Amazon, Google in investment mode; Building clouds isn't cheap

Two Internet giants are investing heavily in their businesses and the Wall Street types are squirming. Every once in a while a company has to flip the bird to the bean counters and go for it.

Two Internet giants are investing heavily in their businesses and the Wall Street types are squirming. Every once in a while a company has to flip the bird to the bean counters and go for it.

If you've followed this industry long enough, Amazon's second quarter earnings conference call would have given you flashbacks. Why? Amazon is building out fulfillment centers---13 to be exact---and investing in infrastructure for Amazon Web Services. And Amazon is even hiring people, 2,200 or so in the quarter. It has been about three or four years since Amazon had to build out infrastructure. Amazon has been freaking people out with building sprees for more than a decade. So far, so good.

Amazon's hires were mostly operational types. Needless to say, fulfillment centers, servers and people don't grow on trees. They cost money. And Amazon's expenses were up so much that earnings were whacked.

Tom Szkutak, Amazon's CFO, said (as he answered yet another question about capital spending):

The largest pieces of the increase are related to capacity, and it's capacity both from a fulfillment perspective and an infrastructure perspective. When I say fulfillment, it's to support our fast-growing retail business as well as our fast-growing filled by Amazon business where we fill on behalf of our partners. From an infrastructure standpoint, we are supporting, again, our retail business. But also, we have an AWS business that's growing very, very strong right now. And so we are supporting that growth by adding CapEx. So that's what's included in the CapEx.

Indeed, Amazon is spending about $200 million a quarter on capital expenses, but the third quarter will see about $300 million. Szkutak said the money is being spent on everything from solar to Kindle to other ventures. But Amazon Web Services and third party fulfillment is grabbing the most investment. "We are supporting the growth in Kindle, supporting our solar business, supporting our [fastly]-growing Web services business," said Szkutak.

But let's not panic too much. Amazon hired 2,200 people in the quarter. When unemployment is pushing 10 percent we should be cheering those hiring sprees.

However, Wall Street analysts are going to cringe. They freaked when Verizon decided to build out its FiOS network. They squirm when Google loses a bit of spending discipline over some crazy idea like Google Apps. Ditto for Amazon.

Patrick Pichette, CFO of Google, noted that you have to spend money to create a big business.  Pichette said:

Successful products do require investment. That is why we are focusing our resources on products that, as you all know, leverage computer science to solve our big problems, offer great ROIs, and very large growth opportunities.

And oh by the way Google added 1,200 employees in the second quarter---a lot of that via the AdMob acquisition. Pichette also had to remind folks that it has a penchant for investing in data centers. "CapEx for the quarter was $476 million, again primarily related to our data center operations. And as a reminder, we continue to make significant CapEx investments, and it just turned out to be lumpy from quarter to quarter," he said.

It's not too surprising that Google and Amazon are two of the largest cloud computing players. The cloud doesn't come cheap, but maybe we should be cheering them on instead of worrying about a few pennies a share.


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