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Amazon (NASDAQ: AMZN) investors likely know the company's most visible business -- e-commerce operations -- isn't its most profitable. Instead, the company's smaller cloud business, Amazon Web Services (AWS), is its most profitable on account of higher margins. Last fiscal year, AWS produced 105% of Amazon's operating income as losses in international retailing offset North American retailing profit.
Therefore, it's key for investors to pay close attention to Amazon's market position in cloud computing. Increasingly, the cloud has become a more-competitive industry, with second-largest provider Microsoft (NASDAQ: MSFT) starting to pick up market share. Do Amazon investors have anything to fear?
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Gartner found Microsoft is gaining on Amazon
Per Gartner, the worldwide public infrastructure-as-a-service industry continues to post torrid growth rates, as spending increased 29.5% in 2017, growing from $18.2 billion to $23.5 billion. No surprise that Amazon continues to significantly lead this industry with a 51.8% market share. However, Amazon's lead over its peers continues to narrow, as the company lost 1.9 percentage points of share this year.
| Company | 2017 Revenue | 2017 Market Share | 2016 Revenue | 2016 Market Share | 2017-2016 Growth |
|---|---|---|---|---|---|
| Amazon | $12,221 | 51.8% | $9,775 | 53.7% | 25% |
| Microsoft | $3,130 | 13.3% | $1,579 | 8.7% | 98.2% |
| Alibaba | $1,091 | 4.6% | $670 | 3.7% | 62.7% |
| | $780 | 3.3% | $500 | 2.7% | 56% |
| IBM | $457 | 1.9% | $297 | 1.6% | 53.9% |
| Others | $5,902 | 25% | $5,392 | 29.6% | 9.5% |
| Total | $23,580 | 100% | $18,213 | 100% | 29.5% |
Data from Gartner and in millions.
The biggest named gainer in Gartner's data was Microsoft and its Azure product. The company grew total market share from 8.7% in 2016 to 13.3% last year on the back of 98.2% growth. Overall, the cloud industry appears to be moving further toward a consolidation phase, as the top five vendors now claim 75% market share versus 70.5% in 2016.
These figures are for infrastructure as a service (IaaS), the base layer of the cloud stack. During the last conference call, CEO Satya Nadella noted the company's commercial cloud business exceeded $23 billion, but this comparison includes revenue attributable to Office 365, its cloud-based software-as-a-service product.
Two reasons for Azure's rapid growth
Azure's revenue growth has been greatly aided by large retailers with significant cloud-based spending: Walmart, Target, Costco, and Walgreens have all decided to use Microsoft's off-site servers, storage, and networking services. This has nothing to do with quality, but rather retailers have complained Amazon uses high-margin AWS to offset razor-thin margins from its e-commerce business. Former Walmart CEO Bill Simon went further, calling Amazon's strategy of using AWS to backstop low e-commerce profits "anti-competitive."