Why Amazon Believes AWS Business Could Be Bumpy

Amazon continues to cut prices of its AWS solution

The AWS (Amazon Web Services) segment is becoming the main growth driver for Amazon (AMZN). AWS revenues grew at a rate of 64% on a year-over-year (or YoY) basis in the last quarter. AWS’s operating margins almost doubled on a YoY basis, as the chart below shows. Despite these stellar results, Amazon still thinks that its AWS business could be bumpy going forward.

This is because Amazon is not only increasing the capacity of its present data centers. It’s also opening up new data centers at a rapid rate, which drives up the cost. Another major reason for the uncertainty surrounding AWS is that Amazon continues to cut the prices of its cloud solution. Although Amazon is the leader in the cloud services market, the competition in this market continues to grow, forcing Amazon to lower prices of its AWS solution.

Amazon is still the clear leader in the cloud services market

According to a report from Synergy Research Group, Amazon had a share of 31% in the cloud services market while the next three players, Microsoft (MSFT), IBM (IBM), and Google (GOOG), had a combined share of 22% in the cloud services market as of 1Q16. Although this shows that Amazon is far ahead of its competitors in this market, it cannot be complacent.

Microsoft’s cloud computing product Azure recorded YoY growth of 140% in 2015 compared to 2014. Google, on the other hand, has suddenly become an aggressive player in this market. Google appointed Diane Greene, co-founder of VMware (VMW), to lead its cloud business in November 2015. It has since been trying to integrate machine learning capabilities with the cloud, and the company claims that this will be its main differentiating factor against competitors.