Amazon Says Expansion Worth Price

After a Moody's credit rating downgrade, Amazon will pay a higher rate to borrow than well-funded competitors, such as Apple, Microsoft, and Google, but says business expansion will pay.

are growing at a rate of 40% a year; virtual server use jumped 99% in 2014 compared to the year before; and S3 storage is up 137%, Jassy said at Re:Invent.

AWS announced Dec. 4 it cut pricing on data-transfer services by 6% for the first 10 TB and by 25% for the next 40 TB. AWS spokesmen called it Amazon's 47th price cut in cloud services. Cuts in some Asia regions, where Amazon wants to make up lost ground to Microsoft (which offered services from China before Amazon did), were as high as 37% in the Singapore region for the first 10 TB and 43% for the next 40 TB. In Tokyo, the cuts were 30% and 15%, respectively; Sydney, Australia, saw cuts of 26% and 21%, respectively.

During Re:Invent, Jassy was asked whether Amazon would be able to continue to compete by cutting prices and expanding into robotic distribution centers. Amazon currently has 10, but plans to build more. Highly profitable businesses, such as Microsoft and Google, are also cutting their cloud service prices. How much longer can Amazon compete on the price front, Jassy was asked.

He responded that Amazon can see that startups like its AWS infrastructure. Amazon now has a team that does nothing but talk to startups and members of the venture capital community. It runs a pop-up loft in San Francisco's Market Street where startup representatives can drop by and ask questions about using AWS infrastructure or test drive the cloud. "We were totally blown away by how many people came to talk to us," he said at Re:Invent.

At the same time, AWS is seeing more interest from established enterprises. Not surprisingly, AWS officials believe their unit represents the future data center for many of these businesses. "We are just at the beginning of a titanic shift. More of these on-premises-to-cloud transitions will be taking place over the next several years."

"When you have an opportunity like this -- there are not many like this in one lifetime -- you invest what it takes," he said. If Amazon is correct and the center of gravity of its business is shifting toward more mature enterprises, then that will help sustain Amazon expansion. "Enterprises spend more total dollars than startups. That's the nature of their business," Jassy observed.

Media reports said it would cost $1 billion to add a cloud data center in a new region of the world, and some have predicted Amazon is no longer in a position to spend that money. But Jassy disagreed, saying Amazon can continue to add regions. He declined to identify a cost per region but said the $1 billion estimate "is wrong."

Amazon might slow its expansion if it's forced to borrow money to do so. It might also slow its expansion if it has to borrow at higher rates than its competitors, as the Moody's rating would appear to suggest. On the other hand, its competitors have nowhere near the data center infrastructure or customer base that Amazon has, considered to be five times higher than its 14 closest rivals combined.

Knowing that he's already got that position, Jassy tends not to be concerned by short-term problems, like a Moody's rating. Cloud computing is "the biggest technology shift in our lifetime," he said at Re:Invent Nov. 12. If Amazon can translate early enterprise success into an increasingly rich revenue stream, Amazon shareholders may be persuaded it's worth the wait for profits. If that rich stream never materializes, then Jassy will have more to worry about than just a step down in the credit risk ratings. Right now, time and the gathering appeal of the cloud appear to be on his side.

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