Ten years on, Jeff Bezos risky bet on Amazon Web Services pays off big... http://siliconangle.com/blog/2016/03/14/ten-years-on-jeff-bezos-risky-be...

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BY ROBERT HOF (HTTP://SILICONANGLE.COM/BLOG/AUTHOR

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UPDATED 12:27 EST . 14 MARCH 2016 7 MIN READ

When Amazon.com launched its first Web

service (https://aws.amazon.com/about-
aws/whats-new/2006/03/13/announcing-
amazon-s3---simple-storage-service/) 10
years ago today, offering storage in the cloud,
people thought it was yet another crazy, profit-
nuking idea from Chief Executive Jeff Bezos.

Why on Earth, investors and analysts griped,

was a company still struggling with a
marginally profitable retail business embarking
on what looked like an entirely unrelated
business: selling the storage and computing
services it used in its own operations to other
companies? In Jeff Bezos Risky Bet, an
October 2006 BusinessWeek cover story
(http://www.bloomberg.com/news/articles
/2006-11-12/jeff-bezos-risky-bet) that was the
first major media account of Bezos thinking
behind Amazon Web Services, one Wall
Street analyst groused that new investments
such as AWS were probably more of a distraction than anything else. Even Tim OReilly, the CEO

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of tech book publisher OReilly Media who recognized Bezos strategy early on, called Amazon a
dark horse against the likes of Microsoft and Google.

From dark horse to Triple Crown winner

A decade later, that dark horse is nothing less than a Triple Crown winner. Theres scarcely a
startup that hasnt run on AWS, and its critical to the digital operations of every company from
General Electric Co. to Netflix Inc., which runs all its massive streaming video on Amazon. The
unlikely offspring of a retail company, AWS has managed to outmaneuver computing and Internet
giants from Microsoft and Google to IBM and Oracle.

Now, the onetime distraction is Amazons key distinction in a consolidating group of technology
giants. AWS grossed $7.9 billion in revenues last year, up 70 percent from 2014, a growth rate four
times as fast as the retail operations. AWS could start to become even more of a revenue driver,
too. Morgan Stanley estimates that revenues will grow to $12 billion this year and $16 billion in
2017.

Whats more, AWS has arguably become Amazons new profit engine (http://www.forbes.com
/sites/roberthof/2015/04/23/amazons-risky-web-services-distraction-finally-pays-off
/#30cb8120a7a7) . Although the unit constitutes only 7 percent of Amazons overall revenues, its
$1.9 billion in operating profit isnt far off the $2.8 billion operating profit of the entire $99 billion
retail business. No wonder that Ben Schachter, an analyst at Macquarie Securities, last year
valued AWS at $75 billion, almost half as much as the rest of Amazons business.

Beyond profit
For all that, the benefit of AWS to Amazon goes well beyond financials. The business has helped
Amazon transcend its roots as a retailer to become a platform, an infrastructure that thousands of
other companies help build, nurture, and profit from, thats at least on par with Microsoft, Google,
and a few other giants. In cloud computing in particular, AWS has a 27 percent share, way ahead
of Microsofts 16 percent and IBMs 12 percent, according to the research group Wikibon.

But Amazon Web Services impact is even more fundamental. In a remarkably short period of time,
it has reshaped the entire technology landscape. By providing countless startups with the ability to
create new businesses seemingly overnight, with far less capital spent on hardware and software,
Amazon likely did more than any other company to pave the way for the huge, cloud-driven
disruptions were seeing in nearly every industry, from retailing to entertainment to transportation.
Its hard to imagine the massive successes of Netflix, Apples App Store, Uber, Airbnb or dozens of
other unicorns without their ability to get big very fast using cloud services AWS pioneered.

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The surprise success of AWS is a vindication for Bezos, even if he

would just as soon keep it quiet. Were very comfortable being
misunderstood, he said in the 2006 BusinessWeek story. Weve
had lots of practice. Although he laughed as he said it, he has long
used press and investor confusion about Amazons plans as a way
to keep rivals off-balanceand nowhere was that more apparent than
in its web services business.

Innovating amidst public confusion

AWSs dominance also reveals much about Amazons approach to
innovation. That approach continues to vex investors, some of whom
wish the company would quit spending so much on new initiatives
and start reaping the profits theyve been expecting for the better part of two decades. But if Bezos
had heeded the naysayers back in 2006, Amazon would have been a very different, far less
important company. As Bezos put it then, We are willing to go down a bunch of dark
passageways, and occasionally we find something that really works.

