Tech Drivers
Tech Drivers

Amazon's cloud service is locking in bigger upfront commitments from business customers, which could help it run away with the market

Key Points
  • At re:Invent last week, AWS highlighted the growth in partner deal size, which suggests growth in upfront commitments, according to Jefferies analyst Brent Thill.
  • It's the latest evidence of AWS signing more multiyear contracts with upfront commitments, typically preferred by corporate clients.
  • AWS is signing both more deals and vastly larger deals compared with Microsoft's Azure or Google Cloud, according to Gartner's Lydia Leong.
Werner Vogels, CTO of Amazon

As Amazon's cloud service continues to increase its market share, it's also showing more signs of locking in customers into bigger and longer-term contracts.

That trend was once again evident at Amazon Web Services' annual re:Invent conference last week, where executives highlighted the growth in partner deal size. Partner deals typically represent multiyear contracts with bigger companies as they involve large-scale projects.

Terry Wise, vice president of global alliances and channels at AWS, said in his keynote that the total deal size brought in by partner sellers has increased 3.5 times compared with last year, while the rate of growth in partner-led contracts is far outpacing the growth of AWS' overall business.

Those numbers show AWS customers making bigger upfront commitments, giving Amazon a more predictable revenue stream for future years, according to Jefferies analyst Brent Thill.

"It suggests customers are doing 'cannonballs' into the pool versus just dipping their toe in," Thill told CNBC. "Bigger commitments mean we have more confidence in revenue as most customers won't leave AWS once they commit."

AWS became popular with its pay-as-you-go model, which helped draw many start-ups because it only charged for the amount of computing power they used. But as AWS matured, and became more popular across businesses of all sizes, multiyear contracts with upfront commitments, typically preferred by corporate clients, have come to account for a larger share of its revenue.

Perhaps that explains why AWS started disclosing "performance obligations" this year, which it defines as future revenue "associated with commitments in customer contracts for future services that have not yet been recognized." In its most recent quarter, that amount grew to $17.8 billion, up from $16 billion in the second quarter and $12.4 billion in the first quarter.

It also added a line about such deal structures in its latest earnings filing, saying AWS offers certain services that are "offered as a fixed quantity over a specified term, for which revenue is recognized ratably."

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'Vastly larger' deals

Lydia Leong, an analyst at Gartner, said she's seeing the same trend among her own clients. AWS is signing both more deals and vastly larger deals compared with its main competitors, Microsoft's Azure and Google Cloud, she said.

"The bulk of AWS deals for Gartner clients are in the range of $5 million to $15 million, with many deals now exceeding $30 million, which is significantly higher than Azure (which tend to be below $1M) and GCP (typically below $5M)," Leong said in an email to CNBC.

Leong said the more interesting trend is the growing number of "renegotiations" — deals in which the customers are quickly blowing past their commitments due to new unexpected projects or business growth, and are compelled to renegotiate a new higher commitment in return for a bigger discount.

At re:Invent, AWS announced a number of large enterprise deals with companies like Amgen, Capital One and Verizon. Korean Air, for example, committed to a 10-year deal that would move all of its infrastructure needs to AWS.

Although most multiyear contracts with enterprise customers come with discounts, they haven't slowed down AWS' revenue growth. In the latest quarter, AWS revenue jumped another 46 percent, to $6.7 billion, up from the year-ago period's 42 percent growth rate.

"We're very happy with the growth in the business — the momentum that we're seeing with enterprise customers," said Amazon CFO Brian Olsavsky during October's earnings call.

In a statement to CNBC, Microsoft expressed satisfaction with its progress against AWS. "We continue to see rapid growth in our cloud business, with Azure revenue in Q1 growing 76%. Our differentiation continues to be in the partner approach we take with our customers to drive success for their business, and this in turn drives increased consumption of our cloud services. We have significant engagements with global brands including Starbucks, Volkswagen, Shell, Walmart, Chevron, and BMW to run and grow their businesses with Azure."

Google did not immediately return a request for comment.