amazon-aws-business-model

Why Amazon Is Doubling Down On AWS

Back in the year 2000, Amazon business model was facing scalability issues, primarily due to its massive infrastructure growth. More precisely Amazon was looking for a way to allow merchants to build their own e-commerce on top of Amazon. This would later become the critical strength and competitive advantage for Amazon.

That is also why with “really no fanfare” Amazon started to put together the infrastructure that would later become Amazon AWS. Today Amazon AWS is a company’s separate segment, and it made over seventeen billion dollars in revenues!

Related: Why Is AWS so Important for Amazon Future Business Growth?

Amazon AWS expenses are primarily comprised of its technology and content costs. Throughout the years, Amazon has doubled down on that:

amazons-technology-and-content-investments-in-millions

Amazon specified in its annual report Amazon AWS “increased spending on technology infrastructure and sales and marketing expenses and related payroll, which was primarily driven by additional investments to support the business growth.”

By looking at Amazon‘s revenue model over the years, it is easy to appreciate how Amazon AWS has grown in importance for the overall Amazon business model:

amazon-revenue-model

As pointed out on Amazon Annual Report for 2017:

It’s exciting to see Amazon Web Services, a $20 billion revenue run rate business, accelerate its already healthy growth. AWS has also accelerated its pace of innovation – especially in new areas such as machine learning and artificial intelligence, Internet of Things, and serverless computing. In 2017, AWS announced more than 1,400 significant services and features, including Amazon SageMaker, which radically changes the accessibility and ease of use for everyday developers to build sophisticated machine learning models. Tens of thousands of customers are also using a broad range of AWS machine learning services, with active users increasing more than 250 percent in the last year, spurred by the broad adoption of Amazon SageMaker. And in November, we held our sixth re:Invent conference with more than 40,000 attendees and over 60,000 streaming participants.

With the AWS segment, Amazon serves “developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through its AWS segment, which offers a broad set of global compute, storage, database, and other service offerings.”

The interesting part of Amazon AWS is that opposite of its core business model (online store), this segment runs at high-profit margins.

For instance, by comparing the revenues and operating income growth over the years, you can appreciate how the cost structure for Amazon AWS gets better over time:

amazon-aws-business

That is also shown in its operating margins over the years: amazons-aws-operating-margins

As reported on its annual report the increase in “AWS operating income in absolute dollars in 2016 and 2017, is primarily due to increased customer usage and cost structure productivity.”

That makes it easy to understand why Amazon is doubling down on its AWS business segment!

As explained by Andy Jassy, Amazon AWS CEO, in a 2017 interview on Forbes:

If you look at what’s happening in the enterprise and the public sector over the last two to three years, it’s exponential and dramatic for AWS,” he says. “You can see it in really every imaginable vertical business segment. So it’s not like these enterprises are running just a couple applications. We have an $18 billion revenue run rate. You don’t have a business that big just on startups. We’re just at the beginning of mainstream enterprise mass migration to the cloud.

Handpicked related content:

Amazon AWS 2013 2014 2015 2015 2016 2017
Revenues 3,108 4,644 7,880 7,880 12,219 17,459
Operating Income 673 660 1,863 1,507 3,108 4,331
Operating Margins 21.7% 14.2% 23.6% 19.1% 25.4% 24.8%
Source: Amazon Annual Report 2017
Source: Amazon Annual Report 2015

 

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

Leave a Reply