PREPARED BY: Abid Imam Karan Jaiswal Mikael Thakur
SCHULICH SCHOOL OF BUSINESS -YORK UNIVERSITY 4700 Keele Street, Toronto, Ontario, M3J 1P3 Masters of Business Program
1.0 AMAZON.COM 1.1 Amazon Today Amazon Amazon today today has evolve evolved d from from the world' world's s larges largestt e-comm e-commerc erce e company company to a technology firm, shifting its function from a technology consumer to a technology provider. Through acquisitions and technology spending funded by meteoric market capitalization, the company has rapidly captured market share in various sectors. Amaz Amazon on’s ’s tech techni nica call and and busi busine ness ss inno innova vati tion ons s and and its its comm commit itme ment nt to serv serve e consumers have earned it the reputation of being a market leader. The current strategy of Amazon is to develop and capture a substantial market of business-toconsum consumer er ele electr ctroni onic c commer commerce. ce. Amazon Amazon is recogn recognize ized d as the most innova innovativ tive e enterprise in B2C e-commerce and the companies name has become synonymous with e-tailing. It has proved itself to be technically very innovative - there is no doubting the online retailer’s ability to try out new ideas. Every few weeks a new feature appears on its website and every few quarters they announce the launch of a product that compliments their e-initiatives. Branding is a powerful and revenuegenerating generating asset for Amazon. Amazon. The company company currently currently has two brands— one with consumers for its low prices and one in the business world for technology expertise, its core competency, which it capitalizes on to support its consumer-facing brand. Amazon has invested millions of dollars in building up their core competencies, much much of whic which h we went nt into IT. IT. Now Now what what Amazon Amazon is doin doing g is leasi leasing ng thei theirr core core compet competenc ency y to other other compan companies ies that that capita capitaliz lize e mutual mutual co-bran co-branding ding in terms terms of revenue growth for both parties.
1.1 Management Amaz Amazon on is obse obsess ssed ed with with findi finding ng inno innova vati tive ve wa ways ys to sati satisf sfy y its its cust custom omer ers s – regardless regardless of what the competition competition is doing. Jeff Bezos Bezos has infused the firm with a i sense of urgency and chaotic flux . The company has also ensured that every executive officer is tied to the company’s succ succes ess s by ma maki king ng stoc stockk-ba base sed d comp compen ensa sati tion on a larg large e part part of thei theirr over overal alll compensation. This compensation model model thus ensures long-term long-term shareholder value. Amazon’s CEO is also strongly tied to the company’s success as he currently owns 24% of outstanding outstanding shares. shares. Furthermore, urthermore, he has requested requested to be compensated compensated a ii modest salary that hovers between $81,000 and $150,000 USD . The fact that a few of his subordinates make more in terms of dollar compensation speaks volumes of the way the firm is structured – that is, a meritocracy. meritocracy. The challenges facing the company is that since 1997 it is not able to convince the investment investment community community that it is able to generate generate profits profits in the long run. Amazon Amazon has made a bet on becoming becoming a provider provider of technology technology services services generally generally known as cloud computing. The following following document provides provides investors a succinct analysis of Amazon’s Amazon’s cloud computing computing offering offering and recommenda recommendations tions if they should pursue investing in the company. 2 | Page
2.0 CLOUD COMPUTING Cloud computing is a technology bound to disrupt not only the business models of exist existing ing softwa software re giants giants such such as Micro Microsof softt but also also disrupt disrupt the IT indust industry ry as a whole. The concept refers refers to the virtualiza virtualization tion of the datacenter datacenter such that server machin machines es are are not thought thought of individ individual ually, ly, but as a comput computing ing commod commodity ity in a grea greate terr pool pool of serve servers rs actin acting g as one. one. Clou Cloud d comp comput utin ing, g, unlik unlike e tradit traditio iona nall computing, is free from the confines of desktop-based hardware and software. Bare bone bones s compu compute terr term termin inal als s run and and stor store e prog progra rams ms from from a thir thirdd-pa party rty serv server er conne connect cted ed to the the Web, eb, (alm (almos ost) t) elim elimin inat atin ing g the the chan chance ce data data loss loss thro throug ugh h a computer crash. In cloud computing, the provider builds a virtualized infrastructure and you get to install and run your applications on it for a pay-as-you-go price that is directly propor proportio tional nal to the resou resourc rces es your your applica applicatio tions ns use. use. The provid provider er automa automatic ticall ally y scales your implementation up and down according to the resources you need at any given time. The main distinction from managed hosting is that some of the choices are made by the provider rather than the customer. They choose how to do the scaling and load balancing, for example, rather than allowing you to specify how it’s done. But you still take responsibility for higher-level application infrastructure such as performance tuning, user provisioning and access rights, framing APIs, and so on. Cloud computing opportunities are are limitless as its its scalability means wonders for a companies IT bottom line. 2.1 TYPES OF CLOUD COMPUTING There are 3 types of cloud computing technology aren arenas as:: 1) Appl Applic icat atio ions ns,, 2) Plat Platfo form rms, s, and and 3) Infrastructu Infrastructure. re. Applicatio Applications ns are what hat almo lmost eve everyo ryone has has alre lready ady use used in the for form of electroni electronic c mail, mail, wiki’s wiki’s search, search, etc. Platforms Platforms are the newest entry where an application platform is offered to developers in the cloud. Developers write write their their applica applicatio tion n to a more more or less less open open Figure 1: Cloud Computing Types Types and specification and then upload their code into the Company Associations clou cloud d wher where e the the appl applic icat atio ion n is run run ma magi gica call lly y somewhere , typi typica call lly y bein being g able able to scal scale e up auto automa mati tica call lly y as usag usage e for for the the application grows. The service being sold is the machinery that funnels requests to an application and makes makes the application “tick”. Finally there is the infrastructure infrastructure – the actual hardware hardware required required to store store data. This is the most powerful type of cloud in that virtually any application and any configuration that is fit for the internet can be mapped to this this type of service. service. Distinction between platform platform and infrastructure providers is currently vague – which is probably due to product development and migration migration into other types of cloud offerings by firms. Figure 1 illustrates illustrates various
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cloud cloud types types and compan companies ies associa associated ted to each. each. Note Note that that only only Goo Google gle shares shares Amazon’s interests in both PaaS and IaaS (see Section 2.2).
