Worrisome Signs for A Crucial Amazon Business

Forget e-commerce, Amazon’s real profit comes from its Amazon Web Services, where pricing is suddenly under a little pressure. Illustration: Photo: Sean Gallup/Getty Images

Amazon may be best known for its e-commerce website. But one of its fastest-growing and most profitable segments is Amazon Web Services, which offers businesses services and storage in the cloud.

The problem for Amazon.com is that cloud services is becoming more competitive, and that means prices are falling, according to Canaccord Genuity analyst Michael Graham. The company made “five meaningful [price cuts] concentrated in November,” Graham wrote, and that could particularly impact results in the first and second quarter of 2017. Amazon’s competitors include both Alphabet and Microsoft.

In 2014, the last time AWS had this many cuts, revenue growth slowed considerably, Graham notes. “In the two quarters following the six pricing reductions in the first quarter of 2014, AWS revenue growth decelerated from 69% year over year to 43% in the second and third quarter each.”

Amazon Web Services accounts for about 10% of Amazon’s revenue, but it’s a much more important source of its operating income. In fact, without Amazon Web Services the company would have posted a loss in its most recent quarter because of losses in other divisions. AWS posted $861 million in operating income, while the overall company made $575 million.

It’s easy to get distracted by Amazon’s many innovations – it’s opening cashier-less grocery stores and even sells its own clothes now – but investors should be wary if momentum stalls for Amazon Web Services.

Big Picture: Amazon’s cloud computing business is showing some worrisome signs, as the company has cut prices.

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