Above the Crowd

Amazon’s AWS Strategy Becomes Clearer Every Day

June 8, 2009:

amazon_bwLast fall, I had a unique opportunity to visit Amazon and learn more about their web services (AWS) strategy. From where I sit as a VC, it was obvious they were winning.  You could see it in the number of startups that were building on their platform, and you could see it in the number of startups that were adding to their platform. All that said, at the time it still wasn’t obvious to me what Amazon’s strategy was to differentiate itself from the others certain to rush into the business — folks like IBM, Microsoft, and Google.

Amazon suggested that the strategy was two-fold, and that it borrowed heavily from the ethos the company has nurtured as the leading web retailer. First and foremost, as a “retailer” Amazon was comfortable running a low-margin business.  This may sound more like a capitulation than a strategy, but think about the competition here.  Do you really think Microsoft or IBM wants to run a low margin business? Recent stories, like this one last week on Gigaom, suggest that neither of them do.  The more I read about these larger companies trying to “add extra value” to avoid the obvious low margin structure inherent in the cloud business, the more I think that Jeff Bezos is crazy like a fox.

The second piece of the strategy leverages the company’s prowess in customer support.  One may ask, “how would a platform company differentiate with customer support?”  The answer is that they would have the best developer relations attitude and execution in the business.  This also appears to be playing out in the marketplace.  No cloud platform vendor is more communicative and more of a “listener” than Amazon.  In my mind, this is where Amazon has a huge advantage specifically over Google. While Google is slowly opening up their App Engine these days, it feels like they are being pulled into this mind set, especially when compared to Amazon’s approach.  I think back to the glory days of Microsoft, and the immense effort that Tod Nielsen put into wooing the developer community.  To me Amazon is executing right out of that playbook.

One last comment on Amazon’s cloud strategy.  Many in the IT world are quick to point out that its only small businesses and rouge developers in large organizations are using AWS.  This is exactly how these markets develop.  Amazon is simply selling to the innovators and early adopters in the market — the exact customers that are prescribed in Crossing the Chasm. These are the customers that others will follow, and by the time the laggards come into the market, the game will be over. At Benchmark, we were lucky enough to have a front row seat during the growth of some of the most successful Open Source companies ever (Redhat, MySQL).  And their early customers were these exact same early adopters.  The huge irony is that the Fortune 500 doesn’t know that their rogue developers are already using AWS inside their company without approval, simply because its easier than traversing the red tape inside their organization. In two years, when they officially decide to “be” a cloud customer, they will find that they already “are” a cloud customer many times over.

As is common practice, I should disclose that I am a shareholder of Amazon in my personal account, and that I was inspired specifically after learning of their AWS strategy. It is truly amazing to see a company the size of Amazon successfully launch a new product initiative so different than its core product offering.  Remarkable.

17 Comments

  1. Rob D June 9, 2009

    It’ll be interesting to see the competitive pressure placed on the internal IT groups for internal cost allocations as cloud use grows. Maybe the next evolution of internal IT will be to manage having multiple clouds and moving among them based on how well they are doing.

    Reply
    • bgurley June 9, 2009

      I think that is a possibility, and surely tools will pop up to help enable this. You are also hearing a ton about “private clouds” in the enterprise. Presumably at some point way into the future, this analysis could be done external vs internal. of course, internal IT would be both a participant and the judge…

  2. Dave D June 9, 2009

    Also seems like less concern with Amazon invading ISV space than either Google or Microsoft Azure. Partners like to avoid the steamroller.

    Reply
    • bgurley June 9, 2009

      Interesting point.

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  5. Your are right in thinking that Bezos is “Crazy like a Fox” to follow a #Blue_Ocean strategy of creating and then dominating a low margin, high volume business.

    As has been proven in tough developing markets like India, there is a lot of money to be made by addressing the “bottom of the pyramid”.

    Similarity between AWS Cloud strategy & Shampoo: In places like India, shampoo is considered a luxury product as it has a high relative costs per bottle, therefore, not a logical market. However, by packaging shampoo in uni-dose single use plastic sachets, Consumer Packaged Goods companies have found a huge market in a large and unlikely customer base at the bottom of the pyramid. This is a classic “bottom-up” strategy.

    Amazon’s AWS strategy has many parallels to this model and to use a Warren Buffet term, also affords Amazon a “wide economic moat” to ward off potential cloud competitors within the market Amazon has created and now dominates. Amazon is building a “Bazaar” (pun intended!) not a “Cathedral”.

    I believe we all need to be thinking about building more “bazaars” and not “Cathedrals”.

    BTW, Bill: Welcome to Paris! too bad we’ve got a bit of overcast weather for you. Rgds, http://www.twitter.com/aainslie

    Reply
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  7. Kevin July 6, 2009

    Are public clouds like Amazon and Google the price leaders? I think Amazon has set a standard in terms of commitment to Cloud Computing, as well as price. However, for companies with more than 10,000 CPU Core, a private cloud will usually come in a lot cheaper-perhaps 10 times cheaper. Quite possibly, the crossover point is even lower- 1000 cores. Can UPS or Fedex rent trucks by the hour from someone and still make money? On the other hand, if Fedex trucks can become sedans or SUVs in seconds, will Fedex still want to maintain its own fleet. I personally like the idea of a Eucalyptus based private cloud with cloud bursting to Amazon.

    Reply
  8. Kevin July 6, 2009

    Do we see clouds becoming a price sensitive competitive business? Will economies of scale mean that there will be relatively few hosting providers who will own most of the market in 5 years- as few as 5?

    Reply
  9. Amelie Relation July 6, 2009

    I think that is the secret: to have the best developer relations attitude and to be very communicative and a “listener”.

    Reply
  10. Kevin Leversee July 6, 2009

    We’ve been using through various projects AWS and can say we are a fan…it makes sense to reach out to the fringe, IBM and Microsoft already have the larger corporations, Amazon must go where the others are not. And hope the platform wins in the end. S3 is fast and cheap.

    Reply
  11. Benjamin September 30, 2009

    I am not sure about the “low margin” business. The AWS offering is using existing infrastructure and is low cost. Even though it represents a small part of the total sales, it was estimated to contribute already 1/3 of Amazon’s profit in 2008! It’s basically retailing HD space and computing power already paid for wholesale price.

    Also, compared to the books/CDs and what not, it is a “landlord” business model, collecting monthly fees. More surprising was how Amazon could stick to such a low-margin biz as online physical retail! No wonder they want to push digital retail with and ebook reader to activate the market.

    Alibaba/Taobao in China recently announced they were starting cloud / AWS-like services. They totally get the “landlord” approach.

    Reply
  12. Andy Baker November 1, 2009

    I agree with your point about customer service being Google’s weak spot. If they think ‘post a question on our forum’ is a satisfactory support strategy for people whose reputation depends on solving critical issues then they are going to hit a brick wall pretty soon.

    Reply
  13. Troy McConaghy November 1, 2009

    Jeff Barr, Senior Web Services Evangelist for Amazon.com, was giving talks about AWS in Second Life years ago. Back then, SL was a real hotbed of innovators and early adopters (and in many ways, it still is).

    Here’s Jeff’s SL profile.

    Reply
  14. Dan November 19, 2009

    How is this any different than any other web services provider? They are just marketing from Amazon now. Wasn’t there a failed company that let you use cloud computing about 10 years ago from Marc Andreesen and it was going to be the next big thing? We’ll see how this pans out. History often rhymes.

    Reply
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