Amazon Sees Further Price Drops in Cloud

Amazon.com Inc., which droppedprices on its Internet-based cloud-computing service last week,said it will keep cutting when it can, putting pressure oncompetitors like Microsoft Corp. to keep its own prices low.

As they tussle over price, the resulting narrower profitmargins may be tough to swallow for both companies. Microsoft isunder pressure from investors concerned about its entry intomarkets where costs are higher than its traditional softwarebusiness. In the meantime, Amazon's stock has slid about 25 percentfrom a record in October as expanded investments in areas suchas cloud services and the Kindle Fire tablet halved margins in2011.

As a veteran of the retail business -- with its razor-thinmargins -- Seattle-based Amazon is more adept at dealing withpricing pressure than Microsoft, analysts said.

Amazon's margins are about 10 percent on cloud services, ahigher rate than its retail businesses, estimates David Smith,an analyst at Gartner Inc. For Redmond, Washington-basedMicrosoft, whose operating margins are 60 percent or wider onWindows and Office software, the scantier cloud profits are amore difficult adjustment, he said.

Amazon's overall operating margin -- an indicator ofprofitability that measures revenue minus operating expenses --narrowed by more than half to 1.8 percent last year, accordingto data compiled by Bloomberg. Microsoft's was little changed at39 percent in fiscal 2011.

Commodity business

"It's a commodity business," said BGC's Gillis. "Theseare ubiquitous services where you win with massive scale, andthe way that you achieve massive scale is to lower the price."