Amazon Web Services: A Down Payment on the Future of Computing

The digital retailer’s big bet on the cloud.

The reader is almost surely familiar with Amazon’s identity as “the everything store”—America’s dominant digital retailer. But in recent years, the firm has leveraged its technical expertise in running a large-scale website to launch Amazon Web Services (AWS), a cloud computing platform. This piece focuses on AWS’s business and operating model alignment.

Amazon & AWS Background

Founded in 1994 as an online bookseller, Amazon has scaled and diversified significantly away from its “dead tree” roots. In 2006, Amazon launched AWS—a foray into cloud computing and services—with two products: Elastic Compute Cloud (EC2) and Simple Storage Service (S3) [5]. These allowed users to purchase computing and storage resources in Amazon data centers. As discussed below, AWS offerings have expanded significantly since then. Previous-quarter AWS sales amounted to $2.1bn—a whopping 78% increase over the year prior [1].

Business Model

Evoking its retail value proposition, in AWS Amazon provides robust, reliable software products and cloud computing services at competitive prices. As the leading supplier in this marketplace—with far more capacity than several leading competitors—AWS derives significant value from its scale [4]. Amazon has leveraged this size by repeatedly cutting AWS prices, grabbing marketshare, reinvesting in infrastructure [2]. As shown below, the firm now operates AWS data centers around the world, with more scheduled to come online soon.

Map showing the locations of current and forthcoming AWS data centers.

Beyond size, AWS also generates value through the competitive merits of its products (many of them enabled by Amazon’s operating model—see below). Amazon has expanded AWS far beyond EC2 and S3, with offerings that span everything from low-level computing infrastructure and software engineering services, to standalone software products that compete with dominant firms like Oracle. With AWS, customers save significant resources that they would otherwise expend on expensive maintenance and management, giving them a strong incentive to conduct all of their business in Amazon’s cloud.

Consensus once held that AWS would serve a revolving niche of small firms that would abandon the platform in favor of wholly owned data centers upon reaching scale. But the quality of AWS services, their competitive pricing, and the ability to leverage the scale of Amazon’s technical infrastructure have called this into question. Netflix—a voracious consumer of web traffic—serves its video content with AWS [3]. Other large and legacy organizations, from the The New York Times [9] to the CIA [7], leverage AWS to augment their digital infrastructure.

Operating Model & Alignment

Despite the scale of its retail operation, Amazon has continuously sought to decentralize operations and empower small, nimble teams to solve problems. This thinking is distilled by Jeff Bezos’s “two-pizza rule” that restricts teams to a size that can be fed with the aforementioned amount of food [6]. This model of team operations first gave rise to EC2 as a tool for Amazon’s internal needs; Jeff Bezos quickly recognized its potential as an externally-facing business model [5].

Small, disparate teams raise concerns over collaboration and coordination. To solve these problems, Amazon strongly incentivizes development of APIs for sharing data and development resources across teams [8]. Amazon’s experience designing APIs has enabled AWS’s APIs to become a standard and straightforward way for customers to manage their AWS infrastructure. This approach also facilitates easy interoperability between AWS services, furthering Amazon’s value proposition by enabling customers to try more of its offerings. This often results in lock-in, as customers cannot easily extricate their infrastructure from its dependencies on many interoperable Amazon products.

Amazon has also launched several AWS products that leverage its existing offerings. For example, Elastic MapReduce (a solution for processing voluminous data) and Redshift (a database for querying and analyzing similarly large datasets) both leverage EC2 for computing resources, and feature easy data importation from S3. This model—enabled by the other operational processes described above—allows Amazon developers to leverage existing work and develop novel services without worrying about “low-level” problems that other teams have already solved [8].

This operating emphasis on communication and reuse of existing infrastructure effectively makes Amazon its own customer. Though the firm’s needs differ from those of its heterogeneous customers, this phenomenon ensures visibility and accountability within the decentralized firm and assists the evolution of individual services. This dynamic also enables price transparency that Amazon emphasizes in its business model: many products that leverage EC2 are priced explicitly in terms of the cost of EC2 itself.

Closing Thoughts

AWS’s market dominance is the product of business and operating model alignment. We saw above how the firm creates (and captures) value for customers, and how its operating practices support that mission. AWS’s offerings and scalability are clear hallmarks of the firm that developed them. These factors have combined to give Amazon a huge stake in the future of computing and digital commerce, and mark Amazon Web Services is a “winning” example of alignment between the Amazon’s business and operating models.

Interior of an Amazon data center.

Sources

  1. Amazon Q3 2015 Financial Results
  2. AWS Blog: Price Reductions
  3. AWS Case Study: Netflix
  4. “Here’s a Reminder Just How Massive Amazon’s Web Services Business Is” (Business Insider)
  5. “How Amazon Exposed Its Guts: The History of AWS’s EC2” (ZDNet)
  6. “Jeff Bezos of Amazon: Birth of a Salesman” (The Wall Street Journal)
  7. “The Trouble with IBM” (Bloomberg BusinessWeek)
  8. “Why Your CEO and Board Should Be Demanding API Adoption” (Forbes)
  9. Notes on New York Times AWS usage come from personal experience, but several posts on its “Open” engineering blog discuss AWS.

Photo Sources

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3 thoughts on “Amazon Web Services: A Down Payment on the Future of Computing

  1. Micah- great post, thanks for sharing. You bring up many interesting points. It seems that the culture of heavy API use is providing many benefits both from an internal efficiency perspective and a marketing / customer value proposition perspective as APIs are offered to external parties. The concept of solving things for internal use first and then selling internal innovations to others is fascinating. It really is a competitive advantage to be your own target customer. Holding all else equal, I wonder if these could be an argument for Amazon to enter new verticals if they can use back-end knowledge / experience they gain from operating new verticals to develop new products for AWS for a variety of clients.

  2. I found this very interesting as the company I profiled uses Amazon Web Services. I think one of the strongest appeals that you mention is the ability to focus on other operational matters instead of managing web servers. This is incredibly valuable in the start up stage of a company where iterating on the front end user experience is much more valuable than the back end. I am curious whether AWS has introductory pricing to try to attract some of the future start ups that may become retained clients.

    Ultimately, as it fits into Amazon as a whole, I am intrigued by how much of their business is made up by AWS now and in the future. Would or could they ever spin it off?

  3. Micah, really enjoyed this post. AWS is ingenious on Amazon’s part, and @Meghan – they sure are trying to attract start ups! Every startup community I was a part of in the last 2 years received a nontrivial amount of free credits towards AWS.

    I’m curious as to how Jeff Bezos views AWS in his overall strategy. Amazon promises online retail, delivery drones, Echo for home automation, that IoT dash button, lots of ingredients going into a black box to dominate the consumer purchase world. AWS seems like a different consumer segment, and I wonder where it fits in.

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