More specifically, in a March 11 blog post (http://www.allthingsdistributed.com/2016/03

/10-lessons-from-10-years-of-aws.html) , Amazon Chief Technology Officer Werner Vogels laid
out 10 lessons that Amazon learned in the process of building AWS over the past 10 years. Most
of all, they indicate a willingness to both move fast on developing new features and at the same
time avoid cutting corners in the name of speed. As he put it in customary Amazon geek lingo,
There is no compression algorithm for experience.

That realization gave Amazon a massive head start that still has rivals choking on its dust. Google,
Microsoft, Oracle, and IBM remain behind despite heavy investment. In January, unable to keep up,
Hewlett Packard Enterprise Co. dumped its public cloud. Even the judge in IBMs lawsuit in 2013
to overturn the Central Intelligence Agencys awarding of a $600 million cloud contract with
Amazon called AWS superior (http://www.crn.com/slide-shows/cloud/240163808/7-things-
the-judge-didnt-like-about-ibms-cia-cloud-legal-battle-with-amazon.htm/pgno/0/6) in virtually
every way but price, adding that the price was not much different either.

Battling the rivals

Still, Amazon Web Services position is far from guaranteed in the future, if only because most
rivals cant afford to cede such a crucial foundation of the technology industry. In November,
Google signaled a renewed cloud push with the hiring of VMware founder Diane Greene
(http://siliconangle.com/blog/2015/11/20/google-bags-vmware-co-founder-diane-greene-

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to-transform-its-cloud-business/) to head its enterprise and cloud businesses. IBM has spent $1
billion on its Bluemix (http://fortune.com/2015/10/01/ibm-bluemix-local/) platform-as-a-service
technology and is busily copying AWS features. Oracle, whose databases and other applications
remain critical to many enterprises, has managed to persuade many customers to leave the
applications alone or move them to its own cloud.

Some rivals are teaming up to counter the AWS juggernaut. Facebook created the Open Compute
Project to open-source the building blocks of servers and data centers, attracting the support of
Intel, Microsoft, and others. Wikibon analyst Stu Miniman suggested (http://siliconangle.com
/blog/2016/03/10/google-said-ocp-is-not-relevant-so-why-is-it-signing-up-now/) in a recent
interview on theCUBE (https://www.youtube.com/watch?v=xXBDymGMp-E&feature=youtu.be)
that Googles new entry (http://siliconangle.com/blog/2016/03/10/google-jumps-in-bed-
with-facebooks-open-compute-project/) into the five-year-old initiative could be an attempt to apply
open-systems pressure on AWS.

Not least, AWS customers, especially those bumping into Amazon competitively, may start liking
what they see elsewhere, or at least trying to avoid getting too reliant on one company. Hewlett-
Packard Enterprise and Oracle have started offering some of the benefits of AWS, such as
self-service, automation, and flexible pricing, for on-premise gear.

Apple, one of AWSs largest customers at 9 percent of AWS revenues by Morgan Stanleys
estimate, is rapidly building out its own data centers for iTunes, iCloud storage, the App Store, and
other services. The firm reckons that Apples construction of 2.5 million square feet of data centers
is almost 40 percent of AWSs capacity. We believe this build is a signal that Apple is increasingly
likely to move away from AWS in the next 18-24 months, Morgan Stanley analyst Brian Nowak
wrote in a Feb. 1 note to clients.

Keeping the lead with database services

Yet Amazon shows no signs of slowing its AWS drive. Its continuing to push further into cloud
services, introducing hundreds of new features every year. In particular, it has started to offer
applications such as database and data analytics services, which it revealed last October were at a
billion-dollar-plus annual run rate.

Thats likely to be AWSs biggest push in the next few years, judging from an analysis of 2,373
AWS jobs listings by Deutsche Bank in November. The main hiring focus is in database services,
the firm said, and Amazon has the potential to benefit from enterprises storing and analyzing a
large portion of their data in the public cloud. Although Deutsche Bank views a concerted AWS
move up into the Software-as-a-service market unlikely anytime soon, thats the next big
opportunity further down the road.

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No doubt some of Amazons AWS initiatives wont succeed, but for the time being, AWS continues
to set the pace for everyone else in cloud computing. In his annual letter to shareholders, released
last April, Bezos was surprisingly bold about the prospects for what he conceded is a very capital-
intensive business, writing: I believe AWS is one of those dreamy business offerings that can be
serving customers and earning financial returns for many years into the future.

And so it seems that his 10-year-old distraction is here to stay.

Feature image by unknown photographer, cc (https://creativecommons.org/licenses/by/4.0/)

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