The business changing the shape of Amazon


Graham Ruddick

May 5, 2015

Amazon Web Services is growing fast, and could eventually become the biggest part of Amazon, the online retailer led by Jeff Bezos

Amazon Web Services might be the biggest business you have never heard of.

It is part of a company – Amazon – that has made its name selling books, CDs, and DVDs to shoppers around the world.

Yet AWS is a completely different beast, and it has the potential to change the shape of Amazon as you know it.

Jeff Bezos, the boss of Amazon, has said that AWS could one day become the biggest part of the company. Given that Amazon posted sales of $23bn (£15.2bn) in the three months to end of January, that is a remarkable statement of intent.

Amazon lifted the veil of secrecy off AWS for the first time in its financial results last month. It reported that AWS generated $1.57bn of sales in the last quarter and operating income of $265m. Perhaps the most striking statistic was the revenues were up 49pc on a year earlier.

Bezos said that AWS was a “$5bn business and still growing fact”. He then added: “In fact, it’s accelerating.”

So what is this mystery business that could eventually transform Amazon?

According to Adam Selipsky, who has been at the top of AWS for the last decade, it is not only the biggest business you have never heard of, but also one of the most important. It has played a key role in formation of a string of start-ups in the last few years, including Airbnb, Pinterest, Spotify, Hailo, and Just Eat. AWS is also used by established multinationals such as Shell, Unilever and BP.

The company has become vital for businesses small and large because it offers cloud-computing services. AWS provides cyber space for businesses to save data and run systems, eradicating the need to build data centres and servers costing hundreds of millions.

Selipsky, an American who serves as vice-president of AWS, says that some businesses wouldn’t have emerged without his cloud computing services.

“That is what our customers tell us. It’s really gratifying,” he explains.

“One of the best parts of our job is working with start-ups who are really innovative and tell us that they wouldn’t have had the funding or human bandwidth to work on these projects without the infrastructure layer taken care of.

“That [the infrastructure] is a common refrain. Think of the effort that start-ups used to have to put into raising capital to buy infrastructure that they may or may not have ever used, because it is a matter of statistics that most start-ups end up going away.

“Instead, with ‘the cloud’, customers can get going in minutes or hours. They can use their efforts to build a product or service and get it in front of customers. It is a fundamental difference.”

It is these benefits that lead Selipsky, Bezos and others to believe that we are on the cusp of a revolution in information technology that will have serious repercussions for business.

“We are in still in the early years of a fundamental transformation as to how IT is done around the world,” Selipsky explains.

“IT has really been done the same way for the last 30 or 40 years. Companies either build or rent data centres, they buy servers, they rack and stack them, they worry about bandwidth contracts with telcos, and their pagers are going off in the middle of the night when servers go down.

“They are spending a lot of time on undifferentiated infrastructure that really doesn’t add value to the customer. There are trillions of dollars every year spent on those data centres and hardware services to run that IT.

“We are still only a small number of years into a fundamental shift where most of that infrastructure will inexorably move to the cloud. The benefits of flexibility and speed in business results, as well as the cost savings are too great to turn back the tide.”

However, placing important documents and data on to an imaginary server in ‘the cloud’ that is shared with other businesses is a concept that some chief executives struggle to comprehend.

It also makes Amazon an extraordinarily powerful business, because other companies are handing over core parts of their operations and relying on AWS to run.

Selipsky says security is AWS’s “top priority”. The company has developed a number of methods to protect the data it holds for businesses, including splitting it up across data centres in the 11 regions around the world that it operates.

“We can lose an entire data centre and customers won’t lose any data,” Selipsky explains. The exact location of the data centres is also kept secret for security reasons.

However, the AWS boss denies that it is dangerous for one company to have so much control over other businesses.

“We are very clear, customers own their data,” he explains. “We don’t look at their data, it’s not our data. If it’s sensitive they can encrypt their data and handle the keys to that data.

“They are running their applications, we are providing the infrastructure upon which they run their applications. We are really partners in provisioning them to use those applications.”

Amazon is by far the biggest player in the growing cloud-computing market. Industry research suggests that it has more server capacity than its 14 nearest rivals added together.

However, it is facing growing competition from Microsoft, Google, IBM and telecommunications business, which are committing significant funds to breaking into market.

It is perhaps surprising that these traditional technology companies allowed Amazon, a retailer, to steal such a march in cloud-computing.

However, Selipsky says that the mentality of Bezos and Amazon was vital in the company establishing a lead. In fact, AWS was initially developed for itself, before it became apparent there was a wider demand for the service.

“We launched AWS over 9 years ago in early 2006 and it was in response to Amazon’s own internal need for really scalable, reliable, low cost infrastructure services,” Selipsky says.

“Amazon always places a big premium on innovation and making sure we innovate quickly on behalf of consumers. We were dissatisfied at the amount of time our development groups were not adding value for customers, doing things like provisioning storage, managing servers, and partitioning databases instead of working on features that added value to customers.

“As we started to ponder what that platform might look like and started talking to potential external customers, we found out that we were not unique and all these companies had the same need. So we very quickly decided to make an external customer facing business and Amazon retail would be simply be one large customer using the platform.”

Bezos’s famed and staunch belief in targeting long-term goals rather than quarterly profit targets has also helped AWS. Not only has AWS focused on improving its services, but it has cut its prices 48 times.

“When you cut costs you have a choice,” Selipsky explains. “You can keep the extra margin for yourself and have higher margins, which is a very legitimate business strategy and one that a lot of traditional enterprise companies have employed.

“Or you can turnaround and pass those savings to your customers by lowering prices. That is Amazon’s strategy. As we continue to innovate and enjoy benefits of scale, we will continue to cut prices and our customers know that.

“That is very different than the strategy that most old-world, old-guard technology companies employ.”

This article was written by Graham Ruddick from The Daily Telegraph and was legally licensed through the NewsCred publisher network.

Comment this article

Great ! Thanks for your subscription !

You will soon receive the first Content Loop Newsletter