Analyzing Cloud Revenues: Look at the Growth, Not the Numbers

A UBS research report sparked a lot of discussion this week with its estimate that Amazon Web Services’ total revenue will top $500 million this year and $1.1 billion by 2014. Some found the numbers impressive; others found them underwhelming. And some latched onto the gross profit margins hovering around 50 percent, despite the fact that net profit margins are just over 10 percent. Analyzing the numbers is fine, but in assessing the promise for cloud computing, it’s more telling to look at the growth curve.

UBS charted gross revenue growth from 2006 through 2011 (a chart is available in Om’s article). That number speaks for itself — it’s an 801 percent annual increase ($329.4 million) over five years for an offering all but pulled out of thin air. If AWS hits UBS’s 2014 estimates, it will be a 2,890 percent increase ($1.3 billion) over eight years. Net annual income over the same time period (2006-2014) is estimated to grow by 6,148 percent ($386 million). Is there anyone out there who wouldn’t want to be part of that fast-growing a business, as either a principal, investor or shareholder?

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Speaking of shareholders, Amazon’s total earnings per share were two cents in 2006; UBS estimates that number will grow steadily year over year, hiting 83 cents per share in 2014 for a total increase of 4,150 percent. During that time, AWS’s contribution to the overall earnings per share will jump from 2.55 percent to 8.35 percent.

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It’s Not Just AWS That’s Growing

Of course, it’s important to remember these are just estimates based in part on (IDC’s) estimates. But even if the numbers aren’t entirely accurate, stated growth from other cloud providers suggests AWS’s growth curve is probably accurate. This week, for example, RightScale announced a 1,000 percent customer spending increase from June 2009 through June 2010. RightScale has launched more than a million cloud servers since its inception; many (likely most) of those are from AWS. In the same period, the company saw a 300 percent increase in servers deployed and a near reversal in the ratio of extra-large instances to small instances — from 58 percent “small” and 12 percent “extra-large” to 22 percent “small” and 56 percent “extra-large.”

Rackspace, meanwhile, has also seen growing cloud computing revenues. In the first quarter of 2010, cloud revenues were $19.3 million, representing 10.1 percent of the company’s total revenue. That’s a 2.6 percent jump in percentage of total revenue since the first quarter of2009, when cloud revenues accounted for $10.9 million of the company’s $145.1 million total revenue. The customer count had almost doubled during that period – from 43,030 to 80,080.

Guy Rosen, who does a quarterly calculation of the top 500,000 web sites hosted on cloud platforms, has also tracked impressive growth. As of August 2010, his research shows 3,011 sites hosted on Amazon EC2 and 2.825 hosted on Rackspace Cloud Servers. Those numbers represent 94 percent and 106 percent year-over-year growth, respectively. With the exception of Joyent, all other cloud providers Rosen tracks also experienced more than 100 percent growth during that period. In the case of AWS especially, the number of high-profile web sites is adding up fast.

There’s No Denying the Potential

It’s easy to get lost in the exact numbers, but the constant growth tells the story: Cloud computing (of the externally hosted variety) is growing at a breakneck speed, and AWS appears to have the lion’s share of the market. But there’s plenty of money to go around, with IDC predicting cloud infrastructure revenue will grow from between $5 and $6 billion in 2010 to between $15 and $20 billion in 2015. Considering growth among smaller providers and the increasing interest from large enterprise and the federal government, both IDC and UBS might be underestimating revenues. Yes, the present revenue numbers are low compared with traditional IT, but the sky is the limit for cloud stakeholders. Isn’t that what really matters?

Question of the week

What do you think: Are growth trends more telling than raw numbers?
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