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Amazon may not be the king of the cloud forever

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Amazon CEO Jeff Bezos might be king of the cloud, but rivals are looking to take his crown.

Amazon Web Services (AWS), the company's cloud unit, last week reported that revenue surged some 60 percent in the second quarter to nearly $3 billion. The business also boasted all-time-high operating margins of 30 percent.

Dave Bartoletti, principal analyst at Forrester, estimates AWS will produce $12 billion in revenue this year. To put that in perspective, that's more than half of all the revenue the entire public cloud market will generate.

But the competition isn't sitting idle.

Cloud storage wars
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Cloud storage wars

Google parent Alphabet last week reported that its 'Other Revenues' segment, which includes its cloud services, jumped more than 30 percent, to $2.2 billion in the second quarter. (The company doesn't break out its cloud earnings separately.) Analysts say CEO Sundar Pichai's company has real advantages of its own.

"They have all the core infrastructure in place running Google search and YouTube," said Colin Sebastian, senior research analyst at Baird, adding, "It's already one of the largest cloud platforms. They are making it available to other third parties and competing with Amazon."

Google could catch up with Bezos within a couple years, Sebastian said. However, that would be a tough challenge given current market trends. (Google did not respond to requests for comment.)

It's true that Google runs a network of sophisticated data centers. It's won over corporate clients, from Home Depot to Autodesk, and its parent Alphabet now sits on a cash pile of some $80 billion. Still, Pichai's company controls just 5 percent of this cloud infrastructure market, according to Synergy Research Group.

In fact, the tech giant that controls the second-highest share of the market isn't Google; it's Microsoft, which retains a big sales force and longstanding client relationships.

CEO Satya Nadella's company is well on track to hit its goal of $20 billion in annual revenue from its cloud-computing businesses by the end of fiscal 2018, which includes Azure as well as Office 365.

Jeff Bezos, Amazon
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Synergy estimates Amazon is roughly three times the size of its nearest competitor, and the cloud leader is still experiencing significant growth: Its near-$3 billion in quarterly AWS net sales was a record quarter and translates to a year-over-year growth rate of 58 percent, according to Amazon.

Amazon's cloud profits more than doubled in the year-over-year period, hitting $718 million, up from $305 million a year ago. That made AWS more profitable than Amazon's North American retail business.

Forrester's Bartoletti argues that the cloud infrastructure war is a battle between Amazon, Microsoft, Google as well as IBM, with success ultimately decided in part by which tech giant boasts the most powerful innovation engine. That's why no investor should count Google out, he said, despite its current relatively small stake in the market.

"No one innovates like Google," said Bartoletti. "They now have to turn that innovation into products and relationships that make enterprise customers comfortable. Enterprise buys from companies they know and like."