Amazon still yields disappointing to meager earnings, while revenues have soared, but this is all about to change with Amazon Web Service.
Amazon’s recent partnership with Rackspace has been a big blow to Microsoft in the latest episode of “Cloud Wars."
Microsoft is only one technology giant that is feeling pain from the viral growth of Amazon Web Service (AWS), and smaller players like Rackspace will be seen moving into a managed services and operations niche for organizations that don’t have the staff to manage “The Cloud” and leverage infrastructure from the big cloud players.
Amazon, founded in 1994 by Jeff Bezos, has had a unique history in the vast landscape of internet success stories. Diversification is an understatement when describing this company’s journey to prominence, and while overly diversified corporations usually end up with wholesale spinoffs (look at GEs recent moves), Amazon continues to disrupt.
Starting as an online book retailer, Amazon was a disrupter from the start and its foray into a wide swath of consumer goods, digital media and consumer electronics has kept competitors like eBay, Walmart, Apple and Netflix on their toes.
Now, with Amazon Web Services, a massive technology disruption is underway that will greatly affect sales volumes of some big players including Cisco, EMC, HP and Intel. Amazon's journey to the cloud was clearly influenced by the technological outcomes of the businesses they pursued, and could be considered a fortunate side-effect.
Not Soft and Fluffy, AWS is the Definition of Cloud
Amazon Web Services (AWS) is the latest in a long line of major Amazon disruptors. This “cloud” play was born of a sophisticated data center evolution that ran Amazon’s day-to-day business and their foray into APIs (Application Programming Interface) for businesses to integrate directly to Amazon’s retail systems.
There was a realization that there was a huge demand for infrastructure and API technologies, and Amazon had created these tools and services for their very own consumption. A popular belief was that Amazon was simply selling excess data center capacity, but that wasn’t the motivation at all and, in fact, there was no excess capacity for their burgeoning business.
AWS was simply an innovation released for public consumption to address some age-old problems that Amazon had solved internally.
Because cloud technologies are becoming more mature, corporate IT strategies are now focused on the extinction of the privately owned data center, a huge cost overhead. Amazon can provide the same services in a more efficient way, with a deeper talent pool than any one organization could do on their own.
Competitors such as Microsoft Azure and even WalMart are also in this game, but the recent announcement of an AWS-Rackspace partnership is an indication of further consolidation in the industry and a bit of an omen for smaller players.
So, Why Is AWS So Big?
There are positive and negatives to this movement. Theoretically, companies will be able to cut a considerable overhead in the form of physical data centers and the personnel that is required to run them.
Various estimates are available, but the average data center utilizes approximately 25 percent of their purchased capacity. With the benefits of the elastic-cloud, utilization will improve greatly and this means lower sales for every infrastructure vendor in the world (Cisco, HP, Intel, etc.)—a big impact to jobs in two ways; job loss at major infrastructure vendors, job loss at corporations that staff their own data centers.
Cloud infrastructure and AWS are far-reaching innovations that will improve the corporate bottom line, but at the expense of vendor profits and many high-skilled jobs.
This stage was set and experience gained with many other profitless and equally disruptive Amazon innovations.
How Did Amazon Get Here?
Turn the Page (Hosting)
Amazon brought together all the right elements of supply and demand by establishing itself as an online book broker capable of fulfilling a “virtually” unlimited number of titles. Booksellers Barnes and Noble and Borders took the brunt of this amazing innovation, Borders even hosting their website at Amazon until 2008.
There may be evidence of AWS DNA in some of these early moves as Amazon has hosted sites for Borders, Target, Sears and Toys-R-Us. It is this experience in hosting other businesses' web properties and keeping them isolated from each other that is a primary component of establishing robust and secure cloud services.
Digital Delivery (Availability and Scale)
Digital media was a logical next step for Amazon. With the arrival DVDs, online sales and rentals had Netflix looking over their shoulders and was just another nail in the coffin for Blockbuster and other movie rental outlets. With the release of the Kindle (Android based—thanks Google), Amazon demonstrated that they were going to change the way content was delivered and consumed.
A true innovation, though many still enjoy the tactile nature of a book, Amazon introduced the potential of self-publishing. Much like the Music industry and its iTunes catalyst, the business side of the publishing house was forever changed.
Amazon launched streaming video in 2006. Now called “Instant Video” with some Prime membership benefits, this video streaming business is one of Netflix’s chief competitors. The infrastructure and services required to support video streaming and Kindle content distribution was very sophisticated and had to be highly available and provide massive scale—two very important characteristics of cloud infrastructure.
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Prime Time (Widely Distributed Infrastructure)
In 2005, Amazon announced “Amazon Prime," a membership service that provided free two-day shipping on many consumer items. In the years to follow Amazon added other benefits to sweeten the deal, such as Prime Instant Video (free streaming video) and free streaming music.
While analysts were concerned with Prime’s impact to this seemingly non-profit organization's bottom line, Amazon once again disrupted the retail industry with its massive fulfillment network and two-day delivery. Competitors simply had to respond in kind, and now, shipping times over two days are considered unacceptable.
More importantly, the scale and distribution of Amazon's warehousing and fulfillment centers that make Prime feasible add the characteristic of widely distributed data centers and network connectivity—the backbone of cloud technologies.
After 20 Years, AWS will be the 800 Pound Gorilla
Amazon still yields disappointing to meager earnings, while revenues have soared, but it is all about to change.
After two decades of technological philanthropy, the reinvestment has paid off and technologies created to support these businesses are now the product itself. Major innovators like Google have contributed great advances to the software industry, but Amazon is unparalleled in direct impact to consumer expectations and how we use technology.
AWS has struck pay-dirt with some data centers costing between 100 and 500 million dollars, let alone ongoing operations, the thought of eliminating them altogether is remarkable.
It is no wonder that investors, though frustrated at times, hang on for the ride. A ride, that from the start, had no clear destination.