Three themes emerged from Amazon’s second-quarter earnings announcement July 26: the power of the cloud and the growth of voice and advertising.

The company missed its revenue targets but beat earnings by a wide margin. The main reasons for the growth were impressive performances by Amazon’s advertising business and its Amazon Web Services cloud computing division, which achieved a 49 percent rise in sales to $6.1 billion (beating the average analyst estimate of $6 billion). In addition, the emergence of its advertising business played a role. As reported in Advertising Age, ad sales comprise Amazon’s fastest-growing segment, bringing in $2.2 billion in revenue for the quarter (by contrast, ad sales for the equivalent period in 2017 were $945 million).

And although Amazon did not disclose sales for its Alexa-based voice products such as the Echo speaker, Jeff Bezos commented in a statement that “The number of Alexa-enabled devices has more than tripled in the past year.”

The uptake of Alexa-based products and cloud computing is especially significant. At Moonshot, we’ve asserted that Amazon is building an intelligent and continuously evolving super platform built on Alexa and Amazon Web Services. This platform enables Amazon to push into new markets from communications to fashion through the voice interface; and to reimagine how people use voice to manage everyday tasks such as ordering products and managing our smart homes.

Amazon’s latest quarterly results show that the company is moving full speed ahead. But Amazon faces competition, too.

Powered by Voice

Amazon has made no secret of its aspiration to build an ecosystem fueled by the power of our voices. It was telling that in the company’s press release, Jeff Bezos talked about Alexa and nothing else. “We want customers to be able to use Alexa wherever they are,” he said. “There are now tens of thousands of developers across more than 150 countries building new devices using the Alexa Voice Service, and the number of Alexa-enabled devices has more than tripled in the past year.”

He made another comment that demonstrated how extensive Amazon’s ecosystem is becoming: “Our partners are creating a wide variety of new Alexa-enabled devices and experiences, including soundbars from Polk and Sonos; headphones from Jabra; smart home devices from ecobee and First Alert; Windows 10 PCs from Acer, HP, and Lenovo; and cars from automakers including BMW, Ford, and Toyota.”

You can see the power of those partnerships whenever an automaker announces a new Alexa interface or a company at CES demonstrates a new product powered by Alexa. Amazon’s network of ecosystem partners is growing.

Amazon also highlighted how the company is investing to ensure the uptake of Alexa. For instance, as Amazon noted, the Alexa Skills store offers more than 45,000 skills created by third-party developers. And, customers can use Alexa to control more than 13,000 smart home devices from more than 2,500 brands. It’s clear that brands are using the creation of digital products via Alexa Skills to emerge into a modern company.

As a sign of Amazon’s dominance, Amazon now commands a 61 percent market share in smart speakers alone. But its share is slipping, as Google Home begins to make inroads and Apple HomePod, considered to be dead out of the gate by many, grabs 4.1 percent share. You can never count out Apple.

Floating in the Cloud

Amazon had much to celebrate with the growth of its cloud-based services under AWS, which accounted for 11.5 percent of Amazon’s quarterly revenue, according to CNBC. Amazon noted a number of companies have become customers, including Ryanair, Epic Games, 21st Century Fox, Verizon, and Major League Baseball (MLB). Amazon noted that “Major League Baseball named AWS its official provider for machine learning, artificial intelligence, and deep learning; and Formula One is moving the vast majority of its infrastructure from on-premises data centers to AWS and standardizing on AWS’s machine learning and data analytics services to accelerate its cloud transformation.”

Amazon is benefitting from being an early developer of cloud-based services, which debuted in 2006. As CNBC reported, in the past three years alone, the revenue it brings in in a year’s time has risen 255 percent.

Is Amazon unbeatable? No. In fact, Amazon faces significant competition from Microsoft. As we noted recently, the ascendance of Microsoft’s cloud services, known as Commercial Cloud, is a big reason why Microsoft also had a stellar quarter. Cloud services grew 53 percent for the quarter, bringing in nearly $7 billion in revenue. That rate of growth also exceeded analysts’ expectations.

In fact, Evercore ISI analyst Kirk Materne told CNBC that Microsoft’s public cloud service, Azure, is growing at a faster rater rate than Amazon Web Services did when AWS was a similar size.

And Microsoft recently signed a five-year agreement with Walmart to use Microsoft’s cloud services. Raj Bala, a Gartner analyst, said in a New York Times article about Microsoft that the booming cloud computing industry is “a two-horse race between Amazon and Microsoft.”

Hard as it may seem to believe, we are in the early days Amazon’s super platform. But with both voice and the cloud, Amazon has real competition. And competition is good. In coming years, Amazon, Google, and Microsoft, are going to push each other to innovate and offer efficiencies built on the cloud. Of the three, Amazon is the leader based on the uptake of Alexa. But Amazon is not the only technology titan building a super platform.

Advertising Ascends

The continued growth of Amazon’s advertising business positions Amazon as a bigger threat to Google and Facebook (the latter of which suffered a historic drop in its stock after reporting lackluster results from its advertising business July 25).

In a conference call with analysts, Amazon Chief Financial Officer Brian Olsavsky said,

“[Advertising is] now a multibillion-dollar business for us. We’re seeing strong adoption across a number of fronts.”

Amazon has built its advertising business by offering tools that encourage businesses to advertise on Amazon, which has become a major search platform in its own right. But what’s changed is that Amazon is now offering advertising products for businesses whether they advertise on Amazon or outside the platform. As Advertising Age noted, “Amazon has a new program with select agencies and brands to run Sponsored Product ads through its ad network that reaches hundreds of publishers. That’s the first time those types of ads, Amazon’s most valuable ad format, will be served beyond Amazon’s own website.”

Google and Facebook: Amazon is coming for you both.

It’s going to be an interesting battle.

Saul Delage

Saul Delage

VP Growth