The conventional wisdom among the pundits covering Infrastructure services is that cloud infrastructure business is a high volume low margin business. Some pundits even dismissed Amazon Web Services because they are not going up the stack to differentiate themselves unlike, say, Salesforce.com.
Amazon probably isn’t going all that far in it [cloud]. It’s got great utilities; you can get very low-cost computing from its virtual machines. And it’s got some other services that are kind of ‘cute’ but good, like Mechanical Turk. But it’s partly a gee-whiz factor, and partly a way for them to service an online developer bank for people who need to build online stores.
During OSCON, after a talk by Redmonk analyst Stephen O’ Grady, James Watters, former Silicon Angle analyst and currently at VMware, immediately pointed out that people are underestimating the margins of Amazon Web Services. In fact, he was so convinced about the big Amazon margins that he followed up his tweet by trying to personally convince Stephen O’ Grady about it at the OSCON lobby. Like many of us who follow the industry closely, he was unconvinced at that time.
Recently, two UBS analysts estimated the size of Amazon’s cloud business and most of us in the pundit world were focussing on the revenue estimates to analyze where they are going and how it is going to shape up the marketplace. However, Redmonk analyst Stephen O’ Grady correctly points out where one should focus on the numbers and what are its potential implications in his post two days back.
Two days ago, two analysts from UBS – Brian Pitz and Brian Fitzgerald – projected Amazon Web Services revenues at $500 million. Many were disappointed, expecting more from the widely acknowledged market leader: a half a billion dollars is approximately what Microsoft spent per datacenter pre-2010.
Those who would focus on the actual revenue figure, however, are likely to miss the more important margin numbers.
He points out to the projected AWS gross margins through 2014 and argues that our belief about the high volume low margin nature of infrastructure service business is wrong and calls for a fresh look at the cloud infrastructure industry.
According to UBS, Amazon Web Services gross margins for the years 2006 through 2014 are 47%, 48%, 48%, 49%, 49%, 50%, 50.5%, 51%, 53%.
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If this is true, most of what what we’ve believed about Amazon’s business – that it was in fact a high volume over low margin business – is wrong. And if that’s wrong, it changes the way we must evaluate the cloud industry and the attendant economic opportunities.
I am sure this topic is going to be dissected among the cloud community in the coming days, months and, if the public-private cloud debate is any indication, years. Did we get the dynamics wrong? If infrastructure business is not a low margin business, what kind of impact will projects like Openstack.org will have on the industry? These are some of the questions which we need to understand pretty soon and I would love to hear from the readers of Cloud Ave about their take on this topic.
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Krishnan Subramanian

Krish dons several avatars including entrepreneur in exile, analyst cum researcher, technology evangelist, blogger, ex-physicist, social/political commentator, etc.. My main focus is research and analysis on various high impact topics in the fields of Open Source, Cloud Computing and the interface between them. I also evangelize Open Source and Cloud Computing in various media outlets, blogs and other public forums. I offer strategic advise to both Cloud Computing and Open Source providers and, also, help other companies take advantage of Open Source and Cloud Computing. In my opinion, Open Source commoditized software and Cloud Computing commoditized computing resources. A combination of these two developments offers a strong competitive advantage to companies of all sizes and shapes. Due to various factors, including fear, the adoption of both Open Source and Cloud Computing are relatively slow in the business sector. So, I take it upon myself to clear any confusion in this regard and educate, enrich and advise users/customers to take advantage of the benefits offered by these technologies. I am also a managing partner in two consulting companies based in India. I blog about Open Source topics at http://open.krishworld.com and Cloud Computing related topics at http://www.cloudave.com.

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