Diving Deep Into Amazon's AWS Pricing Model

In a new report, Citi Research analyst Mark May takes a close look at shareholder concerns regarding Amazon.com, Inc. AMZN’s AWS pricing. AWS currently accounts for 40 percent of Amazon’s operating income and is projected to make up 65 percent of the company’s income growth this year.

“Annualized per annum price ‘adjustments’ (or reductions) in the 20-25% range are to be expected and are in fact healthy for industry growth, though pricing changed have and will likely remain lumpy and the timing hard to predict,” May explains.

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He also points out that pricing alone doesn’t seem to be driving market share in cloud storage because Alphabet Inc GOOGL’s services have consistently been priced below those of Amazon and Microsoft Corporation MSFT without significantly impacting market share.

For now, Citi expects annual AWS price cuts of about 25 percent for the foreseeable future.

The firm maintains a Buy rating and a $780 price target for Amazon.

Disclosure: the author holds no position in the stocks mentioned.