2.2 DISRUPTIVE NATURE OF CLOUD COMPUTING The profusion of cheap storage, software that can run a single massive application across thousands of low-cost servers, and near-ubiquitous internet access across North America has created a virtual supercomputer that is accessible anywhere. For For enterprises, enterprises, the technology technology shift to cloud computing computing provides provides the benefits benefits of a data center without the cost and hassle of maintaining one – thus disrupting the datacenter datacenter-ware -warehousi housing ng business as well as certain IT professio professions. ns. Alternativ Alternative e delivery models such as software as a service (SaaS), will change the way software and services are delivered, diminishing the importance of the traditional monolithic desktop-instal desktop-installed led applicatio applications, ns, which could seriously disrupt the shrink-wrappe shrink-wrapped d softwa warre busi usines ness (Microsof soft et al) Cloud Figure e 2: AWS Technol echnology ogy Computing is also widely expected to change the Figur shape of the OS market and associated revenue because both enterprises and end users increasingly require more on-demand type infrastructure services rather than on-p on-pre remi mise ses, s, self self-ow -owne ned d or comm commod odit ityy-ty type pe soluti solution ons. s. Long Longer er term term,, Ga Gart rtner ner Research predicts that with the help of virtualization of virtualization,, companies will be better able to manage their resources, eventually requiring fewer software licenses; and that prepre-de depl ploy oyed ed appl applic icat atio ions ns in virt virtua uall ma mach chin ines es coul could d repla eplace ce the the OS as an infrast infrastruc ructur ture e while while dramat dramatica ically lly changi changing ng softwa software re distri distributi bution on methods methods and iii resolving OS compatibility issues .
2.3AMAZON’S CLOUD OFFERING After building a massive cloud for its own, internal applications, Amazon realized others could could benefit while while increasing increasing ROI on their datacenters datacenters.. In 2006, Amazon Amazon launch launched ed its Amazon Amazon Web Service Services s (AWS) (AWS) by provid providing ing their their infras infrastruc tructur ture e and platform as a service. Their current position position in the marketplace marketplace is that of a market leader, leader, thriving in a ‘blue ocean’ primarily primarily due to first mover advantage. advantage. However However the industry is bound to become competitive – especially through niche providers. For functional specifications on AWS and pricing structure please see Appe ndix A.
2.4 STRATEGIC STRATEGIC TECHNOLOGY TECHNOLOGY ASSETS At a high high-l -lev evel el,, Amaz Amazon on Web Serv Servic ices es (AWS (AWS)) speci specifi fic c to clou cloud d compu computi ting ng are are composed composed of five strategic strategic technology technology assets: Elastic Elastic Computing (EC2), (EC2), Amazon Simple Storage (S3), Simple Database (SimpleDB), Simple Queue Service (SQS), and
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DevPay. For a brief description of each Strategic Technology Technology Assets (STA), (STA), please refer to Appendix B.
Each STA sits on a specific spot on the technology life cycle. Figure Figure 2 illustrates each STA STA in the the life lifecy cycl cle e Inte Intere rest stin ingl gly, y, for for such such a disruptive disruptive technology technology,, only the EC2 component qualif qualifies ies as pacing. pacing. EC2 develo developme pment nt hardly hardly poses a significant financial risk to the firm and the potent potential ial succes success s is certai certainly nly much much more more clea lear than than what what is ofte often n char charac acte teri rize zed d by emerging technologies . SimpleDB and SQS are key technologies as they both strongly influence competitive advantage advantage today: today: SimpleDB SimpleDB was the first cloud computing computing offering offering for structured structured data storage allowing firms to migrate their company data to AWS and further promoting network effects due to the exponential growth of data as applications use existing data to create more more (see Appendix E – Figure Figure 2). SQS is a unique offering in that it allow allow partial partial migration migration of web applications applications as Greenfield iv development may not not curr curren entl tly y be an opti option on for for ma many ny clie client nts s due due to cost cost and and time time const constrai raint nts. s. Currently no other cloud provider offers a communications bridge such as SQS. DevPay is also a key technology as it facilitates payments made to developers – promoting promoting AWS AWS adoption adoption through through ease of use. It certainly certainly offers offers and supports a point point of differ different entiat iation ion as it levera leverages ges Amazon Amazon’s ’s relia reliable ble and robus robustt paymen paymentt receivable system. S3 is a base technology technology in that it is necessary to survive. survive. S3 provides provides a means of online storage of virtual images used by EC2 instances, but alone does not offer any means of differentiation than other online storage solutions – which is extremely common. Based on the above analysis EC2 is the technology to bet on, as all other STAs are only only relev elevan antt with within in its its cont conte ext. xt. The The cert certai aint nty y of it chan changi ging ng the the basi basis s of competition is solidifying as ambiguity surrounding cloud computing lessens and is worth looking at for a serious bet. Putting the STA’s together into what is known as AWS the following technology-based evaluation categorizes AWS’s benefits: Scalability: Grow and your deployment rapidly, as required, without huge capital costs or operational time. Flexibility: Flexibility: Add and remove resources on-the-fly to cope with peaks in requirements. Only pay for what you need.
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Reliability Reliability:: Take Take advantage of a massive computing platform, without having to build and buy one’s own. Improve organization’s infrastructure SLA’s by using a highly redundant and resilient platform that has no single points of failure. Fast ast Setu Setup: p: Rea eact ct to deci decisi sion ons s or requi require reme ment nts s quic quickl kly y and and depl deploy oy comp comple lex x architectures rapidly.
