Home Amazon Web Services Hits $3.8 Billion Revenue – But Can It Capture The Enterprise?

Amazon Web Services Hits $3.8 Billion Revenue – But Can It Capture The Enterprise?

It took Amazon Web Services (AWS) eight years to hit $650 million in revenue, according to Citigroup in 2010.  Just three years later, Macquarie Capital analyst Ben Schachter estimates that AWS will top $3.8 billion in 2013 revenue, up from $2.1 billion in 2012 (estimated), valuing the AWS business at $19 billion.  It’s a lot of money, and it underlines Amazon’s increasingly dominant role in cloud computing, and the rising risks associated with enterprises putting all their eggs in the AWS basket.

The Enterprise Is Cloud Computing’s Next Big Target

Ultimately, it’s the enterprise that will crown a winner in cloud computing. And as Macquarie Capital posits, Amazon is gearing up to take on the enterprise:

We highlight that much of AWS‟s past growth has come from SMBs [small and medium-sized businesses] and start-ups. While these will continue to drive growth globally, in 2013 we expect a more concerted effort to focus on growing the AWS business at large enterprises. Importantly, the broadening platform offered by AWS is helping to drive adoption in larger enterprises (moving up the tech stack, with RedShift and other recent product launches). Additionally, we think emerging markets offer a significant opportunity, as many enterprises in these regions will likely bypass traditional technology infrastructure and go straight to the cloud.

Not that winning the enterprise will come easily. Outside the SMB market, Amazon has real challenges.  

One is reliability, which has Amazon scrambling to root out “unknown unknowns” before they bring down AWS. In this the company largely has to go it alone. Even if Amazon were to open source the infrastructure it uses to run its operations, as Facebook has, it’s unlikely that the company would derive much benefit. Amazon runs at a scale that few developers have experienced, rendering its “many eyeballs” just that: eyeballs that don’t necessarily know what they’re looking at, and impotent to dig in and help make AWS more resilient. Sure, there are engineers at Google and other Web giants who can appreciate Amazon’s scale (450,000 Linux servers and counting), but what’s their incentive to help by contributing code or insight?

It’s unlikely that the enterprise is going to toss out AWS any time soon, however. It’s just too convenient, and relatively cheap. Amazon is happy to run at ridiculously low margins, according to its CEO Jeff Bezos in a Harvard Business Review interview, because the company believes the potential of the Internet is still largely untapped. In Bezos’ mind, we’re in the midst of a land grab for the future of retail and computing. Building and owning a market is more important than collecting profits from it. At least for now.  

Amazon Is A Tough Competitor

This translates into serious customer benefit. As for competitors, well, Businessweek‘s Brad Stone calls the company’s approach “the Bermuda triangle of business.”  

Amazon also has the benefit of having been first to market, with its interface (API) now dominant among developers. In responding to a podcast question about why his company chose to embrace the Amazon API instead of creating its own, Basho CTO Justin Sheehy highlights the developer inertia cutting against API innovation:

I’ve never heard a single customer say, “Don’t give me the Amazon API.”… If everyone were starting to build these things at the same time then innovating at the API might be interesting. When the majority of users are already using the same one, however, you don’t pick it because it’s the best. You pick it because it’s the API that gives you the least friction to people adopting your product.

None of which is to suggest that AWS has already won the battle for the enterprise. There are plenty of excellent alternatives, particularly for enterprise workloads, in Google Cloud Platform, VMware CloudFoundry, Microsoft Azure, Rackspace and others, not to mention private/hybrid cloud solutions from Citrix (Apache Cloudstack), Eucalyptus, OpenNebula and more. Many of these have technical and other advantages, as well as price discounts in some cases. But right now it is Amazon that is setting the terms, and with its aggressive pricing and product roll-outs, it’s making those terms as onerous as possible for competitors to surpass.

Ultimately, it’s a race to see whether competitors can improve their ease-of-use and cost structure faster than Amazon can improve its reliability and security. Either way, customers win.

Image courtesy of Shutterstock.

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