Side note: numbers between Microsoft and Amazon are not directly comparable because Microsoft includes SaaS solutions such as Office 365 in their cloud revenue. So it is not Azure versus AWS.
That's way more significant than I would have expected. Still, 8% of their revenue contributes 36% of their profits. Makes you wonder why they don't run AWS at the same cutthroat prices as their other businesses.
Walmart is cheaper. Significantly cheaper. You don't have to pay $100-$300 per year plus Amazon's typical 10-20% price premium* in exchange for "free" 2-day shipping. If you live in the right place you can pick up the goods same-day from Walmart, maybe even on your commute, so for some people it's more convenient too.
* The usual caveat about everything varying with geography applies here too, I'm sure.
When I need something in a few days (or later), I'll order it from Amazon when I think about it. If I need something "now" or today, I'll just drive to the store and go get it. I, personally, don't really see the point of the "in-store pickup" -- why order it online if I have to go there to get it anyways?
Its faster if you know what is stocked at your local Walmart. Order on your lunch break, pick it up on the way home without running around the store for 30min.
There is one advantage to ordering online for local store pickup that is worth considering. The online price can be - from my experience - cheaper than than the in-store price. I was surprised to find this on a number of different products recently.
I use in-store pickup at Best Buy almost any time I buy something there. I don't have to worry about it being out of stock, and even better, I don't have to go find it in the store.
Here in the UK "in-store pickup" is known as "click and collect" and it's becoming very popular. In addition the on line price is often lower than the in store price.
Two things: the range offered for instore pickup is far larger than the range held in stock. You don't have to pay delivery costs either. If something is the same price on Amazon as in Tesco [my local supermarket] then I'll order at Tesco and not pay delivery as I know I'll be there in the next few days.
Sometimes I'll "click and collect" just to be sure that the item is in stock. For example I did a price comparison recently to buy a bike saddle, it was cheaper (including postage) from Halfords and I can add stopping there to my journey for very close to zero cost (except time). If I'd ordered it from Amazon then I'd probably be out and end up having to travel to my local postal distribution office, less convenient and more expensive.
There was a big price correction last year which was fairly clearly attributable to competition, especially Google. There will never be quite the cutthroat competition that retail brings, but Amazon is positioning itself as a logistics provider not a retailer.
The competition for cloud will be more like Intel vs. AMD. There will never be half a million different cloud providers, like there were book stores. A cloud is a huge capital asset that few can afford to build.
I think you misinterpret the causality of recent cloud price drops: Google's price drops at year pushed AWS to follow suit, and they haven't matched since (the gap is greater than 20% for GCE vs EC2 now). Microsoft is also publicly committed to matching AWS.
You mean our Free / Bronze support listed here: https://cloud.google.com/support/ ? As people have mentioned on several threads, Google Cloud is actually a business so there are actual support people paid to help when you need it.
Correct, but as they said Amazon's retail revenue gets poured back into R&D and other projects, while AWS is left to generate profits. It's a bit like an insurance policy. AWS is definitely Amazon's most profitable "spinoff" product, besides the Kindle I can't really think of anything else they've made so far that has been that successful.
They do some kinda misleading accounting for AWS. They don't count the capital leases as expenses in "operating income" for AWS, it get's counted at the entire company level. So, because they don't have to expense any depreciation/(expense for capital expenditure in some form) at the AWS level, the "operating profit" at AWS is artificially high and would be negative if it was properly showing the economics of that business.
This isn't to suggest amazon as a whole is doing anything wrong, they are following accounting standards, but that is one place where the standards for capital leases are misleading if you don't read the fine print.
Bezos long ago figured out that the best tax strategy in modern America for a public company is to operate without profit. The company operates with a relatively (to the revenue) small loss, maintaining positive cash flow by issuing and selling additional stock. Selling new stock is (remarkably) tax free. The dilution is negligible since the stock is valued by the revenue (not profit so much). Everybody benefits: executives are now compensated mainly by the RSUs and options, and the corporate profit is only a tax drag that does not really affect this compensation.
Isn't this pretty much the best strategy anywhere in the world? Is there any country that taxes by revenue?
Apple has this weird problem of being so profitable that they have no clue what to do with all that money. And then everyone picks on them for their loophole-based tax mitigation strategies.
Maybe taxes on profits were created so that companies invest their profit instead of hoarding it or giving it to shareholders, creating jobs and infrastructure in the process. As far as I'm concerned, Amazon is using its profits (or lack thereof) exactly as intended.
If you returned it to shareholders they would be reinvesting it too (just somewhere else). You can return capital to investors tax efficiently using share buybacks. Haven't looked at Amazon's annual report in detail so can't tell if they are reinvesting profit in areas that will have high return or not.
I don't think someone has designed taxes around incentives. In most countries wages are more heavily taxed than products, which balances the spending towards buying more things rather than employing more people. It seems very stretched, but some ecologists suggest to tax petrol more heavily and tax wages less, so it would be easier to employ more people for a task than throw more petrol at it (I use petrol in terms of fast tranports).
What about tariffs? They're designed to incentivize buying products made at home. What about "sin" taxes? They're designed to incentivize good behavior?
(Some) taxes are definitely designed around incentives.
