Amazon (NASDAQ:AMZN) is widely believed to be the market leader in cloud computing market and competes directly with Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and HP (NYSE:HPQ). Amazon’s pricing model of charging by the hour has been challenged by a new service ProfitBricks, which bills by the minute. The per minute service would be particularly attractive to companies or applications with constantly fluctuating computing/traffic requirements. Recently, the company announced an online marketplace^[1] where users of its cloud computing services can sell their reserved server instances to other companies. We expect the marketplace to help the company somewhat offset the threat posed by the bill by minute model.

See our complete analysis for Amazon

Instance Marketplace to bring in revenues at almost no incremental costs

Amazon Web Services (AWS) offers its users reserved instances^[2], which allow them to lower their cloud costs by making a one-time payment to reserve computing capacity for a specified time period and receive a discount on the hourly rates. The online marketplace would allow users to move their instances across AWS Regions, change it to a new type or sell capacity for projects that ended before the completion of their term. The AWS management console will be the gateway for these transactions.

We expect the marketplace to generate substantial revenues for Amazon, which will earn a 12 percent service fee on every transaction. As there are no significant investments required in rolling out or operating this service, the twelve percent fee should translate into substantial profits. The Infrastructure as a Service (Iaas) market is expected to grow to $5 billion by 2020.^[3]

Key Risks: Competing products at lower costs

ProfitBricks, an infrastructure-as-a-service company, lets customers spec out their own virtual machines and bills them by the minute, enabling greater control on the services they use.^[4] The two-fold flexibility advantage can translate into substantial savings for companies, which face significant fluctuations in traffic and computing needs as they don’t have to pay according to pre-defined instances and fixed rates. We expect the new pricing model to threaten AWS due to the cost advantages it offers. Besides ProfitBricks, another cloud computing provider CloudSigma^[5] offers a flexible pricing model, which lets users customize their technical specifications but charges them on an hourly or monthly basis.

We currently have a $222 estimate for Amazon which is 13% below the current market price.

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