IT crisis looming: 'What if AWS goes pop, runs out of cash?'

Canalys Channels Forum 2014 The big public infrastructure-as-a-service (IaaS) players may be on the brink of a crisis as cataclysmic as the 2008 banking crash, as they slash prices while spending billions on building out and staffing their operations.

Or so claimed Steve Brazier, CEO at channel beanie Canalys, who warned resellers steering their customers in such a direction to be very careful about the financials of their cloudy suppliers.

“Hundreds of millions of dollars has been spent on building out public cloud infrastructure. We don’t know anybody in the world who is profitable,” he told an audience of 900 at the Channels Forum 2014.

The economics of the market is “somewhat like” the classic “pyramid scheme”, with providers launching services, making promises around performance, winning more customers, building more data centres, adding technicians, and cutting prices to beat the competition.

Brazier said maintaining that approach was only possible “if you are getting new customers to sign up faster than your prices are going down”.

Canalys estimates Amazon Web Services lost $2bn in the last four quarters, and the parent is forecasting losses of between $410m and $810m this quarter.

“We believe most if not all of that is related to AWS,” he said. The division cut prices by 36 per cent in Q2 and this hit revenues at a time when cap-ex increased 51 per cent to $1.29bn.

“It is a difficult situation for them.”

Neither Microsoft nor Google break out the financials for their public infrastructure clouds but the analysts said it suspects the dynamics are “very similar”. Rackspace, one of the “early pioneers” of public IaaS is trying to exit the sector and beef up its managed services biz.

He said nobody predicted the financial meltdown in the banking sector, “but we see the very real potential for a similar crisis in the public cloud market, serious collapses. We have built a business model where there is systemic risk”.

The CIA runs on AWS, “what happens if AWS goes pop, runs out of cash? A very serious issue. They’ll have to be rescued, bank bail outs or Federal bail outs just like with the banks”.

It may come down to which vendors have the deepest pockets, with AWS sitting on $5bn of cash, Google of $61bn and Microsoft on $86bn.

“Microsoft and Google can clearly fight this battle for a very, very long time but Amazon, it’s becoming more questionable.”

He appealed to AWS and others to release their public IaaS numbers, but told channel partners that without this, they were asking customers to make a risky bet.

“What you need as channel partners are financially sound, trustworthy cloud providers,” said the CEO.

Of course the keynote comments could be interpreted as an analyst trying to make headlines, but other old world vendors were quick to weigh into the debate.

Nick Earle, Cisco senior vice president of worldwide cloud and managed services sales, described the situation as a “coming crash” and agreed only Microsoft and Google “can survive the shake-out”.

The public IaaS sector is still in its early stages, said Sue Barsamian, worldwide channel head at HP’s Enterprise Group, “there are still economics to be worked out and profitability equations to be guaranteed from a vendor perspective”.

“As the scale grows in public cloud you’ll see the economies get better for those providers”.

We called Google, Microsoft and Amazon for comment, but have yet to get any. We'll update of and when we hear more. ®