Many companies have that problem. They return the capital to investors to invest somewhere else. That is how equity is supposed to work: you give someone money for something and then eventually give you back more than you gave them originally.
If the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders. Over the short/medium term, shareholders might be content with growth and revenue. Over the long term, without profits the business has nothing for shareholders.
It really isn't a tax strategy any more than being unemployed with no income is a tax strategy. Amazon's strategy seems to be keeping margins low enough that it's hard for others to compete with them, in the hopes of great long-term profits.
While the stock may be valued on its revenue, that valuation is premised on the idea that Amazon will be making a lot of profits from that high revenue in the future. Investors aren't buying Amazon stock believing that it's avoiding profit as a tax strategy to funnel money to employees. They're buying Amazon stock believing that it's the future of retail and that being the future of retail will come with enormous profits.
I don't claim to be especially economically savvy, but isn't the fundamental premise that there's a bounded conversion between revenue and profit? Iow, that one can trade a decrease in revenue for an increase in profit by certain business decisions.
If so, then it's natural that stock price increases when revenue increases, albeit at a discount to actual profit depending on what your expected revenue:profit conversion ratio is.
The interesting part is the next step. Someone buys a stock expecting to benefit from the exchange (sell at a higher price that one purchased it for). Thus, if the stock price is correlated with revenue, and Amazon can increase revenue even without increasing profit, stockholders will still be happy.* Stockholders are looking for increased value for their stock, not any particular metric thereof.
*This is assuming Amazon finances the revenue increases through free cash flow (as mentioned elsewhere) rather than diluting stock
>If the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders.
The Bank of England's chief economist has expressed concern that shareholder power is leading to slower growth.
Andy Haldane told BBC Newsnight that business investment had been lower than was "desirable" for years.
One reason was that a high proportion of corporate profits were being paid out to shareholders rather than reinvested in the company.
He said that in 1970, £10 out of each £100 of profits were typically paid to shareholders through dividends.
Today, however, that figure was between £60 and £70. Mr Haldane argued that left far less cash available for growth-boosting investment and that firms risked "eating themselves".
Corporate short-termism - a focus on immediate gains rather than long-term prospects - was a rising problem for companies and pre-dated the financial crisis, he said.
Issuing stock is not the principle way they maintain positive cash flow. The float between the time their customers pay them and the time they have promised to pay their vendors creates enormous, ever-increasing operating cash flow:
Incidentally, this is pretty much how Warren Buffett made his first billions with Berkshire to the best of my understanding.
He realized that insurance generated enormous carry, and if you were able to better utilize that (say, by buying other companies and improving them) then you had a pretty winning strategy.
Most insurance companies operate this way, which long predates Buffett. In fact, it's possible for premiums to sum to less than the costs of insuring precisely because of the float.
Buffett has done well by choosing companies and people that are good at avoiding losing money.
If Amazon had a viable competitor, the profits of float investments would be the ammunition in the resulting price war. Amazon's margin is someone's opportunity.
Not even just possible, but the default of operation in the industry. Most don't turn an underwriting profit with any consistency and make all their money on their investments from that float.
Not really. Amazon as a whole is dial-a-yield depending on the rate of profit reinvested to grow existing/new capabilities. If Bezos wanted, he could halt expansion and return more profit in the short-term, but that would delay long-term revenue (and hence profit) generation plans (however long he's able to find other business expansion directions which avoid the perils of overexpansion and also avoid plateauing for too long).
Also, some companies like Netflix and Zynga, which are AWS'es main customers, are fine to pay AWS a premium to have most of their infrastructure better managed and on-demand. Whereas most sizable businesses deploy something like OpenStack for baseline load on real, bare metal gear they buy and use AWS for traditional uses: PoCs, disaster recovery and peaking capacity. Startups tend to use AWS at first because it's easy, popular and low-risk, but it's not a panacea because it tends to get very expensive, very quickly. (It is however, clearly, a great business in itself, which probably should be spun-off.)
Disclaimer: I was with a premier enterprise AWS external consultancy shop early on that had significant access to capabilities and expanded limitation perks beyond other shops. Interestingly, they've built limitation increase requests available to most everyone now, which were manual before and depended on how much clout a customer or vendor garnered.
> it's not a panacea because it tends to get very expensive, very quickly.
I've investigated colocs near some AWS locations and found AWS to be around 20% cheaper than the cheapest viable option. With AWS's occasional price drops on top of that and general flexibility it's not a difficult choice.
One thing I found was that most providers were trying to sell vertical reliability (e.g. hardware RAID1), with a matching price. Our redundancy is horizontal at the application level (e.g. Zookeeper, Cassandra) so this has no value for us.
Is that rented gear in someone else's racks or your own gear in racks you rent? Beyond a few boxes, the TCO of buying your own gear is far, far cheaper (look at the prices of Supermicro boxes, not luxury, overpriced enterprise boxes that aren't use-case appropriate).
