Amazon Web Services

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal delve into the origins and growth of Amazon Web Services (AWS), the cloud computing pioneer. They explore the myth of AWS being born from excess capacity, the influence of Tim O'Reilly's Web 2.0 vision, and the internal restructuring at Amazon to a service-oriented architecture. They highlight key figures like Andy Jassy, who crafted a vision document proposing AWS and led its evolution, and Chris Pinkham, who developed EC2. AWS's transformative impact on startups and enterprises is discussed, along with its competitive landscape and the strategic moves that allowed AWS to dominate the cloud industry with a 39% market share. The episode also touches on AWS's missed opportunity with data warehouses, as evidenced by Snowflake's success.

Summary Notes

Audience Reception of Previous Episode

  • The episode was well-received and popular among listeners.
  • David Rosenthal expresses nervousness about living up to the expectations set by the previous episode's success.
  • Ben Gilbert likens their situation to George Lucas making "Empire Strikes Back" after the success of "Star Wars."

David Rosenthal: "People, turns out, loved the episode. That was so awesome. Makes me a little nervous for this one."

Ben Gilbert: "Oh, massively. By far and away our biggest episode ever. Is this how George Lucas felt when he was doing Empire Strikes back?"

The quotes indicate the hosts' awareness of the high standard set by their previous episode on and the pressure they feel to deliver quality content in the current episode.

Introduction to Season Eleven, Episode Three of Acquired

  • Ben Gilbert introduces himself and his role at Pioneer Square Labs and PSL Ventures.
  • David Rosenthal introduces himself as an angel investor based in San Francisco.
  • They establish the context for the episode, which will focus on Amazon Web Services (AWS).

Speaker B: "Welcome to season eleven, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures."

Speaker A: "And I'm David Rosenthal, and I am an angel investor based in San Francisco, cold San Francisco here in August."

The quotes introduce the hosts and the theme of the episode, which is to explore the story behind Amazon Web Services.

Analogy of Amazon's Business Model

  • Ben Gilbert uses a lemonade stand analogy to describe Amazon's business model.
  • He compares the low margins of Amazon's retail business with the higher margins of AWS.
  • David Rosenthal agrees and discusses the disruptive potential of AWS in comparison to traditional companies.

Speaker B: "You sell me the highest quality lemonade you can for the lowest price, $1 a cup. And when you add up all your costs, the variable ones like the lemons and the fixed ones, like the table that you rented, it costs about 98 and a half cents to give me that lemonade."

Speaker A: "Well, then, if you told me that, I would dig into it even further, and I would realize that the existing companies that sold stands and cups and whatnot, they were actually making 70% margins on their stands and cups. And so I would be quite happy to take 30% margins and disrupt them and still do better than my lemonade business."

These quotes illustrate the tight margins in Amazon's retail business and the potential for higher margins and disruption in the cloud computing market, which AWS capitalizes on.

Overview of Amazon Web Services (AWS)

  • Ben Gilbert discusses the significant revenue and profit generated by AWS despite being smaller than Amazon's retail business.
  • David Rosenthal confirms the trend of AWS's operating income surpassing that of the retail business since 2015.
  • They note the similarities and differences between Amazon's online retail and cloud computing businesses.

Speaker B: "AWS's revenue is only about 15% the size of Amazon's massive retail business. But their profits, or the operating income, to be specific, from AWS are in total the same, if not more, than their ecommerce store."

Speaker A: "There may have been some quarters where it was off, but generally that trend is accurate."

These quotes highlight the financial impact of AWS on Amazon's overall business, demonstrating that AWS's profits are comparable to or exceed those of the larger retail segment.

Amazon's Transition to a Technology Company

  • David Rosenthal reflects on Amazon's evolution into a technology company with the launch of the Kindle.
  • They discuss the perception shift from Amazon being a book retailer to a tech innovator.
  • The story of AWS begins with Amazon's challenges as an embattled company post-dot-com bubble.

Speaker A: "Well, we left off the episode in 2007 with the sort of Sony PlayStation like Coda of the Kindle story and the new chapter. One might say that it seemed at the time, to the outside world that Amazon was opening as a true technology company with Kindle."

