In 2022, Amazon, without AWS, would be highly unprofitable.
Spin off AWS from Amazon, and you get a wholly different company (at least from a financial standpoint).
No surprise then that the former AWS CEO, Andy Jassy, has become Amazon’s CEO.
To gain a bit of context of AWS’s incredible rise, back in 2013, AWS made a little over $3 billion in revenues. By 2021, it generated over $62 billion. Almost a 20x increase!
And in 2022, Amazon AWS generated $80 billion in revenues, with over $22 billion in operating income.
By 2022, Amazon AWS alone might be well worth over $500 billion.
Amazon today is worth a bit over a trillion.
So if you remove AWS, Amazon might be worth less than half its current market value!
Not all cloud businesses are born equal.
Some context below for Q2 of 2022:
– Amazon AWS = $19.7B
– Microsoft Intelligent Cloud = $20.9B (Note: this is a larger segment, comprising Azure + other cloud services).
– Google Cloud = $6.27B
As of now, Microsoft’s Azure is a real threat to AWS.
Google Cloud runs at negative margins.
The Google cloud segment lost $858 million in Q2.
Why does the cloud matter so much?
Well, the whole AI ecosystem is getting built on top of it.
In short, the cloud infrastructure is the basis for AI companies to develop, thus creating the next digital industrial revolution.
How come prominent players like Microsoft and Google couldn’t compete with AWS for years?
– Early timing.
– Bezos played a trick on his competitors.
When Amazon officially launched Amazon AWS in 2006, none imagined what a cash machine it was and what it would become.
And Jeff Bezos was pretty smart about it.
What was the trap he employed?
Indeed, when AWS officially launched, it was priced as a utility.
Bezos wanted to avoid “Steve Jobs’ mistake” of pricing the iPhone at such high margins to quickly attract competition.
Instead, Bezos initially made AWS a low-margin business, and over time, it became a highly profitable segment.
AWS rolled out its first mass-market product, Simple Storage Service, or S3, on March 14, 2006.
That is the official date of birth of AWS!
However, AWS was born in the early 2000s. As Amazon went through the dot-com bubble, the company had to redefine its business model.
Jeff Bezos wanted to cash in the Internet revolution by placing bets everywhere. Yet by the early 2000s, many of these bets had turned to zero.
The primary example was pets-com, which went bust in November 2000.
Amazon had to refocus. Get back on strengthening its e-commerce infrastructure and, most of all, change the paradigm. Move from e-commerce to platform.
In short, to quickly expand the selection of goods while keeping prices low, they had to host as many third-party stores on Amazon.
That was an opportunity to fix the jumbled mess which had become the underlying Amazon infrastructure.
Thus, AWS also came about as a side effect of Amazon’s change in paradigm (from e-commerce to platform).
For a period in the 2010s, AWS has powered the whole Web2 startup ecosystem (Airbnb, Instagram, Netflix, Pinterest, Slack, and many more).
And a crucial personal detail, AWS was led by Andy Jassy since 2003. Eventually, Jassy took the place of Bezos as CEO of Amazon.
So you get what a revolution AWS was for Amazon from a business standpoint!
The low-margin strategy worked. Only in 2008 did Google realize the threat of AWS launching its own Google Cloud Platform.
And Microsoft took even longer, launching its Azure in 2010.
That gave AWS an incredible bandwidth to organically grow AWS into the most powerful tech company these days.
Three takes from this story:
– AWS was born as side effect of a paradigm shift: paradigm shifts can be extremely powerful when a breakthrough moment comes. And the dot-com bubble, a survive-or-die moment, really defined Amazon for the next twenty-five years. Also, from this paradigm shift, as an effect, of making difficult decisions, you might stumble upon gild mines! That is how Amazon stumbled upon AWS.
– The physical platform becomes the basis for building an incredible service business: when a company manages to build the next physical platform, initially, margins do not matter. indeed, in the long run, the company owning the physical platform will be able to build a service business on top of it with incredible margins. Often, the service side of the business will serve as the profit and cash flow center to keep subsidizing the physical product for a larger and larger group of people.
– Hide the margins: as the story shows, everyone wants to be in a high-margin business. And a few want to risk their margins. That is why the fact that Amazon hid under its hood the margins and profits of AWS helped it to become the tech giant we know today. Only two years later, from the first AWS official launch, Google came out with a cloud service, and only by 2010 Microsoft did do the same.
Read Also: Amazon AWS, Amazon Business Model, Business Model.