Editor’s note: Amazon Web Services’ 1Q16 results suggest another strong year of performance lies ahead, with a continued focus on database products and global expansion, says Technology Business Research analyst Molly Gallaher Boddy.AWS continues database-driven growth while competition intensifies.

HAMPTON, N.H. – AWS is continuing database-driven growth while competition intensifies.

On its 1Q16 earnings call, Amazon (Nasdaq: AMZN) executives announced that its Amazon Web Services (AWS) segment was a $10 billion business, referring to the run rate reached, as the business grew 64% year-to-year to $2.6 million, with an operating margin of 23.5%.

AWS’ first quarter results reflect the continued momentum the segment gained throughout 2015, and also indicate AWS’ ongoing importance to Amazon’s overall corporate business. TBR notes that AWS’ public cloud continues to be the main driver of the business’ success, with high double-digit growth. The growth of AWS’ IaaS is supported by the company’s ongoing global data center expansion, with 11 availability zones and five new data center regions set to be opened in 2016.

As part of its cloud success, AWS maintains a near-constant rollout of new services, with the company noting the availability of its AWS Database Migration Service, Amazon Inspector, additional storage options for its Amazon Elastic Block Store, and Amazon Lumberyard as some of the 214 new services and features added in 1Q16, up from 170 in 1Q15. With Amazon Aurora continuing to rank as AWS’ fastest-growing product, the availability of AWS Database Migration Service is a key release, helping customers move from on-premises production databases, such as SQL server, to Aurora.

While AWS’ 1Q16 revenue growth projects another quarter of success, TBR notes that year-to-year growth will decelerate over the coming year as AWS’ large revenue base and increased competition hamper large growth percentages. TBR estimates that AWS’ growth will slow to 48% year-to-year in 2Q16 particularly as recent proof points suggest that AWS will face increasing contention in adding new customers as peers like Google and Microsoft message the business-specific tools and outcomes available to their users.

TBR believes AWS would benefit from making changes to how it markets it cloud offerings and bundles services so that it can reach line-of-business users outside its key developer demographic. However, there is not a significant threat to AWS’ financial position in the short term, and the segment will continue to be a key driver of Amazon’s corporate performance.

Competitors’ large-logo proof points challenge AWS’ position as the default public cloud vendor

A number of recent news stories suggest that AWS will be increasingly challenged in its core public cloud infrastructure market without adjustments to its marketing message and product packaging. Though AWS has a growing list of tools and features as indicated on its 1Q16 earnings call, TBR believes that customers are looking for more elevated functionality and outcomes-focused bundles, giving enterprises without teams of skilled, internal developers the ability to more easily manage their cloud infrastructure. Due to its scale, rate of growth, and early-to-market position, AWS has maintained a lead in public cloud, but recent customer wins suggest that peers like IBM, Microsoft, and, in particular, Google, are gaining traction in the market with competitive solutions. In addition, Google’s platform features, membership in the OpenStack Foundation, and its plans to open more data centers over the next two years, position it as a growing threat to AWS. In March, streaming music provider Spotify announced that its internal infrastructure would be moved to Google’s platform.

Further, some customers look to reduce their dependence on AWS by diversifying their infrastructure environments, which threatens AWS’ share of wallet within these accounts. Reports surfaced in March that Apple, a large AWS customer, would move part of its iCloud infrastructure to Google; document storage vendor Dropbox also announced in March that it would move some storage off AWS and to its own infrastructure, marking usage reductions for AWS.

Andrew Jassy’s promotion to CEO shows the centrality of AWS’ performance to corporate business

Despite increasing competition, AWS has not been significantly financially impacted by the recent move of customers to competing cloud vendors, and TBR maintains that Amazon will not divest AWS. In addition to being a consistent driver of profit for Amazon, AWS is able to lend economies of scale to Amazon’s e-commerce infrastructure needs, and will thus continue to be utilized by Amazon at the corporate level.

In April, AWS Senior Vice President Andrew Jassy was given the title of CEO, AWS. Jassy, who has been with Amazon since 2003, has helped to make cloud central to Amazon’s overall business. The change in title highlights the fact that AWS is an important driver of revenue for Amazon, and requires its own CEO to continue such high growth. Jassy’s colleague, Jeff Wilke, was made CEO of Worldwide Consumer, with Jeff Bezos remaining CEO of Amazon.

(C) TBR