How big is Amazon Web Services? Bigger than a billion

If you parse Amazon’s (s amzn) first quarter earnings, you could be forgiven for thinking that Amazon Web Services is now a $2 billion-a-year business.

That’s because Amazon’s revenue from the “other” category for the quarter ending March 31, 2012 was $500 million, up from $311 million for the year-ago period. If you assume “other” is AWS only, that’s a $2 billion-a-year run rate for 2012.

Now, before we go crazy, the “other” category includes, as an Amazon spokeswoman put it “non-retail activities, such as AWS, miscellaneous marketing and promotional activities, other seller sites, and our co-branded credit card agreements.” Still, even if AWS is 75 percent of that figure, that’s a $1.5 billion run rate for the year. Not too shabby. Trying to determine just how big Amazon’s cloud is — in terms of servers, in terms of instances, by any metric — has become a popular parlor game, as GigaOM reported last week.

Last October, GigaOM’s Derrick Harris, using numbers from UBS, estimated that AWS was becoming a better-than-a-billion business and it looks like he was spot on. More recently, Morgan Stanley analysts put AWS at a $1.19 billion run rate for 2011.

On Amazon’s Q1 earnings call Thursday, CFO Thomas Szkutak repeatedly mentioned how fast AWS is growing. And for the upcoming quarter, he told analysts to expect about $0.8 billion to $0.9 billion in capital expenditures relate to software development “driven primarily by our expectations of continued business growth, consisting of investments in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations.” (A transcript of the call is here.)

Big revenue doesn’t mean big profit

Revenue is one thing, profitability is another and no one outside Amazon knows just how profitable these services — margin thin services– are. AWS continually cuts pricing on its EC2 and RDS and other services in the face of growing competition from other IaaS players and there will be more competition coming online as more of the OpenStack camp go live.

Most see AWS as a way for Amazon to sell off compute and storage capacity it doesn’t need as a way to recoup expenses. And yet it keeps adding higher value-added offerings like the DynamoDB database service, which it claims is its fastest-growing service ever. And it’s doing things like launching an official partner program which means Amazon is looking more and more like a traditional IT provider, along the lines of Microsoft(s msft) or IBM(s ibm). (For the record, an Amazon spokeswoman vigorously countered the notion that AWS is simply Amazon selling off capacity. “AWS adds the same server capacity daily that was used to power in the year 2000 when it was a 2.76 billion dollar business.  AWS is a separate business running at massive scale,” she said via email.)

Whatever that profit situation is, it looks like Amazon is bound and determined to keep building, using and selling off that compute and storage capacity. Last week it announced the Amazon Marketplace a way to parlay both the company’s retail and IT expertise to sell third-party technology services along with its own.

Feature photo courtesy of Flickr user akakumo