Someone also has to know how to negotiate with DC's (because power circuits are often the biggest cost factor) and how to separately get good deals on fiber (which is usually far cheaper than the DC's charges because most customers don't know better). DC's often nickel and dime for simple tasks if you don't do it yourself (or have hands that can do it for you). (RackSpace used to charge something $75 every time a box need to be reimaged. DC's will often take forever and charge several arms and legs to rack & stack & cable in your cage, but you will still be at their mercy for freight & delivery and pulling outside fiber, electrical circuits, cooling & rack leveling.)
Overall though, it's still cheaper for web-ops shops to do bare metal in (Google, Yahoo, Apple, etc. in their own DC's and other large/medium shops with predictable baseline loads in someone else's DC's) otherwise everyone would be using AWS. And that's clearly not the case for anyone who's ever been in a real enterprise shop.
Look at Wikia or most any other enterprise shop for baseline loads: mostly bare metal, because it's far cheaper for people whom know what they're doing. Also, BackBlaze... pretty much no way to undercut with them apart from buying an HDD manufacturer and going multi-datacenter-scale.
Rented gear in someone else's racks, and it's only that cheap due to Supermicro. I did calculate what the providers premium was, and it didn't seem too unreasonable given the services such as remote hands and taking care of replacements that were being provided.
Perhaps in your use-case it was cheaper / less risk to rent than to own, but for sizable concerns, it's a no brainer that owning is far, far cheaper.
(For smaller stuff/side projects: In the UK, ByteMark.co.uk is awesome, flexible (colo/rent) and cheap. In the US, Pair.com is great. Linode is also decent.)
(For bigger stuff, there are datacenters in the middle of nowhere where power is cheap. That's the often limiting factor for green-field projects... cost of renting circuits from DC's, not the rack real-estate.)
I am brazilian and I am assuming OP is too, Amazon prices in Brazil are cheaper than the competition, simply because the local oferrings are really expensive.
You'll always be able to engineer a better system for a particular known purpose.
The magic of AWS is that the transactional nature of it gives you more flexibility. I was working with somebody with about a storage requirement that will be in the 800-900TB range. But to hit the price point they want, they'd be buying a 1PB capacity solution.
The catch is, what's next? If they exceed their growth projection (a strong possibility), they need to spend $$$ in capital funds to buy some large block of capacity. That procurement takes time. Implementation requires more planning.
With Amazon, the prices are high/competitive, but the marginal cost of a unit of capacity is the cost of that capacity!
On the other hand, this user also has a large transaction system with well known performance an scaling characteristics. In their case, their buying power and size makes it much cheaper (by 3x) to host in a datacenter with customer-owned equipment.
The bare-metal stuff I manage typically end up at 1/3 to 1/2 of AWS costs. Yes, fully loaded costs including salaries and office costs for anyone touching the servers.
You can certainly find more expensive options than AWS if you look, but similarly paying less than for AWS is easy too unless you start relying on specific AWS features.
Agreed on this advice. When I was new to AWS I kept receiving a bill for a few cents that obviously wasn't worth my time to resolve, but still really irritated my why I couldn't find a running instance. Turns out the running instance was in a different region and I didn't know the EC2 server list displayed only one region at a time.
Are you trying to protect your identity or just make sure the bill doesn't go over a set amount? If the latter then it shouldn't matter if ID is required.
It really feels like they design the thing to make that happen.
I got stung for over $100 just as a casual user, because I never guessed that I had to click through all the (slow loading) regions to see the instances and volumes and snapshots I might have burning money.
Also their documentation. I frankly find it a personal achievement to hear of people successfully navigating their documentation to a working solution.
Just like you, I got burned for about a hundred dollars whenever they switched their UI for EC2 to only show instances per region. I have no idea when that change happened, but they weren't loud enough announcing it.
While they're desperately lacking in good getting started documentation, the reference docs are some of the best in the industry. I'll grant they're not pretty, but they cover everything in detail.
That was a concern of mine until I created alerts. Now I get emailed if X goes over a threshold, and the instance can be shutdown after another threshold.
What I do is set up billing alerts through CloudWatch. I have $25/month in personal AWS usage paid for by my company (to encourage people to learn) and I set an alert when my monthly usage has hit $20 (which just went off yesterday).
The billing and cost management page should show you which regions you are incurring costs from on an ongoing basis.
But yeah, you have to know about all of this to use it. They should probably set a default alert at about $25/month on every new account, then let you change or delete it if you want.
Billing alerts and learning to use the CLI largely remove the issue of ghost resource usage. If you use AWS beyond the basics, it is worth investing the time to get the CLI setup and use it in favor of the web interface.
Yeah, because that's a logical reason they make billions and not because large companies like Netflix (not to mention pretty much every tech startup these days) use them so heavily.
The drop in operating profit from Q1 to Q2 2014 of about 50% (~$100m) made me look into some of their acquisitions being made for AWS.
Might be able to get more clarity into what they are paying for these undisclosed acquisitions prices, assuming their cost for constructing data farms stays relatively constant.
That would only make sense for a very small portion of their users, and confuse a great many.
I think the more likely path is going to be services like their photo library, which can clearly make use of AWS, but doesn't directly expose it to customers. I could see some sort of backup service happening in the near future, and someone else mentioned Echo.
That doesn't make sense. AWS allows Amazon (the retail store) to go very deep into the red and the entire company could still be afloat. There's no reason to distance yourself from the most profitable part of your company.
