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Amazon’s Rent-Our-Servers Operation Draws Competition: Not Good For Margins

Having developed a lovely business renting out computing power to smaller companies, via a unit known as Amazon Web Services, Amazon (AMZN) now faces rising competition in that business from the likes of Google (GOOG) and Microsoft (MSFT).

This Wall Street Journal article lays out the situation nicely.

AMZN Revenue TTM Chart

AMZN Revenue TTM data by YCharts

As seen above, Amazon already operates with profit margins ranging from super-thin to nonexistent. Its free shipping and aggressive price promotions on books and other goods, including its Kindle device, spur sales growth but trash margins. Amazon doesn’t break out Web Services results – part of CEO Jeff Bezos’s rather opaque approach to disclosure – but the Journal quotes estimates of $2 billion in annual revenue from the business, out of a total of $61.1 billion. To garner that $2 billion, Amazon happily crows, it dropped prices for Web Services 24 times since launching the business in 2006. Scale, to be sure. But competition is certainly another force behind price cuts.

Many costs at Amazon, including employment, are growing faster than revenue. And Amazon’s pricing strategy, difficult on competitors like Best Buy (BBY), also hurts Amazon.

Reproducing Amazon's highly-efficient retail business would be difficult, and thus it enjoys both a barrier to entry and gets to complete against relative weaklings like Best Buy and Barnes & Noble (BKS). But renting out server capacity seems more a business of price and financing muscle, and in the latter realm Amazon doesn't enjoy a natural advantage against Google and Microsoft.

AMZN Cash and ST Investments Chart

AMZN Cash and ST Investments data by YCharts

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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