3.0 INDUSTRY ANALYSIS An industry analysis of Amazon’s AWS offering denotes a favorable outlook on the firm’s current position. position. Quoting Merill Lynch Lynch research, cloud cloud computing is seen as a v “$160 billion addressable market opportunity” . However However this this definiti definition on includes includes SaaS providers as well and thus should be taken as an optimistic upper limit for now within the context of PaaS, IaaS and Amazon. Marked by weak substitutes, weak buyer power and high barriers to entry, AWS and other PaaS providers are positioned for sustained business growth and customer lock-in. However moderate supplier power poses a threat that can be mitigated by sourcing their datacenters from multiple providers. Current substitutes substitutes to cloud computing computing or PaaS are the current current preSubstitutes. Current packa packaged, ged, shrinkshrink-wrap wrapped ped softwar software e and hardwar hardware e offeri offerings. ngs. Althou Although gh most most consumers are used to the purchase of software and hardware, AWS’s business model model and the pay-as pay-as-yo -you-u u-use se billin billing g system system will will eventu eventuall ally y win-out win-out due to the Substitutes:: Moderate (current), price-performance gains of the paradigm. Threat of Substitutes Low (future) Buyer Power. AWS’s proprietary coding requirements successfully creates a high switching cost for developers (buyers), meaning that in order for them to migrate thei theirr code code out out of AWS, AWS, they they’l ’lll have have to re-dev re-devel elop op from from the grou ground nd up. up. Sinc Since e Amazon’s core business is not dependant on AWS, buyer bargaining power is also quite low, regardless of their size. Buyer Power: Low Threat of New Entrants. Because the market is new, there will be many new entrants in the cloud-computing sphere. Relative Relative to AWS, AWS, most will be niche players as they will tend not to control the resources resources necessary to overcome overcome the barrier to entr entry y requ requir ired ed to beco become me a lead leader er (i.e (i.e.: .: reve revenue nue,, R&D R&D,, brand brand imag image, e, etc. etc.). ). However, there are a few of potential entrants that already possess many of the attributes required to become a leader in cloud computing, and all that stands in their way is the decision to invest.
Instit Instituti utions ons with with large large datacen datacenter ters s and good good brand brand recogni recognitio tion n can successfull successfully y follow follow a me-too me-too/fo /follo llower wer approac approach h by delive deliverin ring g the same offeri offerings ngs as exist existing ing leaders or succeed in leapfrogging leapfrogging them by analyzing gaps in their offerings. offerings. Yahoo vi claims to be attempting the latter strategy although based on the firm’s slow entry into the market, it will probably achieve marginal success unless it targets different 6 | Page
market segments – segments unaffected by the switching costs associated with adopting GAE or AWS. Bran Brand d equi equity ty is expe expect cted ed to play play a big big role role in the the adop adopti tion on clou cloud d comp computi uting ng providers. Google currently significantly outpaces Amazon in this this area: area: According According to BrandFinance.com, Google’s brand ranks 15 across all global brands with a brand equity of appro approximat ximately ely $24.5 $24.5 Bn USD, while Amazon Amazon ranks 159th, 159th, with a brand vii equity of approximately $5.5 Bn USD . Once IBM IBM is added added into into the mix, mix, there there is simply very little probability that a new entrant can come in as a non-niche PaaS. Economies of scale and initial capital requirements (i.e. datacenters) also create huge hu ge barriers to entry. entry.
Figure 3 Cloud Computing Competitive PaaS - IaaS Positioning. L = Leader; F = Follower; N = Niche; R = Rationalizer
Threat of new entrants: Low Suppli Supplier er Power: Power: Amaz Amazon on is unfo unfort rtuna unate tely ly dependa dependant nt on few providers providers;; but in the same time it is likely to be one of the larger customers for datace datacente nterr items. items. More More importan importantly tly many server suppliers can forward integrate, meaning that they can create datacenters of their own and with with added added effort effort,, integra integrate te their their server servers s into a cloud computing offering. Hewlett-Packard (HP) comes to mind whil while e othe ther serv server er manu ma nufa fact ctur ure ers suc such as IBM IBM and Sun Sun have have already entered. Supplier Power: Moderate
relative e price price perform performanc ance e of substitu substitutes tes,, cloud cloud computing computing Rivalry : In term of relativ providers are at at an advantage. Major players currently currently have little to no significant overlap in their offerings (see Figure 3 for competitive positioning and Appendix F for competitive space occupied). Figure 1 Cloud Computing Competitive PaaS - IaaS Google is considered as Amazon’s Positioning. L = Leader; F = Follower; N = Niche; R closes threat to compet petitive = Rationalizer
leadership leadership even though though their current current offerings offerings are non-overlappi non-overlapping. ng. Google Google is a leader in SaaS, but they are competitively close to Amazon because they’re seen as an immine imminent nt threat threat if they they decide decide to conver convertt their their vast vast datace datacente nters rs to a IaaS IaaS offeri offering ng while provid providing ing a rich rich suite suite of SaaS products products.. In fact, fact, as of April April 2008 Google Google has released released to the media, their intentions intentions of opening opening up their datacenters datacenters viii to the public .