Don't forget that AWS came out of Amazon's need for infrastructure. Amazon is dogfooding with AWS, and that's one of the reasons AWS remains in the lead when it comes to cloud compute platforms. They keep launching new, useful services, that come out of real business use cases.
I'm curious, does it run on AWS in the sense that when I launch an instance I might be collocated on the same physical machine as an instance doing work for amazon.com or do they have a separate deployment of the AWS stack in a dedicated part of the datacenter?
That kind of spinoff only happens when activist investors demand it. I think Jeff Bezos and his true believers still hold a significant portion of the stock.
It is propping up the rest of their business (which is doing very well but like others have said has very low or negligible margins).
If anything, they could leverage their cloud tech further in the consumer space by developing uses for it beyond just video streaming (could be other uses but this is the main one I am aware of). I think we've seen that with Echo and a next-gen version could easily do more as an assistant, an all encompassing one for any digital support needs. Perhaps also stream games a la PS Now.
Operating profits take a charge for depreciation of capital assets over the (tax) economic life of the asset. So, AWS is charged between 1/36 and 1/60th of the value of the server per month for 36 or 60 months. (Exact schedule of depreciation is facts and circumstances dependent.)
But it's not like they're making a profit just because the servers are "free".
Source: I ran tech ops for an e-commerce company you've likely heard of for ~half a decade.
They could well be making that profit exactly because servers are free. AWS operating profit q2: $400m, for a $1.6B/year run rate.
A fascinating post from Benedict Evans looks at Amazon's capex/sales ratio from 2009 and looks at what free cash flow would have been had Amazon preserved that ratio through 2014 instead of incurring massive capex. They would have had another $5B over the year previous to that article. [1] Obviously some of that is warehouses, but unless they speak to how much of that is datacenters, I don't see how anyone can assume aws is actually profitable.
You can see on slide 15 "Segment Results-AWS" that the segment profit for Q2 was $391MM on net AWS sales of $1.842BB. Both numbers are for the quarter.
The article you linked talks about FCF, not operating income, and free cash flow is still hit with, in Amazon's case, what appears to be capital lease payments. (See slides 21 and 22 for the FCF reconciliation for newly acquired capital equipment, which they don't break out at the segment level.)
E&Y audits Amazon's financials. I'm not sure what evidence you have to suggest that Amazon is improperly "not counting" server expenses in AWS profitability numbers, but that would be an extraordinary claim, which would require some substantial evidence to overcome the presumption that E&Y and Amazon finance are correctly reporting.
It is true that E&Y has not signed a full-year audit for a year when AWS broke out AWS P&L separately, as that only happened for two quarters so far.
But your capital lease payments aren't included in (ie removed from) that operating profit. Since you don't know which is larger, I remain befuddled how you claim aws is profitable.
Capital lease principal payments are absolutely charged against operating profit per GAAP.
If Amazon is breaking out a segment P&L for AWS, they are no doubt making a good faith effort to correctly charge operating expenses, including capital leases, against that P&L. They also don't break out their electricity costs to run their DCs nor their engineering costs attributable to AWS, yet I'm confident that they are charging those costs against the AWS segment as appropriate.
What evidence do you have that Amazon is not removing the capital lease principal payments from the operating profit they're reporting? It's not like they could possibly imagine that's going to "fly"...
I'm trying to understand why large companies use AWS for their primary infrastructure. Both AWS and Azure are obscenely expensive when compared to buying servers and colocating them somewhere. The cloud model works well for bootstrapped startups, but anyone with the resources to buy and manage their own servers is crazy if they use AWS or Azure as their primary server platform.
Cloud providers bring you not just localized infrastructure, but distributed infrastructure, with clear mechanisms for scaling as needed, plus support, etc. With AWS, you have a predictable cost, predictable up-time, and ability to scale at peak, and your costs are spread over time, rather than all up front.
With your own servers you have to build out to handle peak load (and run mostly dormant during non-peak hours), across multiple locations, to achieve the same availability.
I'm not sure the costs for the convenience of AWS are so obscene in such a case. They may still be higher, I honestly don't know, but the convenience benefit is huge. They key bit is that AWS' costs are largely -known-, whereas the costs of DIYing aren't.
Per Netflix's blog post about why they use AWS for serving everything except video content - "We could have chosen to build out new data centers, build our own redundancy and failover, data synchronization systems, etc. Or, we could opt to write a check to someone else to do that instead."
Oftentimes for enterprise, having all your infrastructure in place, done right the first time, with someone else eating any costs associated with the unexpected, and ready to start building your application on, is worth the cost. For enterprise, paying a known amount to avoid risk is oftentimes worth it.
"If you’re used to designing and deploying applications in your own data centers, you need to be prepared to unlearn a lot of what you know."
Which is it? Did it save them money because they didn't have to "build their own redundancy and failover" or did they have to build a bunch of custom tools like Chaos Monkey because "I knew to expect higher rates of individual instance failure in AWS, but I hadn’t thought through some of these sorts of implications." ???
From reading Netflix' blog, it's clear that it was a huge learning and engineering effort. That cost has to be taken into account and added to the fact that across many AWS offerings, you're looking at as much as a 10x price / performance penalty versus dedicated or collocation. I'm unconvinced that they couldn't have done it cheaper and better through more transitional approaches, and moreso that it's a meaningful indicator for anyone else.