This quote contextualizes Amazon's transformation into a technology company, marked by the release of the Kindle and the development of AWS.

The Myths and Realities of AWS's Origin

  • David Rosenthal and Ben Gilbert debunk the myth of AWS being born from Amazon's excess server capacity.
  • They credit Werner Vogels, Amazon's CTO, for clarifying that AWS was always intended to be a standalone business.
  • The hosts discuss the strategic and intentional nature of AWS's creation, rather than it being a byproduct of excess infrastructure.

Speaker B: "The excess capacity story is a myth. It was never a matter of selling excess capacity. Actually, within two months after launch, AWS would have already burned through the excess capacity."

Speaker A: "So the best and final word on this that we have to put here, because it literally is from part of the horse's mouth itself, comes from Werner Vogels, the at the time AWS CTO, now CTO of all of Amazon, who wrote flat out in a Quora post in 2011, quote, 'The excess capacity story is a myth. It was never a matter of selling excess capacity. Actually, within two months after launch, AWS would have already burned through the excess capacity. Amazon Web Services was always considered a business by itself, with the expectation that it could even grow as big as the retail operation.'"

The quote from Werner Vogels dispels the misconception that AWS was a way to sell off excess capacity, emphasizing the foresight and ambition behind AWS as a separate and significant business venture.

Tim O'Reilly's Influence on Amazon and Web 2.0

  • Tim O'Reilly's meeting with Jeff Bezos leads to the embrace of Web 2.0 principles at Amazon.
  • The concept of APIs and participatory culture becomes integral to Amazon's strategy.
  • The first iteration of AWS focuses on making's product catalog available to developers through APIs.

Speaker A: "Jeff has been exposed here and Andy too, as his TA to this concept of Web 2.0, this concept of APIs. And Jeff just makes this incredible leap and says we should use APIs internally. And if we make everything a quote-unquote hardened interface was the Amazon term for this hardened API interface, we can blow up all of this. We're going to say no communication. You cannot talk to anybody. Everything you do internally must be done via APIs that then anybody else can access whatever they want. They don't have to talk to you."

This quote captures Jeff Bezos's visionary approach to leveraging APIs within Amazon, setting the stage for a more modular and scalable architecture that would eventually lead to the modern conception of AWS.

Services-Oriented Architecture and APIs

  • The discussion begins with the concept of services-oriented architecture (SOA) and its importance in building scalable and maintainable systems.
  • APIs (Application Programming Interfaces) are highlighted as the method for different services to communicate within a SOA.
  • The benefits of SOA and APIs in creating user-facing applications are emphasized.

"The services oriented architecture thing is sort of the engineering counterpart to that same mental model of okay, well, now we actually are going to build each one of these things as a completely separate application that then all interact to create the user facing thing."

The quote explains that services-oriented architecture is an approach where each component is built as a separate application, and they interact through APIs to form the final user-facing product. This modular design is crucial for engineering robust and flexible systems.

The Steve Yegge Rant

  • The conversation shifts to a famous post by Steve Yegge, a former Google engineer, which became one of the top all-time posts on the internet.
  • Yegge's post, which was accidentally made public, compared the cultures at Google and Amazon and highlighted Amazon's approach to building services.
  • The post emphasized Amazon's mandate for internal services to be exposed through interfaces and designed to be potentially externalizable.

"Steve writes that Jeff and Andy is part of this. Sent a memo out to the whole company at Amazon. It was a big mandate. And, quote, jeff's big mandate went something along these lines. One, all teams will henceforth expose their data and functionality through service interfaces..."

This quote outlines Jeff Bezos' mandate at Amazon, as described by Steve Yegge, which required all teams to communicate through service interfaces and design their services to be potentially accessible to external developers. This approach aimed to standardize communication and focus on improving the customer experience.

