By now the dust has settled on Amazon's second quarter financial performance. It's time to look at what the fine performance of Amazon's AWS division means for the industry at large.
For those who haven’t caught up on Amazon’s recent quarterly financial results, they were surprising for a number of reasons. Amazon has long been seen as the perfect example of a company pouring its money back into growth and foregoing profits for growth. This quarter was, however, different for Amazon, with the company posting only its second-ever quarterly profit. Total net sales for the three months ending on June 30 were $23.19 billion, a 19.9% year-on-year gain that blew away financial analysts’ estimates.
But for those of us who focus on Amazon’s Web Services cloud division, the fact that this quarter was only the second time that Amazon broke out AWS revenues was the cause for delicious anticipation. And we were not disappointed. For the quarter, AWS generated $1.82 billion in revenue, a full 81.5% higher than in the second quarter of 2014. The division’s operating income was $391 million, a fairly staggering (given its already high level) 400-odd percent annual gain.
Clearly, the old criticism that legacy vendors used to make of AWS, that it is a bookseller moonlighting as an IT vendor, have been dispelled. Indeed, many a comic suggested on Twitter that the opposite is, in fact, true: Amazon is an IT vendor that dabbles in selling books. Whatever way you look at it, the fact that AWS’ operating income represents over a third of that for the whole group tells an important story.
But what is even more interesting than this performance, however impressive, is what the future holds for the company. After all, Amazon invested $1.21 billion in capital expenditure for AWS in the second quarter alone. That’s a big bet, and one which Amazon shareholders will help fuel continuing dominance. And while the Amazon share price has soared since the announcement, the longer-term situation is more interesting.
A recent opinion piece on The New Stack questioned whether AWS is actually “winning the problems it poses.” The gist of the piece was that AWS, with its focus on server virtualization, will be left weakened by a move to a more abstracted, services-based future.
The author suggests that much of AWS’ innovations, while epic in scale, focus on making its virtualization-based solutions easier to use. He suggests that the next set of innovations won’t be gained from this approach of delivering servers as easy to deploy, manage, and expend (he used the “servers as cattle” term), but rather to a future where, in essence, no servers exist at all.
The author goes into a detailed technical example of why AWS will be left behind by solutions that have a server-less basis. The reduced complexity, lower number of disparate solutions being used, and increased performance of this consistent approach will, in his view, provide disruption to AWS’ hegemony. While it makes for a compelling argument, it doesn’t, in my view, appreciate the level at which AWS is innovating, and ignores some business fundamentals.
In its essence, AWS is a platform created by and for developers. It came into existence, after all, as a direct result of Amazon’s experience running its own e-commerce platforms. As such, AWS is a very different beast from an organization that delivers solutions without a deep connection to web-scale operations. It is true that vendors like Microsoft build their own products based on their internal experience of building and running their own webscale platforms, such as Office 365 and Hotmail.
The very existence of AWS Lambda, a service that was introduced at AWS reInvent conference last year, is an indication of this very quick, very tight, and very response feedback loop that AWS has between its internal and external customers and its product developer organization. Lambda is, I believe, a good example of why the idea that AWS is being disrupted is flawed.
Lambda is a way of running code without needing to run servers. The business that, arguably, invented the ability for organizations to make mass utilization of servers as cattle introduced a solution that fundamentally swings the story away from server automation 180 degrees. It is also proof, in my view, that AWS shouldn’t be accused of having any predefined bias, be it towards virtualized servers or whatever. AWS is an example of an organizations laser-focused on making significant revenue from delivering exactly what its developer customers demand. AWS will, I believe, do whatever it needs to do to deliver upon that aim. As such, predictions of AWS’ demise are, in my opinion, much more fairy tale than they are the reality. It would seem the share price is a good indicator of this.