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4.0 STRATEGY 4.1 Innovation Strategy Existi Existing ng modes modes of behavi behaviour our are very powerf powerful. ul. Despit Despite e its lead market market share, share, Amazon Amazon continues continues to maintain maintain its entrepren entrepreneurial eurial spirit by encouraging encouraging internal seedling ventures and nurturing them by removing the usual hurdle rates ix. This may be due to the company’s short history and the fact that it is still headed by its founder. It is also also impo importa rtant nt to me ment ntio ion n that that the the firm firm also also leve levera rages ges its its size size and and buyi buying ng power by engaging in a number of acqui quisitions. ns. The nature ure of these acquisitions is not to internalize new ideas that that resul resultt in new, new, Amazon Amazon-bra -branded nded and modified products, but to increase market diversification and growth. growth. Thus Amazon’s innovation innovation strategy is primarily primarily a factor of internal ideas and funding. With shorter market cycles – especially in high-technology, acquisitions a cquisitions are essential to drive innovatio innovation. n. The lack of incorpora incorporation tion of externa externall ideas is thus seen as a threat to Amazon’s ability to maintain its relevance and to essentially ‘keep up’ (see Appendi Appendix x C to view view a compari comparison son betwee between n Amazon Amazon’s ’s and Goo Google gle’s ’s Innova Innovatio tion n Strategy). Google on the other hand has been able to churn out products from both internal and external ideas. Where Amazon’s acquisitions acquisitions and strategic alliances alliances allow the firm to increase market share by delivering the same types of products, Googles endeavors to deliver new product that innovatively aggregate data. Figure 4 AWS Business Strate
At a high high-l -lev evel el,, Amaz Amazon on stra stradd ddle les s two two gener generic ic busin busines ess s stra strate tegi gies es:: differ different entiat iator or and low cost cost provid provider er.. The two tactic tactics s underli underline ne more more strategies of being market in order to gain critical mass through network effects and finally to a standard in terms of a PaaS provider (Figure (Figure 4).
prod produc uctt specif specific ic first-tobecome
The First-to-Market and Low-Cost provider strategies promote early adoption of the AWS platfor platform. m. Propr Propriet ietary ary softwar software e module module calls calls are are used used for AWS AWS and this prom promot otes es buyer buyer lock lock-i -in n (swi (switc tchi hing ng cost costs) s) once once adop adopte ted. d. As mo more re and mo more re deve develo lope pers rs adop adoptt and and port port appl applic icat atio ions ns onto onto EC2, EC2, the the mo more re inte intero rope pera rabl ble e applications become across other services and applications – not to mention the
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lowering of usage cost through through economies of scale. This is how AWS AWS can potentially become a standard as network effects achieve critical mass of members. There is a risk, however, of becoming ‘stuck’ between strategies as very few firms can simultaneously and and successfully engage in multiple Porter-strategi Porter-strategies. es. Whether Amazon will be successful in the juggling act remains to be seen, although the firm has already demonstrated results through the consistent lowering of usage costs and growth in member increase (see Appendix D).
4.2 Creating Value: Value: One-stop shop for web-based businesses Amazon Amazon is creating creating value through through the virtualizatio virtualization n of business business infrastructure. infrastructure. As previously mentioned, a number of STA’s have been used to create what is known as Amazon Web Services (AWS): EC2, SimpleDB, S impleDB, SQS, S3, and DevPay. DevPay. uses em emer ergi ging ng tech techno nolo logi gies es to prov provid ide e the the fram framew ewor ork k or plat platfo form rm to be EC2 uses leveraged by all subsequent AWS AWS offerings. It essentially adds value value by providing a link into Amazon’s computing capacity. capacity. technologies gies to provide provide an online online storage space space for users. Alone S3 uses basic technolo there is very little value to be had (i.e.: “…just another online drive in which I can store all my MP3s”), however once S3 is combined with EC2, synergies are created allowing EC2 users to store their virtual environments. DevPay DevP ay is a wind window ow into into Amaz Amazon on’s ’s trust trusted ed bill billin ing g and and acco accoun untt ma mana nage geme ment nt infrastructu infrastructure. re. The online service service is categorize categorized d as a key technology technology as it eases developers’ burden of collecting collecting payments for their their applications built on AWS. This thus promotes developer membership and the benefits to be gained by network effects. SQS is a key technology as it serves to integrate applications in and outside AWS. One One of the the init initia iall draw drawba back cks s with with AWS wa was s that that it requ requir ired ed “Gree Greenf nfie ield ld” ” development – meaning that it required required applications to to be re-developed. re-developed. With SQS, deve develo lope pers rs ma may y incr increm emen enta tall lly y deve develo lop p add-o add-ons ns to thei theirr exis existi ting ng,, nonnon-A AWS applic applicati ations ons.. This This low lowers ers the switch switching ing costs associa associated ted with adopting adopting a new technology and ultimately furthers AWS adoption.
4.3 Delivering Value (To Developers) - Do more development, waste less time According to Moore’s Model, Model, Amazon is engaged in the “bowling alley” alley” phase: It is targ target etin ing g deve develo lope pers rs by prov provid idin ing g the the tool tools s to deve develo lop p and and inte integr grat ate e thei theirr appl applic icat atio ions ns into into low-c low-cost ost,, scal scalab able le infr infras astr truc uctu ture re whil while e remo removi ving ng acti activi viti ties es relegated to creating and maintaining hardware environments.
4.4 Capturing Value
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Amazon Amazon is setup setup to captur capture e maximu maximum m value value from from its AWS offering offering in terms terms of immediate profitability profitability.. Medium to long-term value value capture is becoming becoming more and more certain as developers and companies increasingly start adopting AWS.
4.4.1 Immediate Profitability Revenue capture is especially easy for Amazon as all transactions are online and integrated integrated into their existing existing payment payment system. EC2 adoption adoption almost necessitat necessitates es branch branching ing off into into AWS’s WS’s other other produc products, ts, there therefor fore e synerg synergies ies creat created ed by AWS’s produc products ts – especi especiall ally y for “Gre “Greenf enfiel ield” d” applic applicati ations ons furthe furthers rs the firm’s firm’s revenue revenue generation.