Amazon's Approach to Internal and External APIs

  • The speakers discuss Amazon's internal use of APIs and how it led to the realization that these could also be valuable for external developers.
  • The significance of APIs as a form of precise and documented communication is underscored, contrasting with less formal methods of database interaction.
  • Amazon's culture of detailed documentation and planning is linked to their API strategy, reflecting a disciplined approach to development.

"APIs are a heavily documentation oriented way of computing. When I'm hitting your API endpoint, there is a strictly documented set of requirements of things I can send you and ways in which you send information back."

The quote highlights the importance of documentation in API design, emphasizing that APIs require a clear and strict contract between the service provider and consumer. This structured communication ensures reliability and clarity in service interactions.

The Evolution of AWS

  • The discussion traces the origins of Amazon Web Services (AWS) from internal infrastructure improvements to a suite of services for external developers.
  • The realization that the same infrastructure could be offered to third parties marks a pivotal moment in AWS's history.
  • The narrative explores the transition from software engineering to providing cloud IT infrastructure, and how Amazon adapted to the needs of distributed teams.

"How do you get from transforming your software architecture to, oh, now I need cloud it infrastructure? Well, it's kind of the same problem."

The quote connects the internal transformation of Amazon's software architecture with the creation of cloud IT infrastructure. It suggests that the challenges and solutions in rearchitecting software were similar to those faced when developing cloud services like AWS.

The Launch of AWS and Its Services

  • The speakers recount the launch of AWS and the initial services, including S3 and EC2.
  • They discuss the strategy behind launching with a set of basic services that could be combined to build scalable web applications.
  • The narrative corrects the official story, noting that AWS's launch was not as centralized and planned as it is often portrayed.

"So unlike myth number one about AWS origins, you couldn't just take excess it capacity and externalize it. They had to go build all this from scratch as external services."

This quote clarifies a common misconception about AWS's origins, explaining that AWS services were not simply a repurposing of excess capacity, but rather were purpose-built from scratch to serve as external services.

The Impact of AWS on Startups and the Tech Industry

  • The speakers highlight how AWS revolutionized the tech industry by enabling startups to quickly and inexpensively deploy applications.
  • They discuss the AWS startup challenge and how early adopters like Justin TV (later Twitch) benefited from AWS's services.
  • The discussion emphasizes the shift in enterprise thinking towards cloud adoption and the various stages of acceptance and integration of cloud services.

"From deciding to write the app to it being up and running on the Internet was measured in days. And after debugging and testing extensively, the end of the month rolled around and I got my visa bill. [...] my bill for the entire development and test of this application was $3.08..."

The quote from James Hamilton illustrates the transformative effect of AWS on software development, showing how developers could rapidly deploy applications with minimal cost, a stark contrast to traditional IT infrastructure and financial processes.

Global Availability Zones and Cloud Evolution

  • AWS's original concept was a global S3 data center with automatic deployment across all data centers.
  • Realization that traffic and WAN consumption would be too high led to a different approach.
  • AWS customers do not run globally by default to avoid unnecessary Internet bandwidth consumption.
  • The evolution of cloud computing includes stages like building in the cloud and building for the cloud.
  • Cloud-native services like RDS and Lambda represent the shift from traditional infrastructure to cloud-optimized solutions.
  • Lambda and the serverless movement illustrate a future where applications are architecturally different, taking advantage of cloud computing's unique capabilities.

"It's not one global availability zone, actually. Interesting point. That was the original premise."

This quote highlights the initial idea behind AWS's data center distribution and the eventual shift in strategy due to practical considerations of Internet bandwidth and traffic.

"You just write your code, and then when you want to call it a thing, just spins up for a few milliseconds, runs your code and spins down, and you were never aware of its IP address or where in the world it was."

This quote explains the concept of serverless computing with AWS Lambda, where developers do not need to manage servers or worry about their location, focusing solely on code execution.

Shift in Development Focus

  • Initially, development teams spent a majority of their time on infrastructure rather than software development.
  • AWS shifted the focus, allowing teams to dedicate more time to software development and less to infrastructure management.
  • AWS Lambda aims to reduce the time spent on infrastructure to zero, representing the ideal of serverless computing.

