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Amazon.com (Nasdaq: AMZN) is well-known as one of the leading e-commerce sites in the world. But, all that might change over the next few years as Amazon shifts into a higher-margin business.
Recently, Netflix (Nasdaq: NFLX) garnered some media attention after reporting a service outage on Christmas Eve. Netflix blamed Amazon on the event, which may have caught many by surprise: what would a competitor in streaming media have to you with your ability to get content to people.
The same might be said for AirBnb, Spotify, Pinterest, and others. All of the companies rely on Amazon Web Services (AWS) as a hosting environment.
The WSJ notes this morning that AWS is the Internet’s fastest-expanding business. Revs of $2.1 billion in 2012 are expected to expand to $3.8 billion in 2013. Amazon’s total retail revs are expected to increase just 25 percent to $73.6 billion for the year.
One Macquarie analyst sees the market for AWS expanding to $38 billion by 2015, while Sanford C. Bernstein expects revs at AWS hitting $15 billion to $20 billion by the end of the decade.
Growth isn’t free though and Bernstein said AWS consumed about 39 percent of Amazon’s $2.7 billion CapEx allotment in 2012. That’s a high price to pay for such a small portion of overall sales.
The service becomes key for smaller firms that don’t have the capital to build-out infrastructure as well as mature companies that want to test out a new idea, but at a low cost. Amazon CEo Jeff Bezos has said that AWS can grow to be as large as the company’s retail business…if not bigger. Amazon plans to do this by beating peers like Google (Nasdaq: GOOG) and Rackspace (NYSE: RAX) on price. Since unveiling AWS in 2006, Amazon has cut prices on the service 23 times.
Margins will suffer in the interim; AWS reported a skinny 1.8 percent margin last year, versus 32.2 percent at Google and 12 percent for Rackspace. Bernstein sees AWS margins expanding to 25 percent over the long haul, giving a boost to Amazon’s overall margins.
Investors willing to wait should be rewarded with even more upside out of Netflix. The stock is currently at all-time highs Monday.
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