Ever since Amazon Web Services emerged as the next big thing for e-commerce giant Amazon.com Inc a few years ago, Wall Street has debated whether the business mints money or just breaks even.
In a recent interview with Reuters, Adam Selipsky, a vice president at the unit known as AWS, made it clear the business is solidly profitable and will be for years to come.
We're very happy with the economics of AWS, he said. It can be a strong free cash flow generating business for the company.
AWS started offering computing power and storage remotely more than five years ago, making it a pioneer in the hot cloud-computing sector. While the business accounts for only about 2 percent of Amazon's revenue, it is growing rapidly. Chief Executive Jeff Bezos said last year it has the potential to be as big as the company's giant online retail operation.
Amazon doesn't disclose AWS results and hasn't commented on margins, so any clues may help analysts and investors form a more accurate estimate of the value of the business.
UBS analysts estimated operating profit margins of 15 percent to 20 percent in a research report last year. In contrast, Gene Munster, an analyst at Piper Jaffray, put margins closer to 5 percent in an August 23 note to investors.
Selipsky described AWS as a relatively low-margin business, but only in comparison with the fat margins of big technology companies, which can be higher than 50 percent.
Washington state neighbor Microsoft Corp had operating profit margins of 36 percent in the second quarter. The software giant's Windows division enjoyed margins of more than 60 percent, while its Server and Tools business had margins of 38 percent.
Tech companies in general have high margins, very high margins, Selipsky said.
We think we can run an attractive, large, profitable business that's incredibly low cost, he added. Other tech companies aren't wired to think about costs in this way. Our ethos is instilled from the top.
Selipsky was sitting across a new conference table at Amazon's headquarters in Seattle. The table was made of doors, complete with empty holes for handles. This harks back to when Amazon started in the mid 1990s. At that time, Bezos made tables out of old doors to save money.
A frugal approach may mean AWS can compete better with big technology companies that are considering expanding in cloud computing but are used to higher profitability.
There are a couple of other players in this business, but I consider Amazon the dominant player, said RJ Hottovy, an equity analyst at Morningstar. For tech companies to launch a competing business to AWS they would have to sacrifice margins.
When Microsoft launched its cloud business, Windows Azure, in 2008, Bob Muglia, senior vice president of Microsoft's server and tools business at the time, told the Seattle Times that margins might well be lower than some of the company's other businesses.
Muglia told Reuters last year that the shift to providing cloud services would likely shrink Microsoft's profit margins, but he hoped new sources of revenue would make up for that.
(Reporting by Alistair Barr and Bill Rigby; Editing by Gary Hill)