Last week Amazon Web Services announced an operating profit of US$265 million for the quarter. It was the first time Amazon broke out the figures for its cloud business.
Meanwhile Apple turned in another record result with quarterly revenues of US$58 billion and earnings up 33 percent to US$13.6 billion.
Both companies did better than expected. The market thought AWS might be loss-making, perhaps break-even at best. Instead it is a US$5 billion a year business turning in a healthy margin.
Likewise Apple’s figure was well above analyst expectations.
What may have been overlooked is that Apple went past a 40 percent gross margin for the first time since 2012. That has a lot to do with the mix of products it sold including 61 million iPhones. Many of those iPhones were high-margin models with large amounts of storage.
Apple may not maintain that 40 percent gross margin, but it earns a better return from selling hardware than any rival. Pure software companies can get gross margins in the 80 to 90 percent range.
When cloud computing first appeared, analysts thought it could show similar high gross margins. It turns out selling cloud services is more like the non-Apple PC industry; a low-margin, high volume business.
That said, AWS managed a 13 percent operating margin, not high, but not shabby either. AWS occupies a special place in the cloud business. It’s the largest player and mainly sells cloud infrastructure.
The sweet spot for cloud service providers lies in the “will there be fries with that” options. IBM and Oracle want to play in the cloud market because being there gives them the option to sell high-margin software and services to customers.
This is what Amazon’s closest rival, Microsoft, does with its Azure cloud. By all accounts Microsoft’s cloud margins are not as good as AWS’s but they are improving.