In the new research report published Monday morning, analysts Scott Devitt, Andrew Ruud and Nishant Verma come to a possibly disconcerting conclusion for any investors banking on Amazon for short-term returns. The report’s gist: “After analyzing Amazon.com’s cost structure in detail and by segment, we conclude that there are far more variable costs than investors believe, leading to an overly optimistic timeline for margin expansion.” But Amazon Web Services is an opportunity Amazon might be able to exploit.
The report estimates that AWS was responsible for $1.19 billion in revenue in 2011 (Ipredicted in October the business was on a billion-dollar run rate), of which $108 million (or about 9 percent) was sheer profit. It’s able to maintain this margin while constantly dropping prices on its cloud services, the report contends, because AWS uses a cost-plus pricing model. That is, it just adds a premium (about 10 percent) on top of the cost of delivering those services, which continue to drop as Amazon leverages its economies of scale to buy and operate more gear and bandwidth at lower prices.
Although AWS margins remain flat, the report notes that AWS also comprises a significant portion of Amazon’s overall technology spending, so being able to drive steady, predictable profit from it is a good thing. Non-AWS technology spending, the authors estimate, is about 4 percent of net sales — “represent[ing] the largest opportunity for operating margin expansion in the near-term.” Keeping those cost down means a greater percentage of revenue goes toward profit.