NEW YORK (TheStreet) -- Amazon's (AMZN) decision to break out the results of its giant cloud computing business, Amazon Web Services, is a sign that the division is growing up and an indication of just how important investing in the cloud is becoming to tech companies.
Companies that offer cloud services, where data and applications are stored remotely and accessed via the Internet, spend a lot of money initially trying to acquire customers. That's why traditional metrics, such as revenue and earnings, are not always the best way of determining how well the business is doing. Earnings are likely to be depressed as marketing and sales expenses are inherently higher than a traditional software company.
Many technology giants, including Amazon, IBM (IBM) , Oracle (ORCL) , Microsoft (MSFT) and Google (GOOGL) , offer software and services that provide customers with access to software, platforms or infrastructure from anywhere in the world as long as the customer has an Internet connection. Among them, they have very different cost structures, with some focusing more on acquiring customers at an early stage in order to maintain and win market share.As of the fourth quarter, there were more than one million worldwide active Amazon Web Services customers making use of Amazon's cloud-computing and data services. On the earnings call, CFO Tom Szkutak said Amazon believes it's appropriate to start looking at AWS by shedding more light on it.
"In terms of AWS, we just think it's an appropriate way to look at our business for 2015," Szkutak said on the earnings call. "And so our plan is... separating it out as of Q1 of this year."
Once a cloud customer is signed, revenue is recognized over the life of the contract, while expenses are recognized immediately. For example, if a contract runs 24 months, the revenue is recognized in 24 equal parts, while the expenses are recognized in one lump sum.