Amazon vs Google: The IaaS wars

Google cut cloud prices. Amazon follows suit. Skirmish over, but war continues. Who will win?

As buyers of cloud services you have two major competitors to look at, Amazon and Google. Unlike most competitors in major, capital intensive industries, these two have very different business models.

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Amazon is a wholesaler with global consumer reach. They rely on selling huge volumes at low margins to millions of customers.

Google is an advertising company. They rely on access to consumer info to provide highly profitable targeted advertising to millions of businesses.

Amazon invented the wholesale infrastructure-as-a-service business. While Google had similar opportunities in IaaS, they've focused on software-as-a-service.

Significant competitors include Microsoft, Rackspace, Apple, IBM, HP, EMC, where significant refers more to potential than current business.

Amazon vs. Google on money

Amazon's results reflect the wholesaler mentality. Their profit margin is a thin 0.38 percent on revenue of $78.12 billion, while Google earns a hefty 20.91 percent on revenues of $62.29B. (All figures from 2013 annual 10-Ks.)

Both are growing fast with year-over-year quarterly revenue rising 22.8 percent for Amazon and 19.10 percent for Google. Both spend billions each year on R&D and — vital for the cloud segment — property, plant and equipment (PP&E).

Amazon vs. Google on strategy

Amazon makes its money selling products to consumers and businesses. Its financial strategy is based on free cash flow — cash flow less buys for PP&E — that is both conservative financially and radical in its long-term view.

Google makes its money selling information about users to advertisers to maximize ad effectiveness. It works well and has produced a gusher of cash used to grow its advertising revenue while also funding a number of services such as Google Apps, Gmail and Android that support consumer involvement and data sharing along with "moonshot" projects such as self-driving cars, FTTH, Google Glass, and more.

Amazon vs. Google on IaaS

Gartner recently estimated that Amazon Web Services (AWS) offers five-times the utilized compute capacity of the rest of the cloud providers. Amazon's revenue category (Other) that includes AWS is showing accelerating growth, more than doubling from 2011's $1.6B to 2013's $3.9B. They've aggressively rolled out new services too.

Google came late to the IaaS war — launching in 2012 — but their recent price cuts, which Amazon matched, heralds a focus that is new. Like Amazon they've been an innovator in scale-out architectures and have a massive internal compute infrastructure.

The Storage Bits take

What does all this mean? While Amazon has thin margins, their free cash flow model means they take a long view on investing for the future, which is good for companies who want a long-term cloud provider. They're ramping up their sales and support for cloud customers as well, an area where they've been weak.

Google's much smaller effort is just one of many competing projects, but is supported by Google's much higher profitability and deep technical bench. But it isn't clear that Google's cloud offerings are core to the company's "organize the world's information" mission. Nor does it seem likely that their stellar ad sales teams can transfer customer skills to IaaS.

Bottom line: this is Amazon's race to lose. Their wholesaler model and first-mover advantage means they will continue to build on their substantial lead, with a goal of long-term profitability based on scale and service. 

That's a combination that most enterprises will embrace. That is, assuming our friends and fellow Americans at the  NSA don't destroy American IaaS competitiveness. Which is a big if, sadly. 

How do you handicap the race?