AWS has been massively innovative. But it's much more expensive, and a huge part of their business is sales and getting CXOs onboard, not necessarily providing good value.
"That cost has to be taken into account and added to the fact that across many AWS offerings, you're looking at as much as a 10x price / performance penalty versus dedicated or collocation."
This.
The pricing is especially egrerious in bandwidth charges which for AWS are almost pure profit.
I've heard that the prices are egregious only in bandwidth charges and that other things were not as bad. Does anyone have concrete numbers to compare?
Plus, many companies have very bursty workloads - we can (and often do) scale from 100 servers up to 1000+ servers several times a day. Without AWS we'd be paying for 1000 servers 24x7, now we only pay for them several hours a day.
We've run the numbers, and we can't host it ourselves anywhere close to what we pay Amazon if we want the same amount of redundancy that AWS gives us "for free" -- we'd have to duplicate most of our infrastructure across 4 separate datacenters to get the kind of multi-AZ, Multi-region redundancy we have now.
So why would you not have localized infrastructure to handle average loads and use AWS to scale to peak only when necessary? Why use AWS even for your average loads?
Because then you have to target two different sets of infrastructure. The extra work and complexity carries with it a rather large cost too, -and- greater risk. It's almost the worst of both worlds, rather than the best, as you have to solve all the problems of rolling your own, -and- pay Amazon for the extra utilization.
> I'm trying to understand why large companies use AWS for their primary infrastructure.
Because they are corrupt? Could be? Large companies are basically centrally controlled economies, and we know how that turns out..
It seems to me that large companies live in a special bubble where they are willing to pay extra for everything. On the other hand, they also charge extra, so externally, it will mostly cancel out.
The winners of this scheme are probably the people involved in running (either directly or as shareholders) these large companies, because their salaries (and other bonuses) are artificially inflated compared to the rest of the society. The losers are probably the government and the taxpayer (i.e. the public), these can be easily made to pay extra but it's difficult for them to charge extra.
I feel like this is a myth that just won't go away.
If you run your 24/7 steady state load using on-demand hourly charged instances, and don't factor in the cost of managing your own hardware and data centres then yes, EC2 is hideously expensive.
If you plan your spend (much like you would in buying your own hardware and DC space) it really isn't - reserved instances considerably reduce prices, and come with bulk discounts when you buy enough of them.
It's been a while, but when costing out our migration to EC2 it came out cheaper than any other VM provider, and was in the same ballpark as leasing our own hardware.
Frankly, they're a rounding error with our current workload. If you're in the business of running a CDN or streaming video you may want to look at other options - Netflix with their caching servers in ISP's data centres are a pretty good example of this.
Care to point to an analysis supporting this? There's surely a point where the bother with replacing spare parts is cheaper than letting someone else deal with it but it must be some scale.
>anyone with the resources to buy and manage their own servers
Eh, I think the bar is a lot higher than that, especially if you have to meet external compliance standards with yearly audits, or have to have good disaster recovery with multiple datacenters. Those kind of things get very expensive if you are under a certain scale.
Off Topic, Previously I was always put off by Amazon's design. You can click on anything Amazon related, AWS included and see some fugly UI and layout.
And i got to check AWS again and i am pleasantly surprised things have improved dramatically!
Yeah the site is slowly migrating to a new design but it so huge and run by some many teams that it takes them time to get it all into shape and by then a new style is being brought out.
As an aside, I worked in a directorate, and the director of said directorate (who worked at amazon before us) told a story every so often of meetings he would be invited to, where the amazon UI team would agonize over specific pixel placements of text and images on the amazon website.
The amusing part to me (this was years ago) was internally I was always thinking "their website is, at the very least, non-intuitive and overwhelming" when he told such stories.
Summary: Many design elements work for Amazon.com mainly because of its status as the world's largest and most established e-commerce site. Normal sites should not copy Amazon's design.
That report is a decade old. While I'm not going to hold up Amazon as the ideal e-commerce design, the site has been drastically altered since 2005 and many of those complaints are invalid now.
Ugh, I don't know if it's just me, but browsing for anything on Amazon.com really irks me. First, the page loads, then a bunch of other stuff loads in the background. The problem is that you try scrolling after the page loads, but the web site is so demanding on the browser that it frequently breaks scrolling. Plus, the tab title flickers the entire time this is going on.
It's clearly a symptom of a large number of people working on stuff that all ends up on the same page.
Can someone explain how Amazon is different (in investor mindset, not legality) from a Ponzi scheme? It seems like retail companies (and even some startups) exist solely by churning investors with new money. Everyone invests based on expected profit at the end of the rainbow, and a lot of money is made selling to the next set of investors who want to carry on rainbow-chasing.
If Amazon were to stop and start making a profit, wouldn't they immediately be undercut by the next generation of quasi-ponzi companies who are now willing to sacrifice short term profits?
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Anyone has numbers for Google?
Side note: numbers between Microsoft and Amazon are not directly comparable because Microsoft includes SaaS solutions such as Office 365 in their cloud revenue. So it is not Azure versus AWS.
