Cloud: % Operating Cash Flow Spent on CAPEX
I recently read a Motley Fool article by Timothy Green suggesting Amazon and Rackspace will be the likely losers in the cloud wars. The basic premise is that the percentage of operating cash flow spent on capital expenditures can be used as a measure of the flexibility a cloud provider has to compete in the current cost war. With Rackspace at 101%, Amazon at 68%, Google at 39% and Microsoft at 14%, the proposed conclusion is clear: Amazon and Rackspace will have a hard time competing with the growth engines of Google (AdWords) and Microsoft (Office, Windows).

Regardless of what you think of AWS, it’s clear there is an increasing sentiment that Amazon’s dominance in the cloud is at risk. It amazes me how quickly the industry went from ignoring Amazon (2006-2009), to denying their success in the cloud (2010-2013), to prognosticating their demise (2014).

Now don’t get me wrong: I believe Amazon does have a long term challenge competing against a company like Google. For all its technology prowess, its business model is much closer to a retailer like Walmart than a software company like Google. You need to look no further than Q1 net income to see the stark contrast of the business models: Amazon $108M, Google $3.45B. Google AdWords is the gift that keeps on giving, producing growth and profits that show no signs of deceleration. Amazon has no equivalent.

But Motley Fool’s analyst made a gross oversimplification. CAPEX consists of many types of expenditures, some of which are likely to re-occur in future quarters (e.g. building new data centers, purchasing servers) - and some of which are highly unlikely to re-occur (e.g. purchasing new office space to expand headquarters). To illustrate the variability of this measure, if you decrement a purchase of land / office space Amazon made in Seattle from their Q1 CAPEX, their percentage of operating cash flow spent on capital expenditures drops from 68% to 37% (note: Google is at 39%).

So I suspect Amazon will survive to fight at least another quarter or two. ;)

*Title shamelessly taken from the famous Mark Twain misquote: “The reports of my death have been greatly exaggerated.”*