4.4.2 Road to Standardization AWS is setup to gain heavily through network effects (see Appendix E for a detailed explanati explanation). on). As more and more users users signup, abandoning abandoning the platform platform becomes becomes costlier - as the low pricing due to economies of scale, the proprietary coding standa standard rd and genera generall migrat migration ion costs costs nullif nullify y almost almost any busine business ss object objective ives s to switch switch providers (from (from Amazon). Amazon). In fact, leading leading cloud services like like Amazon may resist a standard for fear of losing their proprietary lock on early customers. A more standardized cloud computing market could also hurt cloud computing leaders by removing competitive advantages and leveling the playing field, says Nick Carr, blogger and author of the cloud computing-focused book, The Big Switch . "Right now, Amazon and Google can compete based on their reliability or other factors," says Carr. Carr. "But the long-run long-run danger for standard standard utility computing service is that it becomes a commodity and your only way to compete is on price." Therefore standardization standardization may not be the best strategic path to follow. follow.
4.4.3 Amazon’s Ecology According to Ecology As A Strategy by Levien and Iansitix and within the broader context of cloud computing stretching across Amazon.com’s corporate boundaries, AWS fulf fulfil ills ls the the crit criter eria ia of a keystone player: connecting connecting network network keystone advantage advantage player: participants with one another, by making the products created by third parties more efficient, and by providing a point of reference helping participants to new and uncertain conditions. Connecting Network Participants with One Another . Amazon Amazon is is alread already y adept adept at doing doing this this throug through h its curren currentt e-comm e-commerc erce e busine business ss by connec connectin ting g buyers buyers and sellers sellers whether they are businesses businesses or individuals. individuals. AWS is simply an extension extension to Amazon’s overall virtual marketplace offering – connecting buyers who are seeking the use of particular online applications with application suppliers. Increasing Efficiency of Third Party Product Creation. Asides of the learning curve associated with AWS’s proprietary coding requirements, the AWS offering does save significant time in regards to deployment (on-demand infrastructure) and in regards
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to costs (developers: no up-front infrastructure fee, usage-based-pay; buyers: no license license fee, online access access versus shrink-wrappe shrink-wrapped d media). The biggest underlying underlying win is the continued drop in infrastructure fees due to increasing network effects. Providing a Point of Reference. Amazon’s strong brand commands a sense of trust to those who are reticent about migrating their infrastructure to AWS and to those who are skeptic skeptical al of using applicatio applications ns as an online service. service. Amazon’s Amazon’s reliable reliable datacenter would also promote the adoption of business models that exploit the benefits of cloud computing.
Finally, AWS also promotes the creation of niche players, such as consulting services that facilitate facilitate the migration of infrastructure onto Amazon’s cloud. The numbers of offshoot businesses are endless and strengthen the overall ecology by promoting ecolog ecologica icall robustn robustness ess and product productivi ivity ty throug through h the creat creation ion of inter inter-de -depend pendant ant busi usines nesses and the efficiency ncy of each depend penda ant busin siness due due to the aforementioned reasons, respectively respectively.. Some examples of newly created niche firms are RightScale, Hyperic and Soasta, who not only depend on AWS availability but also on its shortcomings (where their offerings bridge identified gaps in AWS). Further synergies are created through other offerings such as mini-laptops that are used primarily for internet access (i.e.: Asus' EEE PCs, HP mini-note, Apple Mac Air, etc…). etc…). These laptops laptops have very little hard hard drive space thus depending on SaaS provid provider er to access access rich rich applic applicati ations ons such such as photo photo editin editing g and word word proces processin sing g tool tools. s. SaaS SaaS prov provid ider ers s in turn turn will will need need Paa aaS S and/ and/or or IaaS IaaS prov provid ider ers s for for thei theirr applications to reside on – thus strengthening s trengthening AWS's ecology. ecology.
4.4.4 Strategy Evaluation Amazon Amazon’s ’s AWS strate strategy gy is vetted vetted agains againstt the follow following ing defini definitio tion n of techno technolog logy y strategy: to maximize the contribution of technology and to acquire, sustain and definition is broken broken down into components and defend competitive advantage . The definition each component into criterions: Maximize Contribution of Technology to Acquire Competitive Advantage
Amazon has successfully used the first-(significant)-to-market strategy to acquire an advantage over others players in the cloud computing arena by:
Getting the initial pool of early adopters (developers, businesses) interested in cloud computing.
Getting a jump on network effects due to usage and cycle of data processing and generation (see Appendix E).
Through EC2, Amazon has maximized the contribution of its existing datacenter resulting in a significant advantage over smaller players as datacenter size acts as an effective effective hurdle hurdle or barrier to entry in providing providing a cloud computing computing service with acceptable SLAs.
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Rating: Very Good Maximize Contribution of Technology to Sustain Competitive Advantage
Althou Although gh Amazon Amazon’s ’s manage managemen mentt espous espouses es consta constant nt innova innovatio tion, n, actual actual R&D expenditur expenditure e to sales paints a different different picture: picture: Accordi According ng to Appendix D’s R&D to Sales Ratio, Amazon spends about 5% - not bad but not great – especially when compared to Google current investing about 14%.
Consistent platform extensions such as S3, SimpleDB and others have added value to Amazon’s AWS offerings through sustaining innovations that promote overall strategy of network effects and reaching gorilla status.
Proprietary API increases switching costs once AWS is adopted.
Amazon has increased and sustained barriers to entry through economies of scale.
Rating: Excellent Maximize Contribution of Technology to Defend Competitive Advantage
Amazon’s revenue is not cloud computing dependant, income from retail businesses can be used to support/enhance/defend AWS.
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Amazon Amazon has and approve approved d patent patent since since 2004 2004 for an an online online marketplac marketplace e for the xi consumption of third party web services . Its effectiveness effectiveness remains to be seen.
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Exposure to heterogeneous rules regarding data ownership and security. security. For example Amazon may lose out to China-based cloud computing offerings as data is highly controlled in the Chinese market
Rating: Low-to-moderate Overall, Overall, Amazon’s technology technology strategy strategy is setup to acquire acquire and sustain sustain competitiv competitive e advant advantage age.. The ambiguit ambiguity y surro surroundi unding ng cloud cloud comput computing ing definiti definitions ons renders renders it difficult to create effective effective patents. As time progresses progresses and the ambiguity ambiguity lessens, a rush for patents is expected.
