(Editor’s note: Jillian Mirandi and Meaghan McGrath are analysts at Technology Business Research.)

HAMPTON, N.H. – AWS’ public cloud dominance will remain unchallenged – but dictates that AWS determine its “next act” to stay relevant for the long-term.

Over the last two months, AWS has expanded its partner ecosystem, adding AT&T and Verizon to improve networking and hybrid IT integration capabilities, launched its second EU region in Frankfurt to address data sovereignty issues, and introduced Directory Service to integrate on-premise Microsoft Active Directory, or set up new, AWS-based directories. These recent launches highlight AWS’ strategic shift to enter global hybrid IT conversations, and willingness to work more directly with large, traditional vendors.

TBR believes public cloud IaaS will be dominated for the foreseeable future by AWS, Microsoft, Google and IBM SoftLayer along with regional players including Alibaba. Public cloud IaaS is a scale-game, and one which the aforementioned vendors will win. AWS remains significantly larger than Microsoft and Google in terms of public cloud IaaS revenue, generating an estimated $4.7 billion in 2014, while Microsoft will generate an estimated $156 million and Google an estimated $66 million in the year (to note, Google Compute Engine was made generally available in December 2013, and Microsoft Azure IaaS in April 2013, giving AWS a 6 year head start). Supported by 90% year-to-year AWS usage growth and over 350 service and feature releases over the last nine months, noted by Amazon executives, TBR estimates that AWS generated $1.2 billion in 3Q14, growing 43% from the year-ago quarter. However, continued price cuts, such as the 28% – 51% cuts in April, pressure top-line revenue growth and margins, but drive increased usage among customers.

This game of scale has led traditional-now-cloud vendors HP, Dell, Verizon and Rackspace to realign their cloud portfolios away from public cloud and towards private cloud, professional services and hybrid IT. TBR believes the shift away from public cloud IaaS will continue among vendors as infrastructure build-out costs and competition increase, while prices and margins decrease. Further, traditional-now-cloud vendors have valuable capabilities such as networking, security, industry expertise and professional services that they can leverage to drive their own type of cloud-driven revenue. TBR projects AWS will take advantage of current mind and wallet share among its customers and partners to understand how it can best position its own entry into hybrid IT. While TBR notes a partner-led migration is a necessary, logical step, TBR believes AWS has time to delve further into its own hybrid initiatives to understand what direct delivered and sold hybrid clouds can drive over the long-term.

AWS is teaming with AT&T and Verizon to improve multi-vendor integration and enable hybrid IT through networking-centric partnerships

In September and October, AWS announced partnerships with Verizon and AT&T respectively. These partnerships are symbiotic to both AWS and the networking giants and underscore customer demand for hybrid IT and multi-vendor environments. The integration will allow customers to benefit from AWS’ highly scalable and cost-effective public cloud, while leveraging on-premises data centers and private clouds offered by AT&T and Verizon. Prior to these partnerships, AWS customers could leverage AWS Direct Connect (launched in 2011) to connect to data centers through AWS via a dedicated network connections. To date, AWS has over 50 Direct Connect partners, the largest being AT&T, Verizon and NTT. AWS’ partnership with AT&T is through inclusion of AWS in AT&T NetBond, which will go live in 2015. This partnership allows AWS and AT&T customers to securely connect through AT&T’s private IP. Similarly, AWS’ inclusion into Verizon Secure Cloud Interconnect (SCI) allows AWS and Verizon customers to connect via Verizon’s private IP.

AWS announces an EU (Frankfurt) region to comply with EU regulations, especially in Germany, and drive European growth

AWS’ launch of a German region, available immediately, will accelerate adoption of AWS as the country is one of the more strictly regulated and privacy-conscious nations. Marking its 11th global region, and second in the EU following Ireland, the new facility located in Frankfurt will allow customers to keep data inside German borders, addressing regional data protection regulations, and extending opportunities for adoption of AWS’ cloud portfolio throughout Europe. The new region also appeals to the environmentally-conscious customers, an area of higher-concern overseas than in the U.S., as it enables them to run on carbon-neutral power. TBR expects that, similar to other environmentally friendly data centers such as Facebook’s Prineville, Oregon data center, AWS’ third carbon-neutral region will bring positive publicity for the vendor.

The European market, and the German market in particular, has faced data sovereignty challenges in adopting public cloud, and we believe sales cycles began to slow after increased fear from the Snowden case, widening the gap between U.S. and European public cloud adopting. Further, European vendors such as U.K-based British Telecom (BT), German-based Deutsche Telekom (T-Systems) and France-based Orange have been gaining cloud traction among their respective countries, thus twisting the arm of AWS. TBR believes that a German data center was required for AWS to increase growth in Europe and we expect ongoing investment in similarly highly regulated countries. Prior to European expansion, AWS launched a Chinese region through partnerships in December; however this region remains in limited preview.

AWS continues to win public cloud IaaS market-share and mind-share, leading to competitors publicly attacking the business unit from all angles

AWS partners, customers and evaluators are beginning to more seriously consider other solutions, namely from Google and Microsoft, as competition heats up. Ongoing discussions have highlighted AWS as more expensive than aforementioned competitors, and that technologically, Google is pulling ahead. AWS is also beginning to lag in the PaaS space as compared with competitors such as Google and Salesforce.com. AWS Elastic Beanstalk, a free service, acts more of a deployment and management layer than a developer-centric platform on which to build applications. AWS Elastic Beanstalk has worked well to date, attracting thousands of developers; however, it remains focused on the hardcore developer market whereas other platforms are vastly simplifying development to grow among “citizen developers”.

The most recent targeted AWS attacks have been from Microsoft and Oracle. Days prior to Amazon’s earnings call, Microsoft executives including CEO Satya Nadella, increased their competitiveness against AWS, announcing a new memory-intensive “G-series” for its Azure public cloud with twice the memory of AWS virtual machines, as well as attacking the validity of AWS’ partnership approach to hybrid cloud. Oracle, having positioning itself as a one-stop-shop for everything cloud (IaaS, PaaS and SaaS), noted that it would join the ongoing pricing wars that AWS is involved against Google and Microsoft. Thought late to market with its full cloud stack, Oracle’s ability to move any Oracle database to the cloud by simply pushing a button, customers’ ability to choose public or private deployments, all marketed with the regular tenacity Oracle exudes when confronting threatening vendors, is expected to challenge AWS’ future growth.