It’s kind of odd that a lot of people are talking about how this company or that company is going to end Amazon’s supremacy in cloud computing.
Late last year Oracle’s co-founder Larry Ellison made a hue and cry at the company’s OpenWorld conference about how Amazon’s dominance is at an end and how his company would overtake them in the cloud space.
The truth is, AWS competitors aren’t going to get anywhere close to it for the next few years. After that, someone might, but even that is a very big question.
For that to happen, AWS either has to slow down its rapid pace of growth, or make a series of big mistakes that will allow a competitor to slip past them to the Number One position.
Let’s look at the many advantages AWS has created for itself, and how difficult it will be for another company to overcome that hurdle that puts AWS between them and the Number One spot.
The Head Start
Amazon Web Services was very early to the cloud computing industry when they launched in 2006. AWS did not invent cloud computing, but they were the ones that took the industry mainstream. It was only after their initial success that Microsoft joined the race in 2010, Google launched Google Cloud Platform in 2011 and IBM bought SoftLayer in 2013.
Google took its time with cloud, and only recently appointed Diane Greene to lead its cloud push; meanwhile, Oracle, which was sitting outside the cloud computing industry for a long time, was forced to get moving and try to compensate for declining revenues from their legacy lines of business in software, hardware and databases. In fact, Oracle only launched its elastic compute cloud nine years after Amazon EC2 was launched.
To say Amazon had a headstart in the market would be an understatement. They disrupted it, then the tech majors took notice, understood the potential of the market and jumped in one after another.
The Smart Move: When they go high you go low
Nobody asked Amazon the retailer to move into technology. They knew their IT infrastructure was a burgeoning cost center, saw the opportunity, and moved in to turn that into a profit center. I believe it was the desperate need of a retailer to save any money possible that prompted Amazon to get into cloud computing as a business.
And they succeeded. In fact, they succeeded in such a big way that their revenues from cloud assets have an annualized run rate in excess of $14 billion.
But there is one huge factor that keeps going unnoticed, and that is AWS’s focus on small players – customers who might add a few dollars at a time to Amazon’s revenue stream.
The top tech players in the IT industry have always kept their focus on the enterprise segment, wooing big-ticket customers for hundreds of millions of dollars in contracts. Amazon played it differently, by reaching out to smaller players who invariably fell into the gaps that were ignored by major tech companies.
By doing this, AWS expanded the reach of the market and competed in a segment where there was literally no competitor to speak of.
“AWS’ leaders “very consciously targeted software developers and startups early on,” even though they knew that enterprises and governments would eventually be the largest clients, according to Jassy.That turned out to be an extremely underserved segment,” Jassy said. A lot of those developers were spending only a few bucks on AWS services, but “we didn’t mind that,” the executive said. “Some of those are going to be the next big enterprise in the next five to 10 years.” – SeattleTimes
But that’s not all.
Amazon has been relentless in cutting costs. Why are they doing this despite being the Number One player in cloud infrastructure making over $3.5 billion in quarterly cloud revenues?
This isn’t something that Amazon did to keep competitors at bay, as one might assume. A quick trip to the AWS blog will reveal that AWS has been cutting costs from as early as April 2008, when there was no competition to speak of.
By constantly driving the price down, Amazon is making cloud services more affordable for users. And when prices keep dropping, demand goes up because potential market size goes up.
Pricing and the Demand Curve
All else being the same, demand at lower prices is typically higher than at higher prices. That’s logical, because there’s always a greater demand generated when prices drop.
This relationship is easiest to see when a graph is plotted, as shown in this example below:
So far, Amazon has refused to bring the price of cloud computing services to an equilibrium or benchmark that other operators can use to build their own pricing structures. By continually pushing prices down, AWS has forced the entire industry to seek the best pricing for their own cloud-related services.
Aside from the direct benefit of price cuts, there’s another thing Amazon gets from doing this – customer loyalty. AWS customers know that they don’t have to keep chasing their provider for discounts or keep comparing price charts from various providers. They’ve seen AWS cutting prices on a regular basis, so they only need to wait for the next one coming their way.
The Big Chase
When you allow someone to have a head start, how do you catch up with them? Either you have to run faster, or they have to run slower, right? But how do you catch up with someone who already has a head start, but just keeps running faster and faster?
That’s the challenge that Amazon’s competitors in the cloud industry face.
How does AWS keep running faster and faster each year? Let’s see…
Amazon’s re:Invent conference has now become a venue for the company’s ritual of launching a myriad new services. According to their CFO Brian Olsavsky, Amazon added nearly 700 new services in 2015 and another 1000 in 2016.
How do you compete with such a highly disciplined frenzy of activity?
To make matters worse for the competition, Amazon has kept its eye only on IaaS thus far. Yes, IoT is something that they are looking at and SaaS is something they badly want, but the focus on IaaS has allowed the company to keep the pace of innovation at an intense level for so many years.
These are just some of the reasons why Amazon Web Services keeps growing its revenues and dropping its prices, yet is able to grow its margins at an impressive pace.
That being the case, would someone care to tell me how any of their competitors is actually going to topple Amazon from its clear pole position in cloud infrastructure and related services?
Microsoft is the only company that can possibly earn more than Amazon from cloud computing, but that’s got a lot to do with their strength in SaaS, not just cloud infrastructure. Microsoft might already be the Number One horizontal cloud service provider, while Amazon is the Number one vertical player.
That’s going to stay that way for a long, long time. Every other top competitor has its own strengths, and it’s great for the industry to have a varied group of companies providing similar services. But at the end of the day, the question of “who is going to topple Amazon from its IaaS pedestal” is a moot point.
It’s simply not going to happen – at least, without a long, drawn-out battle where Amazon will refuse to give even an inch of advantage to its opponent – whoever that opponent might be.
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