How Amazon created AWS and changed technology forever - MarketWatch

SEATTLE — Twenty years ago, Amazon.com Inc. was an online bookstore that was powered by the same servers and systems that other companies used.

In trying to expand beyond books, Amazon AMZN, -1.54%  developed a new way to power its website, pushing it to the most important e-commerce site of the new millennium. In doing so, it developed Amazon Web Services, as well as the entire concept of cloud computing as an industry, which may go down as the most influential breakthrough Amazon has managed.

Launched the year before Apple Inc. AAPL, -2.34%  introduced the iPhone, AWS has changed technology in a similarly outsize way. Apple cemented the mobile age, but it was Amazon that ushered in the cloud era, which has changed the way businesses use technology in the same extreme way that smartphones have changed consumers’ tech habits.

From a 22nd-floor conference room in re:invent, one of three Amazon towers overlooking the Seattle skyline, AWS executives with more than 30 collective years in the division recently gathered to discuss exclusively with MarketWatch how Amazon Web Services grew from a germ of an idea to a fledgling division to what is now Amazon’s fastest-growing source of revenue, and most important and stable profit source.

It’s the story of a project designed to solve a software and database system that at the time limited the e-commerce pioneer to selling books. Beyond spurring Amazon to incredible growth beyond books, AWS blossomed into an industry-shifting technology that lets companies rent computer power and offers tools to businesses and other organizations over the internet.

“I don’t think any of us had the audacity to predict it would grow as fast as it did,” AWS Chief Executive Andy Jassy said in a fireside chat in France in June.

The success of AWS has created a multibillion-dollar cloud market that Amazon still clearly leads, but the growth has attracted deep-pocketed rivals such as Microsoft Corp. MSFT, -0.72%  and Alphabet Inc. GOOGL, +0.24% GOOG, +0.28%. As AWS prepares to host the largest cloud-computing conference in Las Vegas this week — also named re:invent — it faces more challenges than ever, as rivals now seek to siphon off significant portions of a cloud-computing market that AWS created from scratch.

In the beginning

The roots of AWS extend back as early as 2000, when Amazon was an e-commerce company coping with scale problems. As it attempted to add new applications to serve its retail customers, Amazon was hamstrung by “monolithic” software and sets of databases that, as Chief Technology Officer Werner Vogels put it, required rewriting swaths of computer code.

Amazon began to splinter its three largest data sets — customers, goods and orders — into separate items that, in turn, were broken down into smaller units, such as login information or security requirements. At the same time, Amazon began offering computer systems and tools, such as renting IT infrastructure and applications online to other tech ventures, so they could sell their own products via Amazon.com.

Moving to that type of structure allowed Amazon customers to outsource their computing needs — be it storage, servers or networking — on a pay-as-you-go basis. “That was the driver for what later became AWS,” Vogels said.

“Very quietly around 2000, we became a services company with really no fanfare,” Jassy has said.

The timing was precipitous — as more companies began to look to store vast troves of data and computing power, Amazon was pouring billions of dollars into research and development. What became AWS first surfaced in 2004 and officially launched in 2006, with its first cloud products Simple Storage Service (S3) and Elastic Compute Cloud (EC2), and by 2015 it was bringing in nearly $8 billion a year.

Amazon wasn’t just the first to market with a modern cloud infrastructure service: It built on its product with applications for robotics, artificial intelligence, machine learning and a phalanx of databases.

Consider: DeepLens gives developers a view of machine learning via a fully programmable video camera. The RoboMaker app helps companies develop and deploy robot control systems. (The code name for AWS’s robotics effort was B9, after the iconic robot in the 1960s TV series, “Lost In Space.”) The Database Freedom program helps customers shift from traditional database engines to cloud-native ones on AWS. Special-purpose hardware like AWS’s Snowmobile data-storage boxes can move petabytes of data.

“Ten years ago, [Amazon CEO] Jeff [Bezos] and Andy [Jassy] understood [machine learning] would transform Amazon in a big way,” Swami Sivasubramanian, vice president responsible for artificial intelligence and machine learning at AWS, told MarketWatch.

“Historically, [machine learning] has been hungry for compute infrastructure and data, but it was not accessible for most companies,” said Sivasubramanian, who as a research intern at Amazon in the early 2000s saw the potential of the cloud-computing concept. “AWS is making it accessible.”

For more: The engine for Amazon earnings growth has nothing to do with e-commerce

Shawn Bice, vice president in charge of database business, added that AWS’s full embrace of specialized databases has eased the ability of customers to adapt quickly, and easily, to the cloud.

To deliver customers the computer capacity necessary for AI, data analytics and other advanced technologies, Amazon has assembled a network of new data centers in more than 20 geographic regions.

Forrester estimates AWS spends billions of dollars each quarter building new data centers or expanding existing ones. Few cloud vendors can match Amazon’s spending, according to Forrester.

The behemoth of a booming industry

As first to market, AWS has benefited handsomely — revenue catapulted 47% to $25.7 billion in 2018, Amazon reported. Amazon accounted for 48% of the $32.4 billion in global sales generated by providers in the infrastructure as a service, or IaaS, market, according to a report from market researcher Gartner Inc. (Rival Microsoft was next, at about 15%, up from 12.7% in 2017. Alibaba Group Holding Ltd. BABA, -1.03%  and Alphabet’s Google came in at 7.7% and 4%, respectively.)

Expect more. Much, much more. AWS is on pace to grow to $45 billion to $50 billion in 2020 — which would surpass Oracle Corp. ORCL, -1.01%  as the second-largest enterprise software provider — MKM Partners analyst Rohit Kulkarni predicted in late October. And global cloud infrastructure revenue is expected to triple over the next three years to $133 billion, with AWS and Microsoft’s Azure cloud business getting the lion’s share, according to Forrester Research.