"Really what happened is probably development teams in those days were spending like 70% of their time on infrastructure and setup and 30% of their time on software development."

This quote reflects the traditional time allocation in development teams where infrastructure management consumed the majority of resources, a situation AWS sought to change.

AWS's Market Focus and Strategy

  • AWS initially targeted startups with its Infrastructure as a Service (IaaS) offerings.
  • Realizing the potential in the enterprise market, AWS pursued compliance and replication requirements to attract enterprise customers for lift and shift migrations.
  • AWS's strategy contrasts with Microsoft and Google, who initially focused on Platform as a Service (PaaS) solutions, missing out on both startup and enterprise markets.

"AWS, in its earliest days, let's call it the first couple of years, was really startup focused."

This quote indicates AWS's initial market focus on startups and its subsequent realization of the opportunity within the enterprise sector.

"You could say, let's think about the far future, the lambdas of the world, and we're imagining now in 2006, why don't we just build that sort of stuff to start?"

The speaker contrasts AWS's practical approach with the more futuristic, but less market-ready, strategies of competitors like Microsoft and Google.

AWS's Impact on Emerging Companies

  • Companies like Airbnb, Uber, and Instagram started on AWS before becoming major players.
  • Netflix's decision to migrate to AWS despite competing with Amazon in video streaming was a significant endorsement of AWS's infrastructure.
  • AWS's ability to attract and retain customers like Netflix and the CIA bolstered its reputation for security and reliability.

"Netflix becomes a customer. And how crazy is this? They had already built their own in the last like three years."

This quote highlights the surprising move of Netflix, which had invested in its own cloud infrastructure, to become an AWS customer, indicating AWS's compelling value proposition.

Legacy Technology Companies and Disruptive Pricing

  • Legacy technology companies like IBM and Oracle operated with high gross margins and sold proprietary solutions.
  • AWS introduced a disruptive pricing model with lower margins but higher volume, challenging the traditional business model of legacy companies.

"Amazon targeted gross margins and operating margins for AWS in the 20% to 40% range."

This quote illustrates AWS's strategic pricing approach, which, while lower than legacy companies' margins, represented a significant increase for Amazon and disrupted the industry.

Microsoft and Google's Missed Opportunities

  • Microsoft and Google failed to capitalize on cloud computing opportunities due to internal power struggles and a focus on future platforms rather than practical solutions.
  • Microsoft's initial PaaS approach with Azure Cloud Services did not cater to existing customer needs for IaaS, leading to missed opportunities.
  • Google's lack of enterprise sales experience and focus on future technologies like App Engine resulted in a slower start in the cloud market.

"They launched this thing called Azure Cloud Services, which they've now basically deprecated, which was a platform as a service approach."

This quote describes Microsoft's initial strategy with Azure, which did not align with market demand and led to a delayed response to the growing cloud market.

AWS's Database Dominance and Oracle's Challenge

  • AWS is a significant player in the database market, taking share from traditional companies like Oracle.
  • Database services like RDS, Aurora, and Redshift are among AWS's most popular offerings due to their performance and ease of migration.
  • AWS's databases are highly sticky, making customer migration to other platforms difficult and ensuring long-term revenue.

"AWS today is on an $80 billion revenue run rate. That is not the most crazy, impressive, defensible thing about AWS."

This quote emphasizes AWS's substantial revenue from its database services and the remarkable backlog of contracted revenue, highlighting the service's stickiness and market dominance.

Snowflake's Success and AWS's Miss

  • Snowflake's emergence as a successful data warehousing company on AWS's platform represents a missed opportunity for AWS.
  • AWS's broad range of services and lack of a cohesive product strategy may have contributed to Snowflake's ability to capitalize on the data warehouse market.

"How is Snowflake its own $50 billion company?"

This quote questions how Snowflake managed to become a highly valuable company in a segment where AWS already had a presence, indicating a potential oversight in AWS's product strategy.

Crusoe: Clean Compute Cloud Provider

  • Crusoe is a cloud provider built specifically for AI workloads.
  • Nvidia is a major partner of Crusoe.
  • Crusoe's data centers are filled with racks of Nvidia GPUs.
  • The cloud utilizes wasted, stranded, or clean energy for better performance per dollar.
  • Crusoe's data centers are located at stranded energy sites, using power that would otherwise be wasted.

