Amazon’s AWS advantage

Amazon Web Services Logo

Jim Fowler, the chief information officer of General Electric, said, “A.W.S. will be the trusted partner that will run our company’s information technology for the next 140 years.” That’s how long G.E., founded by Thomas Edison, has been around.

-New York Times’ Bits Blog reporting from AWS’ own re:Invent conference.

Over the last week Amazon has released at this conference a slew of new features regarding its cloud infrastructure juggernaut AWS. AWS, used by many startups and increasingly by many big companies as their IT infrastructure, is growing strongly. Last year AWS generated $5.16 billion in revenue. Its Q2 revenue this year was $1.8 billion, a rise of 81 percent compared to last year. AWS had some strong numbers to show off at its conference:

Andy Jassy, the SVP of AWS, today said that AWS has passed over 1 million active customers — those being businesses, not individuals. AWS revenues are booming, too: Overall, AWS is now a $7.3 billion business, he said, with the database business alone currently on a $1 billion revenue run rate.

The company says that AWS has grown 81 percent year on year — “by far the fastest growing provider” among other companies offering cloud-based storage, processing and other database services, Jassy said. Other growth stats include AWS’s EC2 business growing 95 percent, S3 up 120 percent and database services up 127 percent.

Even former competitors like Rackspace are slowly pivoting (paywall) to become system integrators of AWS.

Industry analyst Ben Thompson (paywall) explains why AWS at scale is bringing dramatic change to the IT enterprise world:

New market disruptors, though, have models that are completely orthogonal to the incumbents: in the case of Amazon, by denying the assumption that enterprise computing and storage must be on-site, AWS was able to make a massive bet on scale and scalability that gives their product advantages that simply can’t be matched by an incumbent built around the assumption that each company will have its own IT stack.

All this is to say that AWS is a big, formidable and growing business in and of itself. Does it provide even more than that for its mother company?

Yes. It is always strategically nice to own a infrastructure business at scale that if you want you can leverage for other business endeavors. Consider Amazon Instant Video.

Netflix and Instant Video are right now the two biggest on-demand video streaming providers. And both run on AWS. (See also this AWS case study of Netflix, but also keep in mind that Netflix uses a unique CDN setup). Netflix is a customer, Instant Video is a part of the provider. Amazon has far lesser costs as the owner of AWS. This is important because it helps tremendiously with the business model. Netflix and Amazon are producing more and more of their own TV content for two reasons. One is decreasing dependence on existing license holders. The second is the inherent cost structure of media with high fixed costs up front and low marginal costs for additional copies. This of course is even more true for digital media than it was for traditional media. Amazon can cut the marginal costs of the actual streams down as much as possible. This is very attractive for Amazon. Running Instant Video gets comparatively cheap1 once the high fixed costs are payed for. Instant Video is part of Amazons Prime bundle where it is used as a way of attracting potential Prime customers. With the positioning and cost advantages we delineated it becomes clear how Amazon a.) can provide a competitive service at a low price2 and why b.) they are aggressively moving into original content.

Where else might AWS help Amazon strategically?

Think about what Amazon is doing at the hardware front: Its Dash, the Dash buttons, Echo, even the Fire TV and the Fire tablets. These are all very different forays into a post-PC world. A world of connected devices. The tech industry loosely refers to this as the Internet of Things. (IoT)

AWS is mature and at a big enough scale now that Amazon can throw almost anything at it. This includes the need to process data from millions or even billions of connected devices. And of course AWS introduced last week AWS IoT. From TechCrunch:

AWS IoT will integrate with Lambda, Amazon Kinesis, Amazon S3, Amazon Machine Learning, and Amazon DynamoDB to build IoT applications, manage infrastructure and analyze data.

“Connected does not necessarily mean useful,” said Amazon’s CTO Werner Vogels during the keynote today, and indeed this is what Amazon is aiming at tackling with its mega platform: a place where the many different strands of creating services for disparate connected objects can come together into one place to be run in a cohesive way

See also the official announcement at the AWS blog for more.

This is interesting but not yet strategically important. But what if Amazon doesn’t want to repeat the mistakes of the smartphone world (let’s not speak of the Fire Phone) and it will want to make sure it will be a potent platform provider playing at the level where the rules are made. Amazon could use AWS’ infrastructure to lure cost sensitive hardware startups into using the Amazon platform, however that future (consumer fronting) platform may take form. Amazon already has started experimenting with attractive offerings for new hardware companies. “Amazon Exclusives” is a store front (read a lucrative distribution channel) for successful Kickstarter funded gadgets; exclusive to Amazon and the manufacturers own sites. This might be the first step to a crowdfunding platform from Amazon itself. There are certainly interesting rumors floating around.

The Dash Replenishment Service with its integration of a sales channel of consumer goods into household devices is a window into the possibilities for Amazon. Combining this with a strong sales platform (Amazon itself) and a strong server infrastructure (AWS) one can easily see a virtuous cycle in the near future.

It does not matter how exactly the Internet of Things will take shape. Amazon’s AWS will play almost certainly a large part at its backbone. The cloud itself might not become the main coordinating factor in the IoT. But whereever and whatever the cloud’s job will be in the Internet of Things AWS will be there and it will be a strong household name.

Consider the platform ramifications of this for Amazon.


  1. I say ‘comparatively cheap’ because serving video streams is not cheap compared to over kinds of media. In fact video consumes the most bandwidth, especially if we are talking about HD and 4K quality. Amazon has thanks to AWS maybe the most cost effektive way of doing video online. (YouTube might give it a run for its money.) 
  2. In fact in the US Amazon Prime as a whole is with $99 per year only more expensive than Netflix’s cheapest plan ($95,88 per year). Considering how much one gets with Prime these are interesting price points. 

11 comments

  1. […] yesterdays post about Amazon you could call what is happening at Zappos ‘Amazon’s AWS (or big established system) […]

    Like

  2. […] talked recently here about Amazon’s AWS advantage. With AWS Amazon is cloud infrastructure wise like a retailer who owns the […]

    Like

  3. […] Free unlimited photo storage (How can a company offer this just as an additional feature, you might ask: Amazon’s AWS advantage) […]

    Like

  4. […] for AWS one could leave out “e-commerce” here. But AWS is the from the e-commerce side more or less disconnected juggernaut that keeps on […]

    Like

  5. […] I wrote about this in ​“Amazon’s AWS advantage”: […]

    Like

  6. […] products (Echo/Alexa, Dash button, Dash) but also to be a partner for startups and other companies. There is AWS (now with dedicated IoT-APIs), the Alexa fund for investing in smart home companies and Launchpad, […]

    Like

  7. […] 2006 to the public, it is now a main driver of profits for Amazon. And AWS, additionally, provides a serious infrastructure advantage to Amazon. It will not take ten years for Alexa and Fire TV to grow up. It may take half that time […]

    Like

%d bloggers like this: