon's directors traditionally have given Bezos vast latitude to expand in whatever directions intrigue him. His track record to date has been extraordinary. Since founding Amazon in 1994, he has created a business with a $150 billion market capitalization and more than $80 billion a year of revenue. Still, even geniuses can get caught up in too many projects for their own good.  As I wrote in 2012, "empire-building CEOs can get stubborn about pressing ahead with projects in the face of mounting evidence that their latest dream isn’t working out. Expect some big test of Bezos’s prudence in the years to come."

That moment may have arrived.