On the heels of a blitzkrieg of new product announcements and third-quarter earnings that blew away estimates, some people are asking if Amazon Web Services (AWS) is destined to become the Microsoft of the cloud. Not likely, said veteran cloud watcher and Wikibon analyst Brian Gracely (pictured below). The market is too big and diverse for any one vendor to dominate the cloud the way Microsoft did the desktop. While Amazon’s data center footprint is enormous, it’s a marginal player or even a non-participant in some segments of the market. We asked Gracely what factors could limit Amazon’s future growth.

Customer hesitation

“Right now the biggest inhibitor is IT as usual,” Gracely said. “That’s when IT organizations decide they’re doing fine, they’re afraid of the cloud and they don’t need to change.” He noted that enterprise IT organizations favor incremental change over massive architectural shifts, and Amazon’s limited hybrid cloud options make it less attractive to some big businesses.

Infrastructure costs

Although Amazon’s reported profit margins in the last two quarters were eye-popping, they don’t necessarily reflect the real cost of operating a large IaaS platform. Much of the investment in Amazon’s data centers was buried in past earnings reports, and future buildout costs could damp down profit margins.

Noting that “All of the big cloud vendors want to highlight how many data centers they have,” Gracely pointed out that “Data centers are expensive. There’s always the possibility AWS can be constrained by how fast they can build them or partner with data center partners..”

Costs will be particularly high as Amazon expands into Europe, where many countries require that data be stored within local borders. “The big cloud providers who want to get into Spain or France have to put facilities there,” Gracely said. “They can always partner with a colocation provider, but I don’t think that’s Amazon’s strategy.”

While Amazon’s most recent balance sheet showed a hefty $14 billion in cash, that pales next to Microsoft’s $96 billion in cash and short-term investments. Even IBM has more than twice the assets of Amazon.

Could Amazon.com spin out its cloud subsidiary in order to raise expansion capital? Gracely thinks it’s unlikely. Amazon values AWS’s profit contributions, which help drive other parts of the business.

Competition

Although Amazon dominates public cloud infrastructure, other players have built up significant beachheads, particularly in hybrid cloud and software-as-a-service (SaaS). “People think of this as a winner-take-all game, but we’ve published research that says if you add up all the cloud revenues, Microsoft is actually ahead of AWS at this point, though that includes a lot of diverse services,” Gracely said.

There is clear evidence that Microsoft has overhauled its culture and will be a formidable competitor going forward. “I think we’re going to see Microsoft grow as fast as AWS,” Gracely predicted. “That will be a big factor because Amazon hasn’t really had a lot of competition in the past. “

SaaS and hybrid cloud

While Amazon is often lauded for having vastly greater processing capacity than its direct competitors, the reality is that the overall cloud computing market is a lot more than IaaS. In fact, Wikibon predicts that SaaS will be a much larger market over the next 10 years, and Amazon doesn’t have a direct story to tell there yet. Many large SaaS vendors run on top of AWS today.

“The more we talk to customers, the more we hear that they feel comfortable with SaaS applications,” Gracely observed. “Customers may simply turn their spending that way instead of buying resources from AWS.”

The good news for Amazon is that many SaaS companies use AWS as a platform, so Amazon gets a piece of the pie either way. However, as SaaS players grow, some may opt to move to their own infrastructure.

Rather than battling Amazon in its core business, companies like IBM, Dell/EMC and Hewlett-Packard Co. are going heavily into services, using rich platform-as-a-service offerings like Cloud Foundry and targeting vertical markets. This could become appealing to enterprise customers as the cloud matures. “Customers may just say they’re going to look to more app-centric partners to help them move more quickly,” Gracely said.

Customer choice

Finally, the computer industry is so big and so broad that it’s unlikely that Amazon or anyone else will ever exercise the control that IBM did in the 1970s and Microsoft did in the 1990s. Gracely dismissed the question of whether Amazon will be the Microsoft of the cloud, saying this won’t be a winner-take-all game.

Even industry dominance isn’t what it used to be (see chart at right). “Back when everything was closed, IBM got 70 percent of every computing dollar, but even at the peak of its power Microsoft never got more than 30 percent of the dollars,” he said.  “The world has become so distributed that it’s harder than ever to dominate. I don’t think we’ll see Amazon become another Microsoft or IBM. The world moves too fast and it’s become too distributed.”

John Furrier, Stu Miniman, and Brian Gracely wrapped up day two of AWS re:Invent 2015 (20:19). They discussed talk of a merger between EMC and Dell, how business intelligence was front and center in the re:Invent keynotes and the incredible pace of innovation in the cloud.

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