AWS have about ... zero competition where they are right now. Google CLoud, Azure and the like are not doing quite the same thing just yet.
* The usual caveat about everything varying with geography applies here too, I'm sure.
When I need something in a few days (or later), I'll order it from Amazon when I think about it. If I need something "now" or today, I'll just drive to the store and go get it. I, personally, don't really see the point of the "in-store pickup" -- why order it online if I have to go there to get it anyways?
Yeah.
> I'll just drive to the store and go get it.
Its faster if you know what is stocked at your local Walmart. Order on your lunch break, pick it up on the way home without running around the store for 30min.
Sometimes I'll "click and collect" just to be sure that the item is in stock. For example I did a price comparison recently to buy a bike saddle, it was cheaper (including postage) from Halfords and I can add stopping there to my journey for very close to zero cost (except time). If I'd ordered it from Amazon then I'd probably be out and end up having to travel to my local postal distribution office, less convenient and more expensive.
Huge Disclaimer: I work at Google on GCE.
http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
Amazon is notorious for capital expenditures, some of which is probably why AWS exists.
This isn't to suggest amazon as a whole is doing anything wrong, they are following accounting standards, but that is one place where the standards for capital leases are misleading if you don't read the fine print.
Apple has this weird problem of being so profitable that they have no clue what to do with all that money. And then everyone picks on them for their loophole-based tax mitigation strategies.
What if the share price is not undervalued, the investors would get hurt if you do a buyback.
(Some) taxes are definitely designed around incentives.
Thus, taxes on sins can produce higher revenues than taxes on more price sensitive goods or activities would.
I'd say the optimal strategy is what Facebook and Google do with the double Irish Dutch sandwich http://conversableeconomist.blogspot.com/2014/07/double-iris...
There are all sorts of strategies for optimization. Many involve lobbying Congress for special carve-outs.
It really isn't a tax strategy any more than being unemployed with no income is a tax strategy. Amazon's strategy seems to be keeping margins low enough that it's hard for others to compete with them, in the hopes of great long-term profits.
While the stock may be valued on its revenue, that valuation is premised on the idea that Amazon will be making a lot of profits from that high revenue in the future. Investors aren't buying Amazon stock believing that it's avoiding profit as a tax strategy to funnel money to employees. They're buying Amazon stock believing that it's the future of retail and that being the future of retail will come with enormous profits.
If so, then it's natural that stock price increases when revenue increases, albeit at a discount to actual profit depending on what your expected revenue:profit conversion ratio is.
The interesting part is the next step. Someone buys a stock expecting to benefit from the exchange (sell at a higher price that one purchased it for). Thus, if the stock price is correlated with revenue, and Amazon can increase revenue even without increasing profit, stockholders will still be happy.* Stockholders are looking for increased value for their stock, not any particular metric thereof.
*This is assuming Amazon finances the revenue increases through free cash flow (as mentioned elsewhere) rather than diluting stock
Interestingly the Bank of England's Chief Economist has today attacked that principle of company law: http://www.bbc.co.uk/news/business-33660426
To quote from the article:
The Bank of England's chief economist has expressed concern that shareholder power is leading to slower growth.
Andy Haldane told BBC Newsnight that business investment had been lower than was "desirable" for years.
One reason was that a high proportion of corporate profits were being paid out to shareholders rather than reinvested in the company.
He said that in 1970, £10 out of each £100 of profits were typically paid to shareholders through dividends.
Today, however, that figure was between £60 and £70. Mr Haldane argued that left far less cash available for growth-boosting investment and that firms risked "eating themselves".
Corporate short-termism - a focus on immediate gains rather than long-term prospects - was a rising problem for companies and pre-dated the financial crisis, he said.
https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow/
They are essentially borrowing from their own customers (or maybe more accurately, vendors), at zero interest, to continually build the business.
He realized that insurance generated enormous carry, and if you were able to better utilize that (say, by buying other companies and improving them) then you had a pretty winning strategy.
Buffett has done well by choosing companies and people that are good at avoiding losing money.
If Amazon had a viable competitor, the profits of float investments would be the ammunition in the resulting price war. Amazon's margin is someone's opportunity.
I'd assume there would be advantages on that closer relationship vs a stand-alone insurance company simply investing in a publicly traded offering.
Also, some companies like Netflix and Zynga, which are AWS'es main customers, are fine to pay AWS a premium to have most of their infrastructure better managed and on-demand. Whereas most sizable businesses deploy something like OpenStack for baseline load on real, bare metal gear they buy and use AWS for traditional uses: PoCs, disaster recovery and peaking capacity. Startups tend to use AWS at first because it's easy, popular and low-risk, but it's not a panacea because it tends to get very expensive, very quickly. (It is however, clearly, a great business in itself, which probably should be spun-off.)
Disclaimer: I was with a premier enterprise AWS external consultancy shop early on that had significant access to capabilities and expanded limitation perks beyond other shops. Interestingly, they've built limitation increase requests available to most everyone now, which were manual before and depended on how much clout a customer or vendor garnered.
I've investigated colocs near some AWS locations and found AWS to be around 20% cheaper than the cheapest viable option. With AWS's occasional price drops on top of that and general flexibility it's not a difficult choice.
