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Originally published September 15, 2014 at 8:25 PM | Page modified September 15, 2014 at 9:40 PM

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Investors may balk, but Amazon plans to boost cloud spending

In public documents, the online retail giant discloses plans to spend $1.1 billion on a massive Ohio data center to support its Amazon Web Services business.

Seattle Times business reporter

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Investors sent shares spiraling down in July after the company’s second-quarter financial report blamed larger-than-expected red ink, in part, on its cloud-computing business.

Turns out, the profit pressure from Amazon Web Services, or AWS, won’t likely taper any time soon. Amazon is in the final stages of winning tax breaks and local government approval to build a $1.1 billion data center in Dublin, Ohio, a suburb of the state capital, Columbus.

It’s an eye-popping number from a company that never discloses business-operation costs unless required. Amazon has never publicly divulged the amount of money it costs to develop the massive AWS data centers, known as regions in company parlance.

The division, launched in 2006, rents data storage and computer-server time to corporations and agencies to run core business processes. It has 10 such regions worldwide, including four in the United States (not including the proposed Ohio site). One of them is in Oregon.

Details of the giant data center’s price tag have only emerged in public records related to Amazon’s bid to get tax breaks and land from both the city and state.

In late August, the Ohio Tax Credit Authority acknowledged in a public filing that it had approved a 100 percent, 15-year sales-tax exemption for Vadata, a wholly owned Amazon subsidiary. As part of that deal, the Ohio agency noted that Vadata committed to make “a capital investment of at least $1,110,000,000 during the 3-year investment period starting on August 25, 2014.”

It’s a huge investment, topping the amount the company just agreed to spend to acquire Twitch, a popular website that lets gamers watch and stream videos of game playing.

By comparison, Amazon’s fulfillment centers, the company’s name for its massive, 1 million-square-foot warehouses, cost roughly $100 million each.

“Amazon is the early leader in the market, and they clearly want to defend their position,” said Colin Sebastian, an analyst at Robert W. Baird & Co.

The reason the cost for a giant data center is so much higher than its warehouses is likely because Amazon fills them with racks upon racks of computer servers that run the services offered to businesses.

What’s more, the rooms that house those servers often require expensive equipment to maintain constant, specific temperatures. Amazon also builds its own power generators, servers, and networking and storage gear, all of which likely factor into the price tag.

As expensive as the new data-center operation will be, Amazon is clearly not done building them. Company executives declined to comment on the Ohio site. Instead, the company issued a brief statement, noting it is “constantly evaluating a long list of additional target countries and U.S. locations.”

Indeed, Amazon may be working on similar deals with other municipalities, and those negotiations haven’t surfaced publicly yet. Even if Ohio officials approve the Amazon deal, the company might still opt to set up a data-center operation in a different location, where it may negotiate an even better arrangement.

Cutting prices

At the same time Amazon is plowing that money into AWS data centers, it’s also aggressively cutting prices to keep pace with rivals such as Google and Microsoft that are angling to chip away at its market lead. Earlier this year, the company cut prices from 28 to 51 percenton what it charges corporate customers that use its data-center services. It also brags about the 45 price cuts it has initiated since the business’s inception.

The capital expenditures coupled with those price cuts are, in part, what led to a second-quarter loss larger than Wall Street expectations. And Amazon, during the conference call with analysts about that quarter, projected the current quarter will see continuing losses tied, in part, to AWS results.

Amazon Chief Executive Jeff Bezos has long told shareholders the company will bet on long-term opportunities over short-term profitability. That’s why Baird’s Sebastian believes shareholders will continue to give Amazon a pass on such large AWS capital expenditures as long as the division grows rapidly.

“Amazon looks at this with a very long-term viewpoint,” Sebastian said. “To be a shareholder at Amazon, you really have to believe in Jeff Bezos’ view of the world.”

Cloud rises

There’s little doubt that the cloud-computing business will see significant growth over the next several years. Forrester Research estimates that so-called public cloud platforms, a segment of the market where Amazon leads, will post a compound annual growth rate of 38 percent from 2013 to 2020 as businesses shift from running their own computer servers to renting computing services from others.

“The interest in usage in the cloud is only going to increase,” said Forrester’s Sophia Vargas.

AWS is the market leader now. While the company doesn’t disclose the unit’s annual sales, some analysts believe AWS will generate $5 billion in revenue in 2014, more than 50 percent higher that estimated 2013 sales.

Amazon’s investments ratchet up the pressure on rivals, who need to make similar big bets if they hope to challenge the company lead.

“They put pressure on the market,” Vargas said.

Amazon isn’t the only company spending huge amounts to chase the business. Earlier this year, Microsoft announced plans for a $1.1 billion data center in West Des Moines, Iowa.

120 jobs

In addition to the sales-tax break, which Vadata will apply to sales and use taxes on equipment purchases at the Ohio location, the company won a 75 percent, 15-year tax credit for the creation of $9.6 million in annual payroll. Vadata plans to create 120 jobs at the data center by the end of 2018.

Amazon also is working to get land for the site for free from the city of Dublin. On Sept. 8, the City Council there listened to a briefing from Dublin’s development director on transferring 68.7 acres of city-owned land, worth $6.75 million, to Vadata. According to city documents, the company plans to build at least 750,000 square feet of “office, data center and related facilities” from 2015 to 2024.

The city said it is requiring a “land payback schedule” if Vadata doesn’t finish constructing 750,000 square feet by December 2024. The council plans to vote on the transaction Sept. 22.

Jay Greene: 206-464-2231 or Twitter @greene

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