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We use Netflix to watch movies, Airbnb to book vacation stays, and Facebook to connect with friends. These everyday activities happen on different platforms, but there's something they all have in common: they operate on Amazon Web Services (AWS).
Amazon, known for its global retail dominance, had a well-kept secret until 2015. It was the engine behind Amazon's remarkable growth, and it went by the name of Amazon Web Services (AWS). The rise of AWS is a fascinating tale of innovation and disruption in the cloud computing industry. Equally interesting is how tech giants like Microsoft and Google initially underestimated AWS's potential, only realizing its strength when AWS already marked a big footprint on the cloud computing map.
Now, let's take a journey back in that time to explore AWS's remarkable evolution.
The purposes of AWS’s birth
As Amazon grew rapidly, it faced with a challenge. It was expanding substantially but also burning a lot of cash to invest in their business. This challenge prompted Amazon's management team to seek new revenue streams and diversify their business to fuel the growth.
The common narrative about AWS's inception involves allowing other companies to use Amazon's spare infrastructure for cost-efficiency improvement. However, the true story is more intricate and strategic. Amazon had two purposes in this decision.
1. Streamlining and accelerating Amazon’s innovations
In the early 2000s, Amazon had grown into a massive online store, but it faced a significant challenge. When they wanted to add new features or improvements to their website, it took a lot of time and effort. Imagine if every time you wanted to build a new LEGO creation, you had to spend most of your time making the basic LEGO pieces like bricks and wheels. That's what Amazon's software engineers were doing – spending around 70% of their time creating the fundamental building blocks like a hosting, storage system and computing infrastructure for any project.
They called this "undifferentiated heavy lifting" because it was repetitive work that didn't make their website stand out. Amazon's leaders found it frustrating because it slowed down their innovations. They realized that if they could create a set of tools and services that all their teams could use to build these basic elements, they could speed up the process. So, they decided to build what's now known as AWS, a set of infrastructure services like storage and computing that all teams at Amazon could rely on. It was like giving their teams a magical toolkit to build things faster.
2. Empowering partners with advanced tools
Amazon had affiliates, who wanted to recommend Amazon products on their own pages. To help them, Amazon used to send them a piece of code that they could put on their websites. If someone bought a product through that code, the website owner earned a fee. However, as more affiliates wanted to do this, it became hard to provide unique codes for everyone.
So, in 2002, Amazon decided to give their affiliates a more advanced tool which was a free version of the software building block. It allowed them to be creative and build their own unique ways of recommending Amazon products. But using it was a bit like writing a story instead of just plugging in the code. Surprisingly, thousands of developers loved it because it gave them more freedom to create.
Intriguingly, what began as a solution for Amazon's internal efficiency and empowering their affiliate websites with better tools, eventually revolutionized the whole cloud industry.
What enticed developers to adopt AWS?
To understand why developers eagerly adopted AWS, we need to revisit the early landscape of cloud computing. In the early 2000s, cloud computing was in its infancy. Building a digital product meant first constructing the necessary infrastructure, often involving hefty upfront capital investments. Scaling was slow and costly, posing significant challenges for startups.
Amazon, in addressing its infrastructure needs, recognized that other companies faced similar problems. This realization led to the new concept of "utility-based computing" – a pay-as-you-go model where you pay only for what you use. Over several years, AWS continued to develop its infrastructure and services.
AWS’s leadership team recognized that their infrastructure and expertise in managing massive scale could be a valuable service for other businesses. They saw an opportunity to provide cloud computing resources to startups, enterprises, and developers, allowing them to scale without the traditional overhead. Therefore, in 2006, AWS launched Amazon Elastic Compute Cloud (Amazon EC2), a crucial service that allowed users to rent virtual servers on-demand. This marked the beginning of AWS offering its infrastructure and services to external customers, creating a new business model called Infrastructure-as-a-service (IaaS).
This new model has brought many benefits for its customers, especially startups and small companies due to cost-efficiency, scalability, all-in-one services including storage, computing, database and enhanced security. Like other disruptive innovations, AWS was initially created to target a small group of customers, but when scaled up, it created an entirely new demand for a novel business, later called as IaaS.