One thing I found was that most providers were trying to sell vertical reliability (e.g. hardware RAID1), with a matching price. Our redundancy is horizontal at the application level (e.g. Zookeeper, Cassandra) so this has no value for us.
Someone also has to know how to negotiate with DC's (because power circuits are often the biggest cost factor) and how to separately get good deals on fiber (which is usually far cheaper than the DC's charges because most customers don't know better). DC's often nickel and dime for simple tasks if you don't do it yourself (or have hands that can do it for you). (RackSpace used to charge something $75 every time a box need to be reimaged. DC's will often take forever and charge several arms and legs to rack & stack & cable in your cage, but you will still be at their mercy for freight & delivery and pulling outside fiber, electrical circuits, cooling & rack leveling.)
Overall though, it's still cheaper for web-ops shops to do bare metal in (Google, Yahoo, Apple, etc. in their own DC's and other large/medium shops with predictable baseline loads in someone else's DC's) otherwise everyone would be using AWS. And that's clearly not the case for anyone who's ever been in a real enterprise shop.
Look at Wikia or most any other enterprise shop for baseline loads: mostly bare metal, because it's far cheaper for people whom know what they're doing. Also, BackBlaze... pretty much no way to undercut with them apart from buying an HDD manufacturer and going multi-datacenter-scale.
(For smaller stuff/side projects: In the UK, ByteMark.co.uk is awesome, flexible (colo/rent) and cheap. In the US, Pair.com is great. Linode is also decent.)
(For bigger stuff, there are datacenters in the middle of nowhere where power is cheap. That's the often limiting factor for green-field projects... cost of renting circuits from DC's, not the rack real-estate.)
The magic of AWS is that the transactional nature of it gives you more flexibility. I was working with somebody with about a storage requirement that will be in the 800-900TB range. But to hit the price point they want, they'd be buying a 1PB capacity solution.
The catch is, what's next? If they exceed their growth projection (a strong possibility), they need to spend $$$ in capital funds to buy some large block of capacity. That procurement takes time. Implementation requires more planning.
With Amazon, the prices are high/competitive, but the marginal cost of a unit of capacity is the cost of that capacity!
On the other hand, this user also has a large transaction system with well known performance an scaling characteristics. In their case, their buying power and size makes it much cheaper (by 3x) to host in a datacenter with customer-owned equipment.
You can certainly find more expensive options than AWS if you look, but similarly paying less than for AWS is easy too unless you start relying on specific AWS features.
And as I reply to this, I decided to check my AWS console, because there is an instance for the life of me I can't terminate.
Where I live, every grocery store sells them without requiring ID.
This is the #1 benefit of B2B vs B2C. It's someone else's money.
I got stung for over $100 just as a casual user, because I never guessed that I had to click through all the (slow loading) regions to see the instances and volumes and snapshots I might have burning money.
The web interface is a total clusterfuck.
Just like you, I got burned for about a hundred dollars whenever they switched their UI for EC2 to only show instances per region. I have no idea when that change happened, but they weren't loud enough announcing it.
The billing and cost management page should show you which regions you are incurring costs from on an ongoing basis.
But yeah, you have to know about all of this to use it. They should probably set a default alert at about $25/month on every new account, then let you change or delete it if you want.
Might be able to get more clarity into what they are paying for these undisclosed acquisitions prices, assuming their cost for constructing data farms stays relatively constant.
- Peritor (Ops, Mar 2013)
- ClusterK (Apr 2014, $20M-$50M)
- Amiato (NoSQL, May 2014)
- 2lemetry (IoT, Mar 2014)
- Annapurna Labs (Jan 2015, ~$370M)
- AppThwack (Mobile testing, Jul 2015)
I think the more likely path is going to be services like their photo library, which can clearly make use of AWS, but doesn't directly expose it to customers. I could see some sort of backup service happening in the near future, and someone else mentioned Echo.
This is totally wrong. Amazon retail has been running on AWS for years.
If anything, they could leverage their cloud tech further in the consumer space by developing uses for it beyond just video streaming (could be other uses but this is the main one I am aware of). I think we've seen that with Echo and a next-gen version could easily do more as an assistant, an all encompassing one for any digital support needs. Perhaps also stream games a la PS Now.
But it's not like they're making a profit just because the servers are "free".
Source: I ran tech ops for an e-commerce company you've likely heard of for ~half a decade.
A fascinating post from Benedict Evans looks at Amazon's capex/sales ratio from 2009 and looks at what free cash flow would have been had Amazon preserved that ratio through 2014 instead of incurring massive capex. They would have had another $5B over the year previous to that article. [1] Obviously some of that is warehouses, but unless they speak to how much of that is datacenters, I don't see how anyone can assume aws is actually profitable.
[1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
Operating Profit = Operating Revenue - COGS - Operating Expenses - Depreciation & Amortization
AWS Q2 conf call slides: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...
You can see on slide 15 "Segment Results-AWS" that the segment profit for Q2 was $391MM on net AWS sales of $1.842BB. Both numbers are for the quarter.
