Skies darken for Amazon cloud service unit

NEW YORK — When the covid-19 pandemic hit three years ago, Amazon was one of the few businesses that thrived.

Customers flocked to the online commerce site amid global lockdowns. But even when those lockdowns eventually lifted and Amazon’s sales slowed as people returned to stores, the company could still count on its cash cow: Amazon Web Services.

Now even the lucrative cloud services business is feeling pressure.

Companies are trimming their expenses amid concerns about inflation and fears that a recession might be around the corner. And many of them are being more cautious about their cloud costs, leading to a slowdown in one of Amazon’s profitable businesses. The tech giant’s first-quarter earnings report showed that its cloud unit generated $21.4 billion and was growing at 16% in the first three months of this year — much slower than the 37% growth rate a year before.

It is under those circumstances that AWS will host its two-day security-focused cloud conference starting Tuesday in Anaheim, Calif. The meeting is one of several big events Amazon hosts annually to tout its cloud offerings to its clients or other companies that might be interested in storing their data on its vast network of servers around the world.

AWS is the market leader in the cloud arena, and its customers include some of the world’s biggest businesses and organizations such as Netflix, Coca-Cola and government agencies. But Amazon executives have said the unit is facing short-term headwinds as companies look for ways to save money by reallocating their spending or cutting back on features they don’t need.

Results for the second quarter aren’t expected to be released until late July, but there’s some indication that the slowdown hasn’t reversed course. The company told analysts in April that AWS’s growth rate for that month was 5% lower than the first quarter, souring the mood among investors who sent its share prices lower after hearing the news.

Google and Microsoft, which offer competing cloud businesses, posted strong showings in their respective businesses during the most recent quarter, but they’ve also seen some slowdown in recent months. Still, it’s easier for them to keep growing compared to Amazon, which can face more hurdles since it’s already a market leader and has to grow a larger customer base, said Sid Nag, an analyst at the information-technology research and consulting firm Gartner.

Another challenge for Amazon, Nag said, is that businesses are increasingly using multiple cloud services and moving away from single providers, a move that can boost tech options and prevent companies from being reliant on only one vendor. The firm predicts that more than 90% of businesses will use multiple providers by 2026, a jump from 76% in 2020.

“Amazon’s seeing an artifact of that phenomenon affecting their growth rate,” Nag said.

Despite the pullback, AWS is still expected to be a longterm revenue driver for Amazon. Nag said many companies can’t afford to spend the amount of money it takes to run their own data centers, which would require expensive equipment and real estate. And with this in mind, Amazon is making big investments.

Last month, the tech giant said it plans to spend more than $12 billion on cloud infrastructure in India by 2030, adding to multi-billion-dollar cloud investments it announced earlier this year in Malaysia and Australia. Amazon is also planning to build five new data centers in Oregon after it was awarded a controversial $1 billion tax break.