Amazon Web Services caught many established tech giants sleeping as it boomed to a $20-billion-a-year business, and now it's making a move to dominate a new cloud market: the Middle East. Amazon recently announced it will be investing in its first Mideast data centers, based in Bahrain, which the company said will be built by 2019.
Amazon Web Services continues to be a major source of revenue, growing 42 percent in the just-reported third quarter, with a top-line contribution of $4.6 billion. But there are signs that the rest of the tech world is catching up to Amazon in the cloud: The AWS results marked the ninth-consecutive quarter of a declining trend in AWS revenue growth (Q3 was actually flat compared to Q2), making new markets more important to Amazon's investment in the cloud.
"The Middle East is a bit of a dead zone when it comes to cloud computing," said John Dinsdale, chief analyst and managing director of Synergy Research Group. "Will this change? Yes, but slowly." He added, "Any firm that wants to be a serious global cloud provider cannot afford to just ignore the Middle East."
An Amazon spokesman said the company would not go into details about plans for AWS in the Middle East but added that the company is "far from being done adding [cloud computing data centers] in this part of the world."
Amazon Web Services has benefited from the cloud computing boom of the past decade, which allows companies to outsource many IT functions to large, off-site data centers. AWS accounted for 10 percent of Amazon's total revenue in the third quarter, and operating income of $1.17 billion compared to operating profit of just $347 million for Amazon as a whole. AWS is on pace for annual revenue over $15 billion.
But U.S. competitors, including Microsoft Azure and Oracle, are coming hard after Amazon in the cloud — where it has achieved as high as double the market share of any other player, 30 percent, according to one 2017 estimate. International tech players are pushing into cloud services, too, including Alibaba Cloud. Alibaba already has a data center in Dubai, and Oracle has planned a center to serve the United Arab Emirates.
"That's one of the gaps in coverage," said Santhosh Rao of tech consulting firm Gartner. "The Middle East is one obvious region that (Amazon) hadn't addressed."
There are more than 370 data centers in the world, but most of these are in the United States, Western Europe and East Asia, according to Synergy Research Group.
At least in Saudi Arabia, Chinese tech companies like Alibaba and Tencent are poised to dominate the cloud market. But Rao said this is not necessarily the case in the larger region and that it's too early to tell how Saudi Arabia and Dubai will react to the data centers in Bahrain.
"They just set up shop," Rao said. "We'll have to wait and see how it plays out in the long run."
Bringing cloud services to the Middle East dovetails with the broader business trends in the region, where Internet-based businesses and start-ups are booming. Earlier this year, Amazon acquired the Middle East's largest online marketplace, Souq.com, that serves seven countries and boasts 45 million website visits per month.
Souq.com was founded by a Northwestern University–educated Syrian entrepreneur, Ronaldo Mouchawar. It has been reported that Amazon offered $650 million before there was an $800 million bid from United Arab Emirates-based Emaar Properties, the owner of the world's tallest building, the Burj Khalifa. Amazon prevailed in the acquisition nonetheless.
Souq.com, often called the Amazon of the Middle East, is emblematic of the success of a small but growing start-up scene in the Gulf countries.
"Candidly, like most Americans, I didn't know this was going on in the Arab World," said Chris Schroeder, who in 2013 published Startup Rising: The Entrepreneurial Revolution Remaking the Middle East" in 2013. "People are often surprised that there's incredible talent and an incredible tech ecosystem (in the Middle East)."
More from Global Investing Hotspots:
Countries like Saudi Arabia, Qatar, the UAE and Bahrain are poised for start-up investment because of rising middle-class segments of their societies and increasing access to technology.
"We are working to quickly integrate Souq and Amazon capabilities to provide an exceptional shopping experience for customers in the Middle East," said a spokesperson for Souq.com via email.
Schroeder said the Souq.com acquisition may have a ripple effect on other start-ups by showing that lucrative exits are possible in the Middle East. "It's inspiring to them," he said.
For companies like Fetchr, a Dubai-based start-up that offers consumer and business-to-consumer courier services, the basic cloud computing services already offered have been vital to the expansion of the company. It recently expanded to Jordan and also has operations in the UAE, Egypt, Bahrain, Saudi Arabia and Oman. Fetchr and other start-ups stand to gain access to a much wider network of services, along with increased speed and capability in data-sharing as the cloud evolves in the region.
"You've practically got supercomputer power at the tips of your fingers," said Junaid Qureshi, vice president of technology at Fetchr. "I think it's going to be a game changer."
Amazon's decision to set up their first center in Bahrain sidesteps Dubai, which has received attention as a promising global hub for start-ups and is where Alibaba's cloud operations are based. But Megha Kumar, research director of software at IDC for the Middle East and Africa, said these tech giants can reach many businesses in the region once they set up cloud services in one of the Gulf countries.
Bahrain's bustling start-up scene may have factored into Amazon's decision. Bahrain has a number of programs that support the start-up economy, including a labor fund called Tamkeen and the Economic Development Board of Bahrain, which help to mentor business and start-up owners.
At a recent investment conference in Riyadh, Saudi Arabia, Bahrain's Commerce Minister H. E. Zayed bin Rashid Al Zayani said that the oil-rich state — like the rest of the GCC — has taken steps to diversify its economy. "We're moving Bahrain to a digital economy," Al Zayani said. "We're moving into the next frontier.
For Hala Sulaiman, founder of Beyond Border Consulting in Bahrain, the economic transition — combined with access to education and jobs for women — are supporting start-up activity.
Thirty-nine percent of women work in Bahrain, according to the World Bank. That's relatively high for the Middle East and North Africa region, which averages 22 percent of women in the workforce.
"There's quite a buzz going on in the country," Sulaiman said, adding, "Bahrain has the combination for local businesses to flourish and prosper and as well for international investors to come in and have benefits."
— By Trey Strange, special to CNBC.com