In a less-than-stellar quarterly earnings report, Amazon reported a total loss of $126 million in the second quarter of 2014, due partly to expenditures in the technology infrastructure that underlies its ecommerce platform and its cloud computing services.
According to its quarterly report, Amazon’s net sales rose 23 percent to $19.34 billion in Q2 compared to the same quarter last year, but it has also been spending a lot of money.
It spent $2.2 billion of its operating budget on technology and content, which is about 40 percent more than in Q2 2013. It also more than doubled the money it spent on property and equipment leases to $920 million, mostly paying for technology infrastructure to support its operations but also its cloud computing division, Amazon Web Services.
Amazon has stated that investment in its data center infrastructure is crucial for its long-term potential as it moves forward, even though its quarterly results have made some investors uneasy.
In a Thursday conference call, Amazon CFO Tom Szkutak said, “AWS continues to grow very strongly”, mentioning 90 percent year-over-year usage growth (based on “aggregation of usage across all of our services”) for the quarter. To keep up with this demand, AWS has had to invest in technology infrastructure, which has contributed to $1.3 billion in total capital expenditures in Q2 2014 (compared to $855 million in Q2 2013).
Addressing the recent public cloud price war between Amazon, Microsoft, Google, and others, Szkutak said the AWS team is focused on “innovating on behalf of customers, operating these services at the highest quality levels, and they continue to work on getting more efficient, so that we can have great prices for customers.”
In the second quarter, AWS unveiled price reductions from 28 percent to 51 percent, depending on the service, and added a new, “general purpose” instance type for Amazon Elastic Compute Cloud that’s the lowest-cost Amazon EC2 instances currently available.
At its recent summit in New York City, AWS also unveiled some new capabilities for developers including Amazon Cognito for identity management, Amazon Mobile Analytics, and the AWS Mobile SDK. It also showcased a new cloud-based document collaboration service known as Amazon Zocalo.
Profits from the AWS division are lumped into an “Other” category which also includes third-party seller fees earned and related shipping fees, digital content subscriptions, and non-retail activities advertising services, and our co-branded credit card agreements.
This category, which netted $1.2 billion in Q2, is mostly from North American sales and only represents around six percent of Amazon’s net revenues, which currently come mostly from media, electronics, and general merchandise sales.
However, AWS seems to be propping up the “Other” category, which has grown nearly 37 percent compared to the same quarter in 2013, and could get a boost from foreign customers.
Like many of its competitors in the cloud space, Amazon seems to be going all-in when it comes to building out the physical infrastructure behind its cloud services, which could mean spending more money than it brings in for the short-term.
Amazon, however, is a company that had a reputation for operating at a loss for years, but eventually achieving dominance in the retail space. It’s certainly a gamble that this IT infrastructure will pay off down the road, but this is clearly a familiar move in Amazon’s game plan.