Will Amazon’s Web Services Business Get Hurt by Cloud Computing Commodification? – HuffPost

Will the profitability of AWS (Amazon Web Services) decrease over time (to near zero) because the service is basically a commodity? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Mathew Lodge, San Francisco tech executive, on Quora:

The premise of the question is flawed: Amazon Web Services is nothing like a commodity. I do expect that the profitability of AWS will decline at some point due to competitive intensity specifically from Microsoft Azure and Google Cloud Platform but that really isnt the same thing, and it isnt happening yet.

For over nineyears now theres been a narrative about AWS that says an IaaS cloud is just a convenient place where you can run some virtual machines on demand. The saying The cloud is just computers that belong to someone else embodies this idea. And because one rented virtual machine is much like another, the theory goes, a VM service like AWS is just a commodity like other fungible on-demand services such as electricity.

Peddlers of this narrative felt emboldened when AWS kept cutting VM prices in the days before we could see any financials about AWS. Surely this constant price erosion was evidence of the commodity nature of AWS?

There are two problems with this narrative:

From the outset of AWS, Amazon was building itself a new platform for building and deploying distributed applications. While it intended to eventually use this platform for Amazon.com, it fully intended to sell it to other people too. AWS was never spare capacity not being used by the retail site an enduring myth that just wont die[1].

The death blow to the commodity narrative should have happened when Amazon started breaking out AWS balance sheet in April 2015. Amazon revealed a breathtakingly profitable business with a balance sheet that looks totally unlike a commodity service, while also demonstrating a 49% growth rate that most multi-billion dollar businesses only ever get to dream about[2].

AWS EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is about 50%. For comparison, the best EBITDA Rackspace ever achieved as a hosting/cloud provider was 28%. So AWS is nearly twice as profitable as one of its most efficiently run public company predecessors in the hosting/cloud business. [I am using EBITDA because its the best way to compare profitability of capital-intensive businesses[3].]

Azure and Google Cloud Platform have incredibly competitive basic compute services. Googles compute service is vastly more flexible than AWS. Yet neither is badly denting AWS growth rate. Why? Because the code running inside of that VM needs to actually get stuff done, and AWS has a very broad and increasingly deep set of complementary services that software developers can tap into.

Angela Zhang () does a great job of explaining how well AWS does this, and how unlike a commodity AWS is, in her answer. Stan Hanks articulates The promise that means switching costs are high for the millions already using AWS, and for millions of new users who want not to screw things up by choosing the wrong cloud platform.

AWS and Microsoft are battling for control of the next great app platform.

Many people have been surprised that after years of brutally battling all-comers for server operating system revenue share with Windows Server, Microsoft has embraced Linux and done everything it can possibly do to encourage development of cloud apps on Linux on Azure.

Why the sudden charge of heart? Satya Nadella realized before many others that the battle for app developer mindshare was slipping away from the OS to the cloud and specifically the API of the cloud that it ran on. When your app dependencies are all on cloud services provided by an IaaS like AWS, then winning the OS battle doesnt win you much if they just go run the app on AWS.

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Will Amazon's Web Services Business Get Hurt by Cloud Computing Commodification? - HuffPost