Amazon’s Q2 Numbers Hint at Risky Cloud Game

Amazon’s Kindle Fire.

When it comes to certain aspects of cloud computing, Amazon is the dominant player. While its success has encouraged rivals and imitators, no company has managed to eclipse it as a provider of Infrastructure-as-a-Service (IaaS) to developers and organizations.

In addition, Amazon has expanded into the consumer cloud with its Kindle Fire tablet. Based on a heavily modified version of Google Android, the device is essentially a vending machine for e-books and streaming Amazon content. Although Amazon remains tight-lipped about actual sales numbers, analysts believe that millions of Kindle Fire units have sold since its release in late 2011.

However, success in the cloud hasn’t translated into enormous profits on the scale of Apple. For the second quarter ended June 30, Amazon reported a 96 percent decrease in net income from the year-ago quarter—that’s despite a healthy 29 percent increase in net sales. Although part of the dip was attributable to Amazon’s acquisition of Kiva Systems, which makes robots for warehouse automation, the overall loss isn’t a one-time event: the company expects to see its operating income dip again in the third quarter of 2012.

Meanwhile, Amazon continues to invest heavily in technology. Purchases of fixed assets, such as internal-use software and Website development, totaled $657 million for the quarter, a significant rise from $433 million a year ago. “Both fulfillment and technology investments will likely continue to grow,” Sejuti Banerjea, an analyst with Zacks Investment Research, wrote in a July 27 blog posting. “We do not consider this negative, since differentiation among online retailers is difficult and better experience and support are the things that can drive traffic.”

If one believes the rumors, Amazon plans on following up its original 7-inch Kindle device with a handful of new tablets by the end of 2012. And at least a portion of that $657 million invested in technology will find its way into new infrastructure and services for its business-cloud offerings.

But Amazon also faces some tough competition in months ahead. Microsoft and Oracle both want a piece of Amazon’s cloud market, while PaaS and IaaS startups are always cropping up with big dreams and lots of venture funding. On the consumer side, the Nexus 7 tablet is showing early signs of solid sales, which could make it harder for Amazon to dominate the Android tablet market. And Apple’s app and media ecosystems show precious little signs of slowing.

In light of all that, Amazon seems to be playing something of a risky game, betting that its innovations can outpace the advances of fierce competitors. But it’ll take several quarters, most likely, to see if those bets pay off.

 

Image: Amazon

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