With respect to Amazon, you’ve probably thought about the challenge for traditional brick and mortar retailers in competing with the online company. And you’ve probably enjoyed the convenience of Amazon Prime delivery. But you may not have thought much about Amazon’s cloud business: AWS.
Popular services like Hulu, MailChimp, Signpost and Roadtrippers all experienced major outages in late February 2017. That’s because they all use Amazon Web Services’ S3 cloud system for important functionality, and the service suffered an unprecedented four-hour failure. Research firm SimilarTech reports that more than 150,000 websites around the world use Amazon Simple Storage Service (S3). Cloud Analyst Dave Bartoletti estimates that “north of three to four trillion pieces of data are stored in it.”
While the S3 failure made major tech news headlines, the real news here is a huge success story—how Amazon became queen of the cloud, and how Amazon Web Services (AWS) funds the company’s profitability
AWS is 9% of Sales… and 56% of Amazon’s Operating Income?
In 2016, AWS operating income was just over $3 billion, compared to overall Amazon operating income of $4.2 billion. The math gets a bit convoluted, with a $1B operating loss in Amazon’s international segment and a positive $2.4B contribution by North America. AWS is highly profitable, with 25% operating income to sales in 2016, up from 19% in 2015.
What is this offering that accounts for only 9% of Amazon’s sales but the majority of the profit? Software Architect Nathan Cullen of Roadtrippers explains how companies like his use cloud services:
“Amazon offers pay-for-what-you-use services that real software companies need—and they continue to identify and implement more of these services. It’s like a menu at McDonald’s of everything developers want. As AWS improves their menu of services, more companies can remove expensive home-hosted IT infrastructure. Their services range from websites and databases to artificial intelligence and security. This large range helps them power an increasingly diverse set of applications; anything from phone apps and games to medical devices and investment tools.”
AWS continues strong growth—in 2015, the segment’s sales grew 70% and grew another 55% in 2016. The company gives details on some of its higher-profile growth:
“With millions of active customers, AWS continues to grow, and enterprise customers have committed to migrating tens of thousands of applications to AWS, including: Workday selected AWS as its preferred public cloud infrastructure provider for customer production workloads; Capital One selected AWS as its predominant cloud infrastructure provider; shipping carrier Matson has closed all of its data centers, completing an ‘all-in’ migration to AWS; McDonald’s is transforming its digital-facing properties with AWS; the Financial Industry Regulatory Authority (FINRA) is going ‘all-in’ on AWS for their data analytics platform, which analyzes up to 75 billion market events daily; and Enel has already moved more than 5,000 servers to AWS as it transforms its technology infrastructure on AWS.”
Amazon’s business strategy combines two industries, retail and tech services. Retail is low margin, but high volume. In North America, Amazon earned about 3% on its $79B net sales in 2016. But Amazon’s retail presence gives it a strong brand and high consumer awareness, with 300 million users.
Amazon Web Services builds on this strong brand with a high-margin offering in the quickly growing market of cloud computing. Although most consumers have never heard of AWS, they encounter it every day, and it’s highly-respected in the tech industry. AWS’s re:Invent 2016 conference boasted 30,000 attendees and 50,000 streaming participants and was sponsored by companies such as Intel, Salesforce and Accenture.
The company is not resting on its laurels with AWS. Over the last year, the segment expanded its offerings significantly, including:
- Artificial Intelligence – to help apps understand natural language, engage in conversation and analyze images to recognize faces, objects and scenes.
- Athena – Fast and simple data mining of AWS databases
- Snowmobile – Extremely high-volume data transfer, accomplished through shipping containers hauled by semi-trailer trucks
- QuickSight – Business analytics tool available for users with various levels of technical expertise
As AWS continues to add features and services at a rapid pace (not to mention its strong growth with enterprise accounts), Amazon is certainly a company to look out for. While it’s appealing to focus on opening the Amazon Prime boxes on your front porch, the real place you should be focusing is on the cloud.