| SAN FRANCISCO, July 21
SAN FRANCISCO, July 21 The tech industry maxim
that "no one ever got fired for buying IBM" is a testament to
how Big Blue has been the gold standard in computing services
But IBM faces an unlikely challenger in Amazon.com Inc
, the e-commerce retail giant that is becoming a force
in the booming business of cloud computing, even winning backing
from America's top spy agency.
After years of being dismissed as a supplier of online
computer services to startups and small businesses, Amazon Web
Services (AWS) beat out International Business Machines
this year to snag a $600 million contract with the Central
IBM has successfully appealed its loss in the contest,
stalling it for now. But the episode highlights how Amazon is
evolving from an online retailer into a competitive provider of
information technology and services to big companies, and
That has helped push Amazon shares to a new record ahead of
the company's second-quarter results due on Thursday. Amazon
doesn't break out AWS results, but Wall Street believes it is
expanding faster than the retail business and is more
"AWS is one of the main spokes of the bull case on Amazon
shares," argues Ron Josey, an analyst at JMP Securities.
"Software and IT investors are aware of and are trying to size
AWS, and what the impact could be on their sector."
IBM is entrenched in corporations across the globe; and with
one of the industry's biggest research budgets, is likely to
remain so for some time. But it and other players like Oracle
are taking note of AWS as cloud computing takes off.
Public cloud computing, which AWS pioneered in 2006, lets
companies rent computing power, storage and other services from
data centers shared with other customers - typically cheaper and
more flexible than maintaining their own.
Amazon has begun to build a portfolio of significant
clients, including Samsung, Pfizer, the
Public Broadcasting Service and NASA, the U.S. space agency.
That unexpected threat is rippling through the sector. After
two quarters of falling sales, Oracle announced partnerships in
June with former foes Microsoft and Salesforce.com
, a response in part to AWS's expansion.
"AWS is having a really meaningful impact on IT and the big
incumbent companies like IBM are reacting to that now," said
Colby Synesael, an analyst at Cowen & Co, who covers Rackspace
Hosting, one of Amazon's main rivals in the cloud.
FROM BOOKSTORE TO TECH
Amazon began life as an online bookseller, but in past years
has expanded into everything from tablet computers to video.
Critics say it is spending heavily with little regard for the
But its stock hit a record $309.39 on July 16 and is up more
than 22 percent this year. In contrast, Oracle is down 4 percent
in 2013. IBM, which reported a fifth straight quarterly sales
fall on Wednesday, is up 1 percent.
AWS slashed prices on one of its popular services, EC2, this
month and Rackspace shares promptly slid, leaving them down more
than 45 percent so far this year.
AWS generates at least $2 billion a year in revenue now from
a total pie of more than $60 billion, according to analysts who
expect that to quintuple to more than $10 billion in coming
years, partly driven by higher government cloud spending.
The tussle with IBM over the CIA contract has helped burnish
Amazon's credentials, increasing Wall Street's confidence in the
ability of AWS to compete with the big boys of enterprise IT.
Five companies vied for the contract - AWS, IBM, Microsoft,
AT&T and another unidentified firm, according to a report
on the bidding by the U.S. Government Accountability Office.
When AWS won, IBM protested, triggering the report by the
GAO. The agency recommended in June that the CIA re-do some
parts of its contract negotiations, giving IBM another chance.
But the GAO also stated that AWS's offering was superior.
"In every technical criterion Amazon out-scored IBM, one of
the most sophisticated and capable IT companies in the world,"
said Carlos Kirjner, an analyst at Bernstein Research.
The CIA had "grave" concerns, according to the GAO report,
about IBM's ability to provide "auto-scaling," a feature that
automatically adds or removes computing power in response to
"Auto-scaling is very complex and there are not many cloud
providers that can do it well, but Amazon is great at it," said
Kyle Hilgendorf, a cloud computing analyst at Gartner. "I don't
think anyone thinks IBM has a better cloud service."
IBM spokesman Clint Roswell said there were "inaccuracies"
in the government's assessment of its CIA proposal.
"IBM remains committed to providing enterprise-level secure
and robust cloud solutions and looks forward to a renewed
opportunity to show our capabilities to fulfill the requirements
of this important agency," he added.
An Amazon spokeswoman declined to comment on the CIA
contract. A CIA spokesman also declined to comment.
IBM bought SoftLayer Technologies, a rival to AWS, for $2
billion in June. That could help it when the CIA comes calling
again, said Bill Moran at Ptak Associates.
"They do not need any other issue like 'auto-scaling' to
bedevil them the next time around," he added.