5.0BUSINESS 5.0 BUSINESS STRATEGY FOR THE FUTURE Amazon’s current growth strategy for its web services division is to increase market penetration through platform platform extensions. For example, example, Amazon’s Simple Simple DB service allows the running of queries on structured data via applications on EC2 – thus Simple DB is an extension to EC2 allowing current developers developing on EC2 an enha enhanc nced ed codi coding ng envi enviro ronm nmen ent. t. For Amaz Amazon on to rem emai ain n comp compet etit itiv ive e as an infrastructure provider it must adopt the current ‘green’ ‘green’ trend. As servers become more numerous, powerful and densely packed, more energy is needed to keep the data centres centres at room temperature. temperature. Often just as much power is needed for cooling 12 | P a g e
as for computing. computing. In order order sustain sustain a compara comparative tive advanta advantage ge and pass pass down down cost savings to end-customers, servers will be located in remote areas where cost of energy is substantially cheaper and the environment much cooler e.g. Iceland or Siberia. Being LEED certified will will also be a future future trend and possibly possibly a compliance requirement. Infrastructure is bound to become a commodity like electricity, with prices/rates that that will will even eventu tual ally ly decr decrea ease se towar towards ds the the cost cost of prod produc ucti tion on as compe competi titi tion on increases. As Amazon has established a first mover advantage and is experienced in the low margin margin retail retail industry, being a commodity-based commodity-based business may actually actually be beneficial. Amazon may need to invest more in capital spending, especially on servers. Google is said said to opera operate te a glob global al netw networ ork k of abou aboutt thre three e doze dozen n data data cent center ers s with with,, accor accordin ding g to some some estima estimates tes,, more more than than one millio million n server servers. s. Micros Microsof oftt is also also investing billions of dollars and adding up to 20,000 servers.
5.1 Future of the Segment Industry consolidation is inevitable with cloud computing space dominated by those companies who have invested in infrastructure early and/or acquired it. Technology industry usually turns out to be a game of duopoly with two main players emerging. Google and Amazon will be the likely industry leaders on the Internet with other players relegated to the status of niche providers.
6.0ISSUES 6.0 ISSUES AWS has unique unique attrib attribute utes s that that requi require re risk risk assessme assessment nt in areas areas such as data data integrity, recovery and privacy, and an evaluation of legal issues in areas such as ediscovery, regulatory compliance and auditing. There are drawbacks to keeping all of one’s data in the cloud, of course, and one of the main ones is that one can be cut off from it at crucial times- either because of no internet coverage/access or because because the cloud you're using is unavailable unavailable (crash). (crash). Currently Currently Amazon Amazon does not provide 100% uptime (rather a 99.999%) nor provides a service level agreement (SLA) for its customers. Also there is no cloud computing standard or security models and this is beneficial for Amazon since most of the risk and blame, if something goes wrong, will fall directly on the shoulders of IT(CIO’s etc.) and not on the cloud computing service providers. A risk that Amazon AWS is exposed to will be legal ramifications of lost data and downtime. In order for Amazon.com to execute its business strategy (Moore’s bowling alley strategy), it must enter new segments targeting big business. Challenges posed by moving past the bowling-alley phase include:
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•
•
•
•
Today, cloud data storage locations are ambiguous while The European Union has strict limits on what citizen-data can be stored, where and for how long. Many Many compli complianc ance e regula regulatio tions ns requi require re that that data not be interm intermix ixed ed with with other other data, such as on shared servers or databases. Industries such as banking and health require data to be stored in their home country to be compliant with industry and regional specific regulations such as Sarbanes Oxley and HIPAA. Patriot Act – USA’s radical Patriot Act has been around for several years, and stories of servers being seized without justification almost as long.
6.1 SARBANES OXLEY Compan Comp anie ies s bene benefi fitt by using using AWS by givi giving ng up some some cont contro roll over over the the data data in exchange for cost economies, however companies have a particular concern about clou cloud d comp comput utin ing, g, name namely ly its its impa impact ct on Sarb Sarban anes es-O -Oxl xley ey (SO (SOX) regul egulat ator ory y requirements. The SOX act was enacted to prevent scandals from happening again. The legislation establishes new or enhanced standards for all U.S. public company boards boards,, manage managemen ment, t, and public public accounti accounting ng firms. firms. The SOX SOX act holds holds signin signing g officers officers responsible responsible for the fairness fairness and completene completeness ss of their company's company's financial statements. They are also held responsible for the state of the company's internal controls, and must report any deficiencies. An internal control is a process designed to reas reasona onabl bly y assu assure re that that obje object ctiv ives es can can be me mett in the the foll follow owing ing cate catego gori ries es:: fina financ ncia iall repo report rtin ing g reli reliab abil ilit ity, y, oper operat atio iona nall effe effect ctiv ivene eness ss and and effi effici cien ency cy,, and and compliance compliance with with applicable applicable laws and regulations. regulations. Hosted Hosted archiving archiving is perfect for SOX SOX compliance compliance requirements requirements.. SOX SOX is an onerous onerous IT burden, burden, and the right cloud computing solution can solve the requirement. Compli Comp lian ance ce has has been been one one of the the domi domina nant nt them themes es in the the post post-E -Enr nron on age age of corporate IT. SOX, while an issue is not going to be a real issue as long as Amazon reall really y wants wants to segment segment out to get into the enterpris enterprise e marke market. t. Being Being a public public company, Amazon already has most of the SOX controls controls in place and can implement appropriate separation in terms of data, encryption to pass any audit. To build a trustworthy reputation among enterprise customers, Amazon will need to undergo audits to obtain S AS 70-1 and SAS S AS 70-2 certification, internal policy. policy.