The article you linked talks about FCF, not operating income, and free cash flow is still hit with, in Amazon's case, what appears to be capital lease payments. (See slides 21 and 22 for the FCF reconciliation for newly acquired capital equipment, which they don't break out at the segment level.)
E&Y audits Amazon's financials. I'm not sure what evidence you have to suggest that Amazon is improperly "not counting" server expenses in AWS profitability numbers, but that would be an extraordinary claim, which would require some substantial evidence to overcome the presumption that E&Y and Amazon finance are correctly reporting.
It is true that E&Y has not signed a full-year audit for a year when AWS broke out AWS P&L separately, as that only happened for two quarters so far.
If Amazon is breaking out a segment P&L for AWS, they are no doubt making a good faith effort to correctly charge operating expenses, including capital leases, against that P&L. They also don't break out their electricity costs to run their DCs nor their engineering costs attributable to AWS, yet I'm confident that they are charging those costs against the AWS segment as appropriate.
What evidence do you have that Amazon is not removing the capital lease principal payments from the operating profit they're reporting? It's not like they could possibly imagine that's going to "fly"...
I try to post here this weekend
Cloud providers bring you not just localized infrastructure, but distributed infrastructure, with clear mechanisms for scaling as needed, plus support, etc. With AWS, you have a predictable cost, predictable up-time, and ability to scale at peak, and your costs are spread over time, rather than all up front.
With your own servers you have to build out to handle peak load (and run mostly dormant during non-peak hours), across multiple locations, to achieve the same availability.
I'm not sure the costs for the convenience of AWS are so obscene in such a case. They may still be higher, I honestly don't know, but the convenience benefit is huge. They key bit is that AWS' costs are largely -known-, whereas the costs of DIYing aren't.
Per Netflix's blog post about why they use AWS for serving everything except video content - "We could have chosen to build out new data centers, build our own redundancy and failover, data synchronization systems, etc. Or, we could opt to write a check to someone else to do that instead."
Oftentimes for enterprise, having all your infrastructure in place, done right the first time, with someone else eating any costs associated with the unexpected, and ready to start building your application on, is worth the cost. For enterprise, paying a known amount to avoid risk is oftentimes worth it.
"If you’re used to designing and deploying applications in your own data centers, you need to be prepared to unlearn a lot of what you know."
Which is it? Did it save them money because they didn't have to "build their own redundancy and failover" or did they have to build a bunch of custom tools like Chaos Monkey because "I knew to expect higher rates of individual instance failure in AWS, but I hadn’t thought through some of these sorts of implications." ???
From reading Netflix' blog, it's clear that it was a huge learning and engineering effort. That cost has to be taken into account and added to the fact that across many AWS offerings, you're looking at as much as a 10x price / performance penalty versus dedicated or collocation. I'm unconvinced that they couldn't have done it cheaper and better through more transitional approaches, and moreso that it's a meaningful indicator for anyone else.
AWS has been massively innovative. But it's much more expensive, and a huge part of their business is sales and getting CXOs onboard, not necessarily providing good value.
This.
The pricing is especially egrerious in bandwidth charges which for AWS are almost pure profit.
Amazon is only cheap if you don't use it.
We've run the numbers, and we can't host it ourselves anywhere close to what we pay Amazon if we want the same amount of redundancy that AWS gives us "for free" -- we'd have to duplicate most of our infrastructure across 4 separate datacenters to get the kind of multi-AZ, Multi-region redundancy we have now.
Because they are corrupt? Could be? Large companies are basically centrally controlled economies, and we know how that turns out..
It seems to me that large companies live in a special bubble where they are willing to pay extra for everything. On the other hand, they also charge extra, so externally, it will mostly cancel out.
The winners of this scheme are probably the people involved in running (either directly or as shareholders) these large companies, because their salaries (and other bonuses) are artificially inflated compared to the rest of the society. The losers are probably the government and the taxpayer (i.e. the public), these can be easily made to pay extra but it's difficult for them to charge extra.
If you run your 24/7 steady state load using on-demand hourly charged instances, and don't factor in the cost of managing your own hardware and data centres then yes, EC2 is hideously expensive.
If you plan your spend (much like you would in buying your own hardware and DC space) it really isn't - reserved instances considerably reduce prices, and come with bulk discounts when you buy enough of them.
It's been a while, but when costing out our migration to EC2 it came out cheaper than any other VM provider, and was in the same ballpark as leasing our own hardware.
Eh, I think the bar is a lot higher than that, especially if you have to meet external compliance standards with yearly audits, or have to have good disaster recovery with multiple datacenters. Those kind of things get very expensive if you are under a certain scale.
And i got to check AWS again and i am pleasantly surprised things have improved dramatically!
The amusing part to me (this was years ago) was internally I was always thinking "their website is, at the very least, non-intuitive and overwhelming" when he told such stories.
I guess they found better UX people. =pp
edit: typo
http://www.nngroup.com/articles/amazon-no-e-commerce-role-mo...
It's clearly a symptom of a large number of people working on stuff that all ends up on the same page.
If Amazon were to stop and start making a profit, wouldn't they immediately be undercut by the next generation of quasi-ponzi companies who are now willing to sacrifice short term profits?
https://ycharts.com/companies/AMZN/shares_outstanding