The Early Customers
One of AWS's earliest and most prominent customers was Netflix, which began using AWS in 2008. At that time, Netflix was primarily a DVD rental service but rapidly expanding its streaming video service. By moving its streaming infrastructure to AWS, Netflix gained the scalability and flexibility required to meet growing demand, ultimately becoming a global leader in online streaming.
Another early adopter was Airbnb, which used AWS for its hosting needs. Airbnb also started using AWS in around 2008, shortly after its founding. During its early days, Airbnb was a small startup looking for a reliable and scalable hosting solution. AWS provided the infrastructure needed to support Airbnb's platform as it grew. This allowed Airbnb to focus on its core business of connecting travelers with hosts while AWS managed the hosting and infrastructure aspects.
The competitor landscape
The most intriguing aspect lies in the initial reactions of its competitors. It's noteworthy that Amazon only began publicly disclosing AWS revenue in its financial reports starting from the first quarter of 2015. This revelation occurred nine years after the official launch of its services. Can you guess the scale of AWS during that period? By looking at Amazon's financial reports, it becomes evident that AWS had burgeoned into a nearly $5 billion business, far removed from its status as a mere side project. With consistently high double-digit year-over-year growth, AWS had firmly established itself as a substantial and highly profitable business.
Source: Amazon SEC Filings
You might wonder about the positions of Microsoft and Google in this race during that period. Microsoft first unveiled its cloud computing service, Windows Azure, in 2008, with the initial commercial launch taking place in early 2010. Similarly, Google entered the cloud business in 2008 with App Engine. However, both companies appeared to underestimate the potential of AWS, perhaps due to overconfidence in their leading positions.
A telling moment came in a 2014 interview with Charlie Rose, where Steve Ballmer, the Former CEO of Microsoft, was asked about AWS. He responded with a laugh, saying, "They Make No Money." Ironically, just a few months later, the business that Ballmer had referred to as "unprofitable" turned out to be a nearly $5 billion behemoth that dominated the cloud computing market. This serves as a stark reminder of how AWS's rapid ascent caught even industry giants off guard.
However, it wasn't just the leadership of Microsoft and Google that failed to recognize the dramatic rise of AWS. Even Wall Street harbored doubts about its business model. In 2006, Safa Rashtchy, an analyst from Piper Jaffray & Co., expressed skepticism, stating, “I have yet to see how these investments are producing any profit.”
Furthermore, many others struggled to grasp why Amazon ventured into AWS and the connection between selling books and providing technology services to other businesses. Adam Selipsky, CEO of Amazon Web Services, recalled that: “The answer, of course, was: AWS has nothing to do with selling books. But the technology we use to sell books has everything to do with AWS and what we can offer customers”.
This underscores Amazon's aspiration to be recognized not merely as an online retailer but as a technology company doing online retail. AWS opened up a new and highly promising market, catering to diverse customers including developers, startups, and businesses of all sizes. It was a bold move that reshaped perceptions of what Amazon could achieve beyond its retail roots.
A closer look to AWS’s financial numbers
To gain a deeper understanding of AWS's strategic role within Amazon's overall development strategy, let’s look at its proportion in Amazon's P&L statements. In 2021, while AWS generated only 13% of the total company's revenue, it contributed a staggering 74% of the operating income. This illustrates the immense profitability of AWS within Amazon's ecosystem. In 2022, AWS's revenue increased slightly to constitute 16% of the total revenue but accounted for a remarkable 186% of the operating income across the entire business.
Source: Visual Capitalist
Today, AWS still maintains its leadership position in the cloud computing market, alongside formidable competitors such as Microsoft Azure and Google Cloud Platform. However, the gap in market share between AWS and these competitors has been narrowing as they intensify their investments in this rapidly evolving industry. It's worth closely monitoring how Amazon sustains its innovative culture amidst the rapid technological changes of our era.
For AWS, it has proven to be a monumental and successful undertaking for Amazon. It also provides valuable insights to outsiders like us, offering a glimpse into Amazon's "Day One" culture which maintains a long-term focus, customer obsession, and bold innovation. These principles have undoubtedly paved the way for Amazon to achieve remarkable heights in its ongoing journey of innovation.
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That’s all for today. I hope you enjoy it.
Till next week!
Cheers,
Do Thi Dieu Thuong