Amazon Is Supercharging Its Cloud Computing Revenue

By Adam Levy Markets Fool.com

Image Source: Getty

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If you want to get the most out of that new tablet or smartphone you bought on Black Friday, you're going to have to download some third-party apps. The same is true of businesses using Amazon's (NASDAQ: AMZN) cloud computing platform, AWS. The tens of thousands of businesses using Amazon's cloud are also paying for various other cloud services like analytics and monitoring or data transfer services.

Last month, Amazon announced the addition of software-as-a-service subscription products to its AWS Marketplace. There are already 3,500 services in the Marketplace, and Amazon says over 100,000 customers already use it to find cloud services that meet their needs and work directly with AWS.

With the launch of SaaS subscription products in Marketplace, Amazon is moving toward some of the most valuable cloud purchases -- recurring subscription revenue.

Amazon's cloud computing app store

The AWS Marketplace works the same angles as Apple's (NASDAQ: AAPL) App Store. They each make it easier for customers to find third-party apps. They make billing easy by using the payment information customers already have on file. They make it easy to use the app by ensuring an easy installation process. These are benefits cloud software companies will pay for.

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Apple generated over $6 billion from app developers last year, thanks in part to its de facto monopoly over iOS app downloads. While Amazon doesn't benefit from being the only place to buy other cloud services, it can make a nice commission for other developers' work. And subscriptions open the door for those commissions to come in every month.

As Amazon adds more and more services to its Marketplace, it could become the first place businesses look when they need to add something to their current setup. It's done the same thing with its regular retail marketplace. It's added more and more products thanks to a growing number of third-party sellers, and now 55% of online shoppers begin their product search on Amazon.com.

Importantly, any revenue Amazon makes from the AWS Marketplace will be relatively high-margin. Amazon already has billing in place for its regular customers. Customers will just see additional charges for whatever services they bought or subscribed to in the previous month on their regular AWS bill. Unlike its retail business, third-party sellers don't require nearly as much overhead (like warehouse storage, shipping, etc.).

AWS is a big part of Amazon's future

Amazon's management has mentioned several times that AWS could grow to be a bigger part of its business than retail. In a press conference three years ago, Andy Jassy -- the head of AWS -- told reporters "[CEO Jeff Bezos] is very excited about the AWS business and he believes -- like the rest of the leadership team does that in the fullness of time --it is very possible that AWS could be the biggest business at Amazon." He repeated that message in an interview with the Seattle Times last month. That despite the fact that Amazon's retail business has nearly doubled since 2012.

Jassy mentioned the "capability to build further up stack" as another potential avenue to grow AWS and take on a market "that's trillions of dollars worldwide" in his interview with the Seattle Times. Moving up the stack means offering more sophisticated applications.

Things like offering SaaS subscriptions in its Marketplace will help it do just that. Not only could Amazon grab a commission off of sales, it could get more data on what enterprises are using its platform for. It could then use that data to develop new products or cater its existing products to fulfill customer needs better. Amazon already does that on the retail side of its business.

AWS accounted for over 60% of Amazon's operating income over the last four quarters. With its continued revenue growth above 50% and the addition of high-margin revenue from AWS Marketplace, it should continue to drive Amazon's profit growth for some time.

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Adam Levy owns shares of Amazon.com and Apple. The Motley Fool owns shares of and recommends Amazon.com and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.