Is Demand Slowing For Amazon Web Services?Is Demand Slowing For Amazon Web Services?

In the first quarter of 2009, Amazon's net sales surged 18% to $4.9 billion, fueled by sales of electronics and other general merchandise, which jumped 38% compared to a year ago. Holding the company back, however, was its "other" sales category, which grew only 8% and includes revenues from Amazon Web Services.As I've pointed out before, Amazon doesn't break out financial details on its Amazon Web Services business. AWS sales are lumped into a non-retail category called "other," which includes Amazon Enterprise Solutions, miscellaneous marketing and promotional activities, and co-branded credit cards. In the first quarter, Amazon's "other" revenues totaled $120 million, an 8% increase over the first quarter of 2008. These "other" sales accounted for 2% of Amazon's overall business in the quarter, compared to 3% a year ago.

For the past few quarters, Amazon's "other" sales have been growing robustly--34% in the fourth quarter of 2008 and 42% in the third quarter of 2008, compared to the same periods a year earlier--and I surmised that the growing popularity of AWS was a contributing factor. (For my analysis on Amazon's 4Q 2008 results, see "Amazon Web Services Help Fuel Blow-Out Quarter.")

So, what explains the modest growth of Amazon's "other" revenues in the first quarter, and is AWS to blame? In short, we don't know, but there are a few bits of information to analyze.

For one thing, $101 million, or 84%, of Amazon's "other" revenues in the quarter were generated in North America, so whatever the explanation for the single-digit growth rate, it probably has roots in the U.S. market. Also, in the first quarter of 2008, Amazon's "other" sales climbed 43%, so last quarter's unimpressive performance can't be blamed on seasonality or on a normal dip in first quarter business activity.

Several financial analysts asked about AWS on Amazon's first quarter results conference call last week with CEO Jeff Bezos and CFO Thomas Szkutak, but the answers to their questions were less than satisfactory. At one point, the execs explained that Amazon's "other" sales "tend to be a little lumpy from quarter to quarter." At another, they said there's "good traction" among companies of all sizes, including enterprise accounts, for AWS, but offered no supporting data. (You can listen to a replay of Amazon's conference call here.)

Based on the publicly available data, it's possible that AWS first quarter sales grew at a significantly slower rate than previous quarters. If so, why? Does it reflect slowing demand for Amazon's on-demand IT infrastructure?

It's also feasible that AWS revenues continue to grow at a steady, impressive pace, but that the growth is masked by the small size of Amazon's cloud business. We simply don't know. The financial analysts who monitor Amazon on behalf of shareholders need to press the company for an explanation that goes beyond things being "a little lumpy" in an emerging part of its business.