Amazon CEO Jeff Bezos Amazon CEO Jeff Bezos

For a company that charges so little for its products and services, Amazon sure is worth a lot. Nowhere is this more true than in its Amazon Web Services (AWS) business unit. Despite dropping prices dozens of times over the past few years, one analyst is now projecting the value of the AWS business to top $50 billion by 2015, driven by success in its Marketplace.

At a mere 6X multiple on an estimated $8 billion in 2015 revenues, $50 billion may actually undervalue Amazon’s cloud business.

Selling Cloudy 1s And 0s

Other businesses command much higher revenue multiples than Evercore Partners gives AWS. Dropbox, for example, is seeking an $8 billion valuation, which represents a 34X multiple on 2012 revenues. And in Sillycon Valley, revenue-free Snapchat gets a 3,000,000,000X multiple.

And yet which of these can claim to be the future of enterprise computing, as AWS can?

AWS would almost certainly get a more bubble-esque valuation multiple if it operated more profitably. But as Amazon has done in retail, it generally favors pricing that gives it slim profits but a fat market share. It is pricing for future domination, in other words. So far this approach has ensured rapidly growing revenues, as Macquarie Capital estimates suggest:

Not that Amazon completely eschews profits. For example, like Apple and others it has introduced an app store of sorts, allowing vendors to sell digital services through the AWS Marketplace. As Evercore analyst Ken Sena explains in a research note: Amazon’s AWS “Marketplace [is] an important source of growth and margin expansion for AWS as Amazon collects 20% on the software billings, similar to its third party retail business with virtually all of it dropping to its bottom line.”

Sena goes on in his note to project Marketplace contributing $1 billion in the next two years, which represents 13% of projected AWS revenues, up from an estimated 5% today. Ultimately Evercore sees Marketplace accounting for 40% of AWS’ valuation.

Rosy Multiples On A Doomed Business?

In the past detractors scoffed at such optimistic projections. In early 2013, Macquarie Capital analyst Ben Schachter opined that AWS would generate $3.9 billion in 2013, worth up to $30 billion based on an 8X multiple. 

VMware’s vice president of Cloud Services, Mathew Lodge, slapped at the "chutzpah" of "assign[ing an] arbitrary multiple to a business with unknown revenue," while separately positioning his own company’s technology against AWS, finding it universally wanting (click to enlarge):

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Lodge's slide reveals the subtext behind most criticisms of AWS business value: it can't possibly last. That is, serious enterprises would never trust important workloads to Amazon’s Infrastructure-as-a-Service offering, leaving AWS to scrape nickels and dimes off the floor.And yet, if anything, AWS has surpassed expectations, and has demonstrated an ever-increasing relevance for serious enterprise workloads.

Developers: They Matter

As much as some may wish otherwise, the reason is simple: developers matter. Redmonk analyst Stephen O’Grady has gone so far as to suggest that “developers are the new kingmakers” within enterprise IT. Some scoff and suggest that developers may be relevant for introducing new technologies to the enterprise but that Operations holds the keys to ensuring real budgets get allocated to these technologies, the truth has been much more nuanced.

DevOps, it turns out, is very real. And DevOps loves Amazon.

There is a fundamental shift underway within enterprise computing, one that doesn’t completely overlook the Operations gatekeeper but also doesn’t slavishly bow to it. Developers, keen to get work done for the lines of business they serve, are routing around Operations bottlenecks and forever changing the shape of enterprise IT.

All of which translates into a very big AWS business worth, at the very least, $50 billion by 2015.

Lede image courtesy of Etech under a Creative Commons license.