6.2 INTELLECTUAL PROPERTY Intellect Intellectual ual property property (IP) is a huge gap for Amazon. Re Relativ lative e to their e-commerce e-commerce compet competito itors, rs, Amazon Amazon has one of the fewest fewest patents. patents. Howeve However, r, this is likely likely to change change as the firm becomes becomes a techno technolog logy y provi provider der.. Curre Currentl ntly y Amazon Amazon holds holds a single single patent patent in regar regards ds to AWS. The patent patent was establ establish ished ed in 2005 2005 for a web xii services marketplace . There have been no cases of infringement to to date, perhaps perhaps indi indica cati ting ng a poor poor pate patent nt cove covera rage ge or out out of court court sett settle leme ment nts/c s/cro ross ss pate patent nt agreements.
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7.0FINANCIAL SYNOPSIS
If the Internet is to be dominated by huge computing clouds, the performance and profitability of the largest clouds is an important issue, and Amazon is likely to provide the best early case study of how to monetize a huge utility computing operation. operation. Amazon Amazon has the first mover advantage, advantage, and their early early investment investment in research and development has started to pay off. off. Amazon AWS AWS provided a profit of $111 million in the first quarter of 2008, and if you take the growth of developers as a metric, AWS AWS will continue continue to drive profits profits for Amazon (see Figure Figure 5). Even with Google launching their cloud computing offering, Google App Engine, AWS will only benefit from the future media frenzy behind that (since they'll both be mentioned in tandem). In 10 years, Amazon’s Amazon’s Web Web services business is going to be sizeable. And it’s not a stretch to predict that Amazon’s cloud computing effort will be the profit margin savior of the company. Today, Amazon’s retailing business bankrolls these fliers into cloud computing services. In a decade, Amazon’s cloud will subsidize the retailin retailing g business. It will take take some time before they have enough enough scale to have a meaningful impact that becomes visible, given the scale of our other businesses. So with a $10 billion business, even though these businesses are doing very well, it's going to take some number of years before they become meaningful. This customer set is developers. A lot of them are start-up companies.
8.0CONCLUSION Figure 5: AWS Developer
WHAT TO BET, HOW MUCH TO BET, WHEN TO BET recommen mend d bettin betting g on the cloud cloud computi computing ng industr industry, y, What to bet on: We recom specificially the IaaS players as this represents a paradigm shift in the IT industry. The shift would affect companies in a number of sub-industries including software companies, internet service providers and hardware manufacturers. Companies in each of these industries will face significant change if cloud computing is to be the next step for the industry. AWS is simply a single offering in the IaaS space we recommend diversifying the major players (AWS, GAE) and smaller, promising niche players such as 3Tera 3Tera and Saleforce.com.
When to bet: Referring to Appendix H, it is clear that we have missed the upswing period for an investment on on AWS. AWS. The ideal time time would have been 2 nd quarter 2006 when the stock was near its all time low and when the company officially launched its AWS AWS service. Since then the stock has appreciated and is now hovering near its all time high. However, to be prudent we recommend to take a ‘hold’ position as a IaaS storm is brewing above Amazon’s current blue ocean - which is bound to look bloody. 15 | P a g e
Investors are concerned concerned with the present value of future cash How much to bet: Investors flows, and since the NPV on their web services asset is kept secret, we can make an analysis based on year over year developer growth which is (See Figure 5). In terms of inve invest stin ing g in Amaz Amazon on pur purely ely as a blue blue-c -chi hip p clou cloud d infr infras astr truc uctu turre play play,, we recommend a diversified diversified approach with a mix of 70:30 Amazon, Amazon, Google play. Nonblue chip investments should be balanced across the major niche players such as 3Tera 3Tera and Akamai. If the company’s company’s cloud computing strategy strategy is not successful, successful, investors can fall back on Amazon’s successful retail business. Instead Instead of building building ‘cute’ applications applications and ladling them out to the masses — the Google and Microsoft model — Amazon is delivering silicon power to the people, which is is the real real disruption. disruption. It’s clearly clearly evident evident that that Amazon Amazon is in a league league of its its own in terms of infrastructure and its AWS unit was profitable as of the first quarter 2008, however Google has opened its cloud as of April 2008 and will eventually take market market share if not through through acquisitio acquisitions/in-h ns/in-house ouse development development then through through the strength strength of its brand. However, However, since Amazon Amazon is sustained sustained by its complimentary complimentary assets and its successful e-retail business, we recommend that an investment be more heavily weighted on their company. We continue to believe that the transition to "cloud computing" is a disruptive trend that will increasingly put legacy PC and enterprise businesses like Microsoft (MSFT) and Oracle (ORCL) behind the eight ball.
8.0 Future Proposals for AWS The following are some of the recommendations we suggest investors to bring up during an Amazon annual meeting and/or open conference call regarding their cloud computing offering:
1. Lowe Lowerr Structure Structured d Data Stora Storage ge Costs Costs There are current current inconsistencies in Amazon’s low-cost strategy. strategy. Structured data storage storage is simply simply too pricey pricey to appeal appeal to storag storage-h e-heav eavy y implem implement entati ations ons.. If Amazon is to benefit from network effects due to data growth (Appendix E – Figure 2), it needs to remove remove the data cost barriers. In the end, the more data, the higher the switching costs, the more likeliho likelihood od of attaining attaining a sustained sustained bigplayer status. status. A good analogy analogy would be to exist exist in a blue ocean (blue (blue ocean strategy) among a handful of whales.
2. Sp Spin in off off AWS uni unitt Amaz Amazon on need needs s to clea clearl rly y iden identi tify fy their their AWS stra strate tegy gy inst instea ead d of strad straddl dlin ing g multiple ones for the sake sake of simplification simplification and focus. It also needs to be mindful mindful of the brand image that is inherited from its e-commerce business – whether it is a hindering hindering or an enabli enabling ng factor factor. As Amazon. Amazon.com com contin continues ues to grow as a technology infrastructure provider, we predict that the e-commerce business will dimi dimini nish sh the the AWS bran brand d whic which h is why why we reco recomm mmen end d spin spinni ning ng off off and and rebranding AWS as a wholly owned subsidiary of Amazon.com. 16 | P a g e
3. Consolidate – M&A In order to compete with technology giants who acquire to sustain growth (and innovation), we recommend Amazon to follow suit. Amazon should acquire niche players specifically in the cloud computing sphere as well as establishing data centres internationally in order to increase robustness of their offering and network topology.
