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 Amazon.com 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.
David Rosenthal: "People, turns out, loved the Amazon.com 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 Amazon.com and the pressure they feel to deliver quality content in the current episode.
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.
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.
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.
Speaker A: "Well, we left off the Amazon.com 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.
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 Amazon.com 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 Amazon.com capacity. Amazon Web Services was always considered a business by itself, with the expectation that it could even grow as big as the Amazon.com 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.
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.
"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.
"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.
"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.
"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.
"So unlike myth number one about AWS origins, you couldn't just take excess Amazon.com 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 Amazon.com capacity, but rather were purpose-built from scratch to serve as external 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.
"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.
"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, 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.
"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.
"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.
"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 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.
"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'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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.