"Crusoe's data centers are nothing but racks and racks of a." "Crusoe's cloud is purpose-built for AI and run on wasted, stranded, or clean energy."

These quotes highlight Crusoe's specialization in AI cloud services and their unique approach to powering data centers with otherwise wasted energy sources, contributing to both cost efficiency and environmental benefits.

Environmental and Cost Benefits

  • Crusoe's approach benefits the environment by utilizing stranded energy.
  • Data centers are located in remote locations, using energy from sources like oil flares and wind farms.
  • Crusoe's model reduces reliance on the energy grid.
  • Energy costs are lowered and passed on to customers, following the GPU costs.

"Crusoe, of course, locates their data centers at stranded energy sites." "Since Crusoe doesn't rely on the energy grid, energy is the second largest cost of running AI after, of course, the price you pay Nvidia for the chips."

These quotes explain Crusoe's strategy of placing data centers at sites with excess energy and how this results in lower operational costs, which are then transferred as savings to their customers.

AWS: A Case Study in Power

  • AWS is known for achieving persistent differential returns.
  • AWS had increased operating margins from 19% to 30% despite competitive landscapes.
  • Factors contributing to AWS's profitability include Moore's Law and economies of scale.
  • AWS's platform as a service offerings encourage customers to use more advanced cloud features.

"Now they're at 30%. They've gotten more profitable when the landscape got more competitive."

This quote indicates AWS's growing profitability in a more competitive market, which may be attributed to technological advancements and strategic business practices.

Amazon's Seven Powers

  • Amazon exhibits counter-positioning and scale economies.
  • Switching costs and branding are also evident in Amazon's strategy.
  • Amazon's cloud business benefits from being the largest, spreading capex over a wide surface area.
  • The concept of multi-cloud is discussed as a strategy for vendor diversification.

"Check, check." "Once people are semi trucking their data into your data centers there are very real switching costs."

These quotes reflect on the various strategic advantages Amazon has developed, such as scale economies and switching costs, and how these contribute to its strong market position.

Multi-Cloud and Platform as a Service

  • Multi-cloud strategies involve using multiple cloud providers for diversification.
  • Amazon has argued for the benefits of using their integrated platform services.
  • The evolution of cloud services now includes proprietary offerings that can run in customers' data centers.

"So again, the thing that they were fighting against when they first launched, now that they're the big incumbent, they're running the playbook."

This quote discusses how Amazon, once a disruptor, now uses its incumbent position to advocate for integrated cloud services, demonstrating a shift in strategy to maintain its competitive edge.

Apple and Cloud Strategy

  • Apple's focus on consumer technology may have caused them to miss opportunities in cloud services.
  • Apple's relationship with developers and its importance in the mobile cloud market is debated.
  • The discussion touches on whether Apple could have offered cloud services for developers.

"Should Apple have been offering something for developers there too?"

This quote raises the question of whether Apple missed an opportunity in providing cloud services tailored to developers, suggesting a possible oversight in their strategy.

AWS and Scale Economies

  • AWS is considered the best scale economy business due to its fixed costs and customer base.
  • Amazon's retail business and AWS both rely on large-scale infrastructure investments.
  • AWS's proactive price reductions are compared to TSMC's strategy for securing customer orders.

"This long-tail distribution of returns is why it's important to be bold."

This quote from Jeff Bezos encapsulates Amazon's approach to taking risks for potentially large payoffs, reflecting the company's philosophy toward investment and growth.

AWS's Commitment to Service

  • AWS maintains services even if they do not meet initial expectations to preserve customer trust.
  • Examples include SimpleDB and other less successful services that AWS continues to support.

"There's stuff that didn't live up to the full potential... but there were customers using it, so they kept it up."

This quote underscores AWS's commitment to supporting services that customers rely on, even if they are not as successful as anticipated, highlighting the importance of customer trust in their business model.

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