Ed. note: This is the first in a three-part series drawn from a major report on Amazon AWS by Wikibon Co-Founder and Chief Analyst David Vellante. The next section will look at how other IaaS providers can compete successfully with the Amazon steamroller. The third will look at the implications for CIOs in medium-to-large organizations.
With close to $1.5 billion in AWS revenue from IaaS, $57 billion in revenue overall in 2012, and a $120 billion market cap, more than HP, Dell, and EMC combined, Amazon is the 700-pound gorilla of cloud services. And it is eating up the market with a closed-loop strategy based on a low-margin pricing strategy that includes passing on savings Amazon achieves as its purchasing volumes increase, along with an aggressive development program that produces a constant stream of upgrades and new features. So as it adds more business, it commands higher volume discounts from its suppliers that it uses to decrease its prices at a rate of once a quarter, attracting more business.
This, writes David Vellante in his comprehensive new analysis of Amazon’s AWS business, “Cloud Computing 2013: The Amazon Gorilla Invades the Enterprise” has driven a 25%-30% year-to-year growth rate for the past four quarters. And at the AWS re:Invent conference in November, Amazon executives made it clear that they plan to disrupt the current enterprise computing landscape generally and infrastructure services specifically by bringing this low-margin strategy into enterprise IT.
His analysis is based on a just-finished Wikibon study of Amazon’s impact consisting primarily of in-depth interviews with 25 AWS customers and cloud services providers and analysis of service contracts for Amazon AWS and other providers.
Amazon, he writes, catalyzed what is today called “cloud computing” when it introduced AWS in 2006. Today it competes on such a massive scale that “very few, if any, IT organizations and competitors will be able to match Amazon’s size, cost structure, and pace of functional delivery.”
Vellante analyzes the six key values that AWS Senior VP Andy Jassy presented at re:Invent:
- Shifting CAPEX to OPEX: This, Vellante writes, is one of the most appealing and defensible values of AWS.
- Lower costs: Referencing an IDC study commissioned by Amazon, AWS executives cite 70% lower TCO. Wikibon, however, cautions that its research shows that on an apples-to-apples basis, renting from Amazon is often significantly more expensive than owning, especially for companies with over $1B in revenue.
- Elastic – no guesswork: This value point is totally legitimate, important as the economic disaster of 2008-’09 demonstrated, and something that few if any internal IT organizations have matched.
- Speed and agility: Amazon executives say the IDC study suggests a 5X improvement speed and agility. Wikibon infers that to mean speed of application deployment. Its data indicates that this is true for small and simple applications but cautions that the ratio declines and sometime flips to the negative side for complex applications.
- Avoiding non-differentiated heavy lifting (aka infrastructure plumbing): Another completely legitimate benefit.
- Go global in minutes: AWS now has infrastructure in 9 geographic “regions” with 25 availability zones (distinct locations within a region designed to provide failure isolation from other availability zones) and 38 points-of-presence for content distribution.