ra2 studio - Fotolia

AWS earnings augur rising public cloud tide -- for some

AWS surpassed $2 billion in revenue last quarter -- and industry watchers say it's still early in the maturation of the public cloud market.

The fates of two major IT vendors in the public cloud this week show a pattern that will continue as the market matures, in which the rich will only get richer.

HP dropped out of the public cloud market as Amazon surprised Wall Street with massive overall profit gains for its cloud for the third quarter of 2015. Amazon Web Services (AWS) revenues grew 78% year over year to $2.085 billion, with a whopping $521 million in profit compared to $98 million a year ago -- despite eight price cuts to AWS offerings in recent months.

"Typically when a company gets this big, [operating margin growth] tends to slow down quite a bit," said Jillian Freeman, senior analyst for cloud with Technology Business Research Inc. in Hampton, N.H.  "The fact that Amazon is actually speeding up goes to show where the market is, and that they'll continue doing this for the next couple of years."

AWS' earnings rise as other clouds fall

Freeman attributed AWS earnings growth to the flywheel effect of scale -- the big only get bigger while the smaller get left behind as massive economies of scale form a steep barrier to entry for newer competitors.

"[Amazon has] about 25% of the market right now and their market share will continue to grow," Freeman said. "Legacy vendors are shifting their focus away from public cloud and toward private cloud, and bringing Amazon in with a broker function."

HP, which shut down its public cloud offering this week, is one such company that will focus on private and hybrid clouds. Rackspace, once an Amazon competitor, now resells and manages Amazon public cloud services.

"The public cloud marketplace is going to be dominated by a small number of players that are not the traditional guys," said John Treadway, senior vice president with Cloud Technology Partners, a consultancy based in Boston.

Treadway, an Amazon shareholder, also predicted that today's big three -- Amazon, Google and Microsoft -- will remain the market leaders for the next decade.

"Just think about the barriers to entry for a new competitor," Treadway said. "To even be remotely interesting to a user, they have to spend a ton of money, while the big players are still accelerating their spending and taking market share."

Further growth will also be fueled by the hundreds of products and services AWS offers; Freeman said her market research indicates most enterprise customers are still focused on the core services of the Elastic Compute Cloud and Simple Storage Service. Amazon EC2 Dedicated Instances, introduced earlier this month, will be another big incentive to hop over to the public cloud for companies in regulated industries with legacy database licenses, she said.

Database and analytics products round out the growth in revenues, accounting for 10 to 20% of AWS' revenues, Freeman estimates. Amazon has said its Aurora database has surpassed its Amazon Redshift data warehouse this year as the fastest-growing product in company history, though it did not give specific numbers around that growth.

Chinks in AWS' armor

However, competitors do still have some tacks to take against AWS as the market matures.

One area competitors can hammer on is the specter of AWS lock-in as Amazon launches more and more sticky services, Freeman said. Another is Amazon's increasingly complicated billing as it adds ever more services, according to Treadway, who predicted Amazon will bundle its products for simplified pricing and greater accessibility to new customers.

Meanwhile, the rising public cloud tide will lift more than just Amazon's boat -- Microsoft and Google also reported strong growth for their public cloud services this week, and Microsoft said Azure usage has doubled in the last year.

Beth Pariseau is senior news writer for SearchAWS. Write to her at [email protected] or follow @PariseauTT on Twitter.  

Next Steps

How to survive an AWS outage

Tools to help you migrate from VMware to AWS

What to know about the latest AWS Lambda updates

Dig Deeper on Amazon EC2 (Elastic Compute Cloud) management