For Amazon.com, fastest growth proves to be in the cloud

Nearly a decade after it started as an internal project for a group of engineers, Amazon.com's cloud services unit has turned into the online retailer's fastest-growing business.

The company gave highly anticipated insight into the growth of Amazon Web Services on Thursday, saying that during the first quarter it had reached $1.57 billion in revenue, up nearly 50 percent from the same period last year. It had operating income of $265 million, up from $245 million last year. It was the first time Amazon has released such details about what many investors consider the most lucrative part of the retailing giant.

"Amazon Web Services is a $5 billion business and still growing fast — in fact it's accelerating," Jeffrey Bezos, Amazon's founder, said in a statement. (Bezos also owns The Washington Post.)

Seattle-based Amazon Web Services is widely known for providing computing power to start-ups and companies such as Netflix and Airbnb, and media organizations including The Washington Post.

At its D.C. office, which opened last fall, the mood is more like a start-up than a multibillion-dollar business. A single elevator leads to the top floor, where you're greeted by a mural of dogs. (A photo of the late Rufus, Amazon's office dog, also adorns the wall.)

The rapid rise of the business was a surprise even to some insiders.

"You turn around and [suddenly] you're in 2015," said Teresa Carlson, vice president of Amazon's worldwide public sector.

When Carlson describes Amazon Web Services' growth strategy, the phrases "customer-obsession," and "long-term vision" come up often, a reminder of its Amazon-like approach to conducting business.

That philosophy is evident in the company's government work, where Amazon has grown to dominate the cloud services market. It is a small share of the division's overall business, but it is increasingly important, analysts say.

Industry analysts say Amazon is by far the largest provider of cloud infrastructure and services to the federal government, including to the Central Intelligence Agency and the Pentagon. The company declined to say how many U.S. government agencies it serves, but it has 1,500 government clients globally. Amazon also has a government-only cloud for storing sensitive data.

It may have been a pioneer in the field, but Amazon's status in cloud computing is not going unchallenged. Competitors such as Microsoft Azureand Google Cloud Computing are making strides. Microsoft reported a 106 percent increase in commercial cloud revenue for the quarter Thursday.

The increasing competition could help drive down costs for the government, but Amazon likely will not be unseated anytime soon, analysts say.

Amazon holds the largest market share in the government sector, analysts say. Overall, the company's cloud service capacity is five times larger than the next 14 cloud vendors combined, according to a 2014 report by research firm Gartner.

"They are a tough act to follow," said Lydia Leong, vice president at Gartner's Technology and Service Provider Group.

The company's rise in the government sector followed a federal directive for agencies to consolidate data centers and move to the cloud several years ago.

"We always knew that this was a huge market," Carlson said.

In the beginning, Carlson said explaining the concept of cloud computing to officials was a challenge. For the government, the idea of storing information in a public, shared virtual environment with a pay-as-you-use model was a sea change.

A key part of Amazon's strategy was developing relationships with a network of companies that already had a history of government work. These software and IT companies developed into a mini-industry that specialize in delivering Amazon cloud services to the government.

The tech company also teamed with agencies that were open to experimentation, such as NASA's Jet Propulsion Laboratory, an early adopter of the Amazon cloud.

"We realized eight years ago that cloud computing would be a game-changer — we could do science in a few days that we would otherwise spend weeks on," said Tom Soderstrom, the laboratory's chief technology officer.

NASA's test case for cloud storage occurred when the Curiosity rover touched down on Mars in 2012. The rover's high-resolution images were hosted on Amazon's cloud, so they could be consumed by the world in real time, Soderstrom said.

The last obstacle to overcome in the government market was security: How do you ensure that sensitive data is protected?

In 2013, Amazon took a step that analysts say gave it greater legitimacy in government circles.

It became the first vendor to meet the newly defined Federal Risk and Authorization Management Program standards, which outline security requirements for the cloud.

The company also won a $600 million contract to design a private cloud for the CIA, and prevailed against a bid protest, cementing its status as a trusted vendor, analysts said.

Despite the growth of the Web Services division, Amazon is struggling to turn a profit. The company reported a loss of $57 million, or 12 cents per diluted share, during the first quarter, despite a 15 percent increase in sales.