Amazon opens up about AWS revenues

Amazon Web Services is a big business that is growing fast. Amazon has typically remained quiet on the subject of AWS financials, but has finally opened up about how the service is doing. columnist Bernard Golden looks at what AWS revenues really mean.

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What’s interesting about AWS’s revenues is how little they support this point of view. Overall, it’s clear that the bulk of AWS use is for new applications rather than as a lower-cost alternative to on-premise hosting of legacy applications.

And these applications are far from commodity, me-too offerings. AWS has enabled a plethora of innovative startups, allowing them to create new IT-based businesses that have, in many cases, rapidly grown to be significant in their own right. To name just three:

  • Netflix makes video consumption an always-on, available-everywhere user experience and is shaking up the established ecosystem of media creators and distributors
  • Airbnb provides a platform for lodging, disrupting the existing hotel industry by making a far wider range of traveler options available throughout the world
  • Pinterest lets people create virtual scrapbooks, allowing like-minded enthusiasts to share valued content

It’s no exaggeration to say that AWS has dramatically changed the economics and timescales of starting new companies, and the fertile soil of the service has allowed thousands of new companies to germinate, push up new shoots, and in many cases, flourish.

However, a more recent development is the dramatic growth in AWS enterprise adoption. Each week I encounter enterprise IT groups -- many of them in industries one would surmise would be reluctant to use AWS -- developing plans to use the service in a major way. Many of these companies are ones that two or three years ago vowed that they would never use AWS.

The motivation for these enterprise initiatives is surprisingly similar to that of the startups -- an ability to quickly and cheaply deliver new applications with innovative qualities. In that sense, these initiatives embody Marc Andreessen’s “Software is eating the world” mantra, which I discussed here and here in pieces on the Third Platform. Simply put, far from IT being a commodity, AWS is enabling and benefiting from huge growth in IT innovation.

Therefore, the de facto view on the part of the startups that AWS is their natural computing environment, together with the increasing adoption on the part of enterprise IT, indicates that AWS’s growth rate is likely to continue for the foreseeable future, i.e., the next decade. Indeed, one of the reasons for Fitzgerald’s call for AWS to be spun out of Amazon is his feeling that AWS faces a trillion-dollar opportunity. Baldly stated, demand for AWS is huge, growing, and long-lived.

It might seem that this belief is overblown, but it is exactly in line with other IT platform shifts of the past. Each platform change led to a huge expansion of use and a vastly larger overall spend on IT. It’s likely that AWS will be the beneficiary of a similar phenomenon, as IT expands into more and more segments of our society and economy.

What AWS revenues mean for incumbent vendors

It’s a truism airlines and automobiles supplanted railroads for personal travel because rail operators failed to understand they were in the transportation industry, not the rails and railcars industry. People used railroads as a mechanism to get from one place to another -- and once another option was available that was faster and cost-competitive people flocked to it. A mere two decades after the industry’s peak during WWII, it was on its last legs, with many passenger railroads going bankrupt and the remainder abandoning passenger travel nearly everywhere.

Most incumbent vendors view cloud computing as a recasting of infrastructure delivery -- an offering that delivers computing and storage with more agility. Therefore, most of them have responded to AWS by creating a cloud offering that incorporates their infrastructure product, claiming that its superiority makes AWS much less compelling; in other words, they are framing the competition on the basis of the quality of the underlying infrastructure. Unfortunately, by doing so they indicate a fundamental misunderstanding of what is driving AWS adoption.

AWS has prospered by making it easier and faster for users to create and deliver applications. It began by offering infrastructure as a service, which, by itself, sparked immense demand. It has now added a panoply of additional services to the core infrastructure offering. For years people have talked about Unix/Linux as a set of Legos -- services that could be mixed and matched to support innovative uses. AWS is now building a ginormous set of Legos to support a new generation of applications.

The danger for incumbent vendors is that they will repeat the mistake of the railroads by believing they are in the infrastructure industry, not the application enablement industry. Many of them have looked to the size of the traditional infrastructure revenue stream and their position in the infrastructure landscape and dismissed AWS’s threat.

What incumbent vendors need to recognize is that the IT market battle is rapidly shifting from infrastructure to application enablement -- and that market will ultimately prove to be far larger than the current market, just like all previous IT platform shifts. Missing this shift means becoming the next generation Penn Central.

Frankly, I’m surprised by the lack of urgency on the part of incumbent vendors. While they appear to have some awareness of the reasons for AWS’s popularity, they display a puzzling lack of intensity in terms of the pace of their response.

The evidence is plain to see. The largest vendors are experiencing dropping revenues or, at best, anemic growth -- this in a time of obvious explosion in IT use. We are experiencing unprecedented growth and innovation in IT and, right now, the incumbents seem at a loss as to how to respond. One thing is clear: trying to fight this battle on the basis of infrastructure is a losing proposition.

AWS customers use it to help them deliver next-generation applications. Failing to understand this, and figuring out how to respond to customer demand for application-oriented functionality, will consign vendors to the scrapheap occupied by passenger trains and buggy whip manufacturers. This is a humbling prospect for yesterday’s IT giants, but as the saying goes, the first step to getting yourself out of a hole you’ve dug is to quit digging.

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