Amazon reached those stratospheric heights using the same recipe it has applied assiduously to its other mega-businesses, hewing closely to a companywide strategy of 14 “leadership principles“ — “Customer Obsession,” “Are Right, A Lot,” “Invent and Simplify,” and “Have Backbone; Disagree and Commit” — that are uttered endlessly by Amazon executives.

“It’s like a religion about the customer,” Vass says. “Jeff Bezos says you can’t predict your competitors or what the government will do. But you can invest heavily in the customer point of view.”

See also: It’s Apple vs. the cloud in race to be the world’s most valuable tech company

It sounds like bland culture-speak, but it is tough to argue with the results. By outlining the parameters of a product with a customer before building the technology — or “working backwards from the customer,” as Bill Vass, vice president in charge of edge computing and Internet of Things devices at AWS, puts it — AWS has been able to amass millions of customers that include big-name clients like Intuit Inc. INTU, -1.01%, Netflix Inc. NFLX, -1.56%, General Electric Co. GE, -1.12%, Expedia Group Inc. EXPE, -1.22%, Lyft Inc. LYFT, +0.04%, Siemens AG SIE, +0.62%  and McDonald’s Corp. MCD, -1.15%.

AWS has “built a sizable ecosystem to support the variety and scale of needs required by its customers,” said Lindsey Koshansky, vice president of clinical innovation at Locus Health, a Charlottesvile, Va.-based digital-health company that is an AWS customer.

Competition taps into the force

The AWS success story has redefined the tech industry in such a way that it has radically altered the business blueprints of some of the biggest names in the history of technology, such as Microsoft, Google, Oracle and International Business Machines Corp. IBM, -0.66%, just to start. They’ve all scrambled to catch up to AWS and grab a slice of an expanding market.

Meanwhile, the market has changed, allowing these other companies to develop a strategy that could make them stand out against Amazon, or at least compete with the titan of the industry. The move toward a “hybrid-cloud” strategy of keeping some data and actions on-site and using cloud-computing for other tasks seems to have benefited Microsoft, while businesses seeking to strike deals with multiple cloud providers has been beneficial to Google.

Gartner analyst Nag sees opportunities for Microsoft to leverage its dominance as a software-as-a-service provider to make inroads in winning big cloud contracts. “Microsoft owns the desktop. Microsoft owns the OS. And Microsoft owns the apps,” Nag told MarketWatch. “It has to bully pulpit to effectively drive vendors to the cloud.”

AWS’s sheen of invincibility in the cloud was punctured in October, when what looked like a slam-dunk contract win of a 10-year, $10 billion pact with the Pentagon, known as JEDI, turned into a shocking loss to Microsoft and warnings from some analysts of a fundamental shift in where the market is headed.

See also: Amazon files suit, challenging Pentagon’s award of $10 billion deal to Microsoft

“With JEDI, I believe the game has changed and the market perception will provide Microsoft the opportunity to apply significant pressure to AWS,” Futurum Research analyst Daniel Newman told MarketWatch, noting just 20% of enterprise workloads are currently in the cloud. “AWS had the first-move advantage. But it is not as deeply entrenched as Microsoft at corporations. We will get closer to parity over the next four, five years.”

He predicts Azure, which cleaved off 1% of market share from AWS in 2018, will continue to make gains this year and into the future.

How big a gain? How about enough to make it Microsoft’s biggest business, at a projected $90 billion in fiscal year 2023, according to a Nov. 18 research note from Stifel Nicolaus analyst Brad Reback. He said most potential business customers are in the early stages of shifting their computing tasks to the cloud, and Azure is best positioned to appeal to them because of Microsoft’s strong enterprise-software offerings.

Microsoft has said little about the JEDI award, but John “JG” Chirapurath, general manager of Azure data, blockchain and artificial intelligence at Microsoft, told MarketWatch, “We see some of the largest corporations on Earth adopting the Azure model for the same reason” that the Pentagon chose Microsoft — a hybrid-cloud setup, with deep data analytics and security.

“Hybrid is really the default computing situation for every large customer. It is here to stay,” Chirapurath said in a phone interview. “When I look ahead, the customer condition is not going to be one cloud or the other. The first thing I see is hybrid. Not just on-premises, but adopting technology on the edge. The second big area is data analytics.”

From 2015: How the cloud has made this tech boom different from the dot-com era

Companies that choose between AWS and Azure do not want to be locked in completely to those vendors, however, which opens the door to other vendors to jump in. Large companies want a multi-cloud strategy beyond a public option, said IBM Chief Information Officer Fletcher Previn.

“They want to avoid vendor lock-in,” he told MarketWatch. “A stove-piped AWS can be hard.”

Will Grannis, Google Cloud founder and managing director of the CTO Office, cites a recent Gartner survey of CIOs that showed 81% are consuming multiple clouds.

“The market is shifting from the mono-cloud to multi-cloud,” Grannis told MarketWatch in a phone interview. “We’re also in the third wave of cloud, in which customers have moved from a strategy of (technology) rental to building their own platforms and applications to do cool and interesting things. And we’ve built some incredibly successful platforms at Google, like Android and Chrome.”

The variety with which companies large and small are adopting cloud computing underscores its evolving nature and the opportunities that await Amazon, Microsoft, Google and others, according to Sean Feeney, cloud practice director at digital consultancy Nerdery.

AWS executives can relate. As the architects of a comparatively new market, they know its story is far from told.

“The shift to cloud is in its early innings,” Ariel Kelman, chief marketing officer at AWS, told MarketWatch from the company’s San Francisco offices. “It is a big and growing pie.”

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