Share on facebook
Share on twitter
Share on linkedin

What the AWS Numbers Really Mean

A Cloud Guru News
A Cloud Guru News

Last week the entire cloud industry sat still, waiting with bated breath, anticipating Amazon’s quarterly results. Or, more accurately, waiting to see just how well AWS did. Amazon announced its numbers, and the answer is, AWS did well. Very well.

For the quarter, AWS racked up $2.57 billion in total revenues, growing YoY at a 64% clip. AWS operating income rose to $604 million, with operating margin increasing from 17% to 28%. As the figure below indicates, AWS revenues have been growing very steadily with CAGR of around 70+% for the year. Amazon also announced that AWS is on track to be a $10 billion business in 2016 — not a very daring prediction, to be sure, given that it could achieve that with no growth at all for the rest of the year.

To put that in perspective, VMware revenues for the same quarter were $1.59 billion, with a growth rate of 6%. In other words, around 40% less revenue than AWS. Dell’s Q4 2015 revenues were $14 billion, shrinking 6% YoY. HP Enterprise Q4 2015 revenues dropped 3% to $12.7 billion, with net income of $319 million, which I think gives it an operating margin of around 2.5%.

In other words, while the stalwarts of IT were barely growing or even shrinking, AWS was crushing it.

Whither AWS growth rate?

So AWS is doing well. The question is, how well will it do in the future? As the chart above indicates, the AWS growth rate has slowed over the past year — although most anyone else in the industry would kill to “slow down” to 64% growth. I heard a number of people opine that AWS growth is about to slow significantly — although, when pressed as to the reason its growth rate will drop, they mostly mumble something about “well, it’s bound to, innit?”

The nextplatform ran an interesting exercise forecasting AWS revenues a decade out, using five different growth path scenarios. The middle growth scenario puts AWS at $62 billion in revenues in 2026.

How about those AWS margins?

In “The Case of Silver Blaze,” Sherlock Holmes solves a mystery by noting that the most significant clue is something that didn’t happen — the watchdog didn’t bark, because the lawbreaker was, in fact, the horse’s owner. The dog didn’t bark because it recognized its master’s smell.

While many people commented on AWS’s high — and growing — margins, I think the most interesting fact about them is why they are so high. After all, Amazon’s core business strategy is using low prices (and the concomitant low margins) to drive customer demand, which enables scale, which can reduce costs — and you see where this is going. So why does Amazon violate this precept with AWS — why doesn’t it drop AWS prices to stimulate what it calls “the flywheel of growth”? To my mind, Amazon’s failure to reduce AWS margins is the absence of barking — something that should happen, but hasn’t.

As I see, there are three reasons Amazon isn’t reducing its prices to follow its low-cost foundation:

  1. It treats AWS as a different sort of business than everything else it does. This would be an odd strategy. Every other part of Amazon follows the low-cost mantra, so managing AWS as an exception seems unlikely.
  2. It doesn’t need to, as there seems to be sufficient customer demand at current prices. This might have plausible a few years ago, when AWS was running wild with no significant competitors. Today, however, when Microsoft and Google are firmly committed to growing their cloud offerings, it’s less sensible. Why would AWS forfeit growth to other companies, when it could obtain it with a simple price drop?
  3. AWS is running flat out to install sufficient capacity just to keep up with current demand. Dropping prices to stimulate additional demand would be foolish, and run the risk of AWS having insufficient capacity. Said in another way, this means the bottleneck in AWS’s growth is supply, not demand.

Both numbers two and three imply that AWS faces large, consistent, and ongoing demand. In other words, AWS growth is unlikely to fall off a cliff and might very well continue to grow in middle double digits for the foreseeable future. At a 50% growth rate, 2020 would see AWS revenues at $50 billion, with operating margin of $14 billion. At that size, AWS would be among the largest, if not number two or three in the industry.

What AWS revenues mean

This quarter’s results represent more evidence that Amazon is upending the technology industry. The numbers reinforce the 2014 IDC forecast which predicted an industry future of haves and have-nots — a set of public cloud vendors growing at 15% and a set of legacy vendors growing below the economy’s inflation rate (in other words, shrinking).

This dramatic shift is reinforced by the recent JP Morgan report that predicts that cloud-based enterprise workloads will grow from today’s 16.2% to 2020’s 41.3% — a near-tripling of workload deployment.

IT platform shifts can be a wondrous or terrifying prospect, depending upon whether one is aligned with the new or lashed to the old. Anyone who witnessed the headlong growth of a Cisco or Dell (in its heyday) will never forget the heady thrill of observing magic unfold. Likewise, anyone who witnessed (or worse, was employed at) companies like DEC or SGI cannot fail to remember the sick dread of a business imploding under the pressure of competitors better attuned to the needs of the market.

AWS has come a long way since its humble beginnings in 2004, when it launched its first service — Simple Queue Service. Today it boasts over 40 services, and seems to announce four or five new ones at each AWS event.

Jeff Bezos once said “your margin is my opportunity.” As the linked article indicates, not everyone reacts to that statement positively — especially those who end up with Amazon offering something that siphons off their profits.

I think a different way to say this is that Amazon constantly looks for markets that are tied to inefficient processes that can be streamlined through reengineering and automation. By taking out friction, Amazon can lower customer costs and raise customer satisfaction. Nothing it does could not be done by a market incumbent; it’s just that incumbents are usually wedded to business-as-usual and see improving their product or service as a fruitless task that will disrupt the existing state of affairs without delivering enough immediate benefits. It takes an Amazon to see the opportunity in business-as-usual being changed to business-as-could-be. And when that change occurs, customers rejoice and competitors wail.

Bernard

Keep your skills relevant with AWS training from A Cloud Guru

Recommended

Get more insights, news, and assorted awesomeness around all things cloud learning.

Get Started
Who’s going to be learning?
Sign In
Welcome Back!
Thanks for reaching out!

You’ll hear from us shortly. In the meantime, why not check out what our customers have to say about ACG?

How many seats do you need?

  • $499 USD per seat per year
  • Billed Annually
  • Renews in 12 months

Ready to accelerate learning?

For over 25 licenses, a member of our sales team will walk you through a custom tailored solution for your business.


$2,495.00

Checkout