APPENDIX APPENDIX A: AMAZON’S AWS PRICING STRUCTURE
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Machine Utilization - $0.14 per Amazon SimpleDB Machine Hour consumed Amazon SimpleDB measures the machine utilization of each request and charges based on the amount of machine capacity used to complete the particular request (QUERY , GET, PUT, etc.), normalized to the hourly capacity capa city of a circa 2007 1.7 GHz Xeon processor.
Data Transfer $0.100 $0.170 $0.130 $0.110 $0.100
per per per per per
GB GB GB GB GB
-
all data transfer in first 10 TB / month data transfer out next 40 TB / month data transfer out next 100 TB / month data transfer out data transfer out / month over 150 TB
Data transfer "in" and "out" refers to transfer into and out of Amazon SimpleDB. Data transferred between Amazon SimpleDB and other Amazon Web Services is free of charge (i.e., $0.00 per GB).
Structured Data Storage - $1.50 per GB-month Amazon SimpleDB measures the size of your billable data by adding the raw byte size of the data you upload + 45 bytes of overhead for each item, attribute name and attributeattribute-value value pair. pair. Amazon Amazon SimpleDB SimpleDB is designed designed to store store relativel relatively y small amounts of data and is optimized for fast data access and flexibility in how that data data is expre expresse ssed. d. In order order to minimize minimize your costs costs across across AWS services services,, large large objects or files should be stored in Amazon S3, while the pointers and the meta-data associated associated with those files files can be stored in Amazon SimpleDB. SimpleDB. This will allow allow you to quickly search for and access your files, while minimizing overall storage costs. See below for detailed descriptions on calculating your own structured data storage requi require reme ment nts s and and for for a mo more re deta detail iled ed expl explan anat atio ion n of how how stor storag age e in Amaz Amazon on SimpleDB and storage in Amazon S3 differ. Source: Source: Amazon.com Amazon.com – AWS Service Offering
COST COMPARISON TABLE: AMAZON & GOOGLE Cost/GB
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Cost/hour
Cost/month
Cost/ 1TB
($ )
($ )
($ )
($ )
AMAZON Instance Standard Instances Small
0.1
72
Large
0.4
288
Extra-Large
0.8
576
Medium
0.2
144
Large
0.8
576
High CPU Instances
Structured Storage
1.5
1500
0.1
100
0.17
170
Data Transfer In-bound data Out-bound data (<10TB)
GOOGLE CPU Core Hour Storage
0.12
86.4
0.18
180
In-bound data
0.11
110
Out-bound data
0.13
130
Data Transfer
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APPENDIX B: AMAZON’S AWS STA STA DESCRIPTION Amazon Elastic Compute Compute Cloud (EC2). Web Service Service that provides resizable resizable compute capacity capacity in the cloud. Scalabilit Scalability y is achieved within within minutes both, by the user and the application. Amazon Simple Storage Service (S3). Storage for the internet, internet, that can be used to store and retrieve any amount of data, at any time, from anywhere on the web. Amazon SimpleDB . A web service for running queries on structured data and works hand hand-in -in-h -han and d with with EC2 EC2 and and S3 in order order to stor store, e, proc proces ess s and and query query data data sets sets.. Mitigates large-scale, upfront database investments. Amazon DevPay DevPay.. Online billing and account management service that makes it easy for developers to get paid paid for applications they build on AWS. AWS. Unlike the first three offeri offerings, ngs, DevPa DevPay y is not an infras infrastruc tructur ture e servic service, e, but strong strongly ly support supports s their their adoption by developers.
APPENDIX APPEND IX C: AMAZON’S AMAZON’ S INNOVATION INNOVATION STRATEGY
APPENDIX D: AWS DEVELOPER GROWTH
2006 Q1 Developers 160,000 2008 Q1 Developers 330,000
Current growth rate since launch: 51.5%
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APPENDIX E: NETWORK EFFECTS Figure 1: Network Effects due to User-sign up
Essentially as the number of AWS users increase, usage costs go down due to econom economies ies of scale. scale. As prices prices go down, down, the willing willing to pay increas increases es as the new price-point price-point appeals appeals to a broader broader audience. audience. And finally finally once the willingness willingness to pay hurdle rate has been satisfied, more users sign up.
Figure 2: Network Effects due to data
The above figure is more relevant to data-heavy d ata-heavy users such as large market research firms.
APPENDIX F: PAAS, IAAS ANALYSIS Segment
Description
Platform as a service (PaaS)
Many of the companies that started out providing on demand application service serv ices s have deve develope loped d plat platfor form m serv se rvic ices es as we well ll.. The pl plat atfo forrm segment of cloud computing refers to prod pr oduct ucts s tha thatt ar are e use used d to dep deploy loy applica app lication tions. s. Platf Platform orms s serv serve e as an inte terrfa fac ce forr use fo serrs to ac acc ces ess s applications provided by partners or in some cases the customers.
Infrastructure as a service (IaaS)
The final segment in cloud computing,, known as infrastruc computing infrastructure, ture, is very mu much ch the backbon backbone e of the enti en tirre conc co ncep ept. t. Infr In fras astr truc uctu turre vendors provide the physical storage space spac e and pro process cessing ing capa capabili bilities ties thatt all tha allow ow for the all the ser servic vices es described above. The products in this segme se gment nt ar are e sli slight ghtly ly mor more e var varie ied d than those in the other areas of cloud computing but include ones such as managed hosting, and developme development nt environments enviro nments (such as Google gears) that allow users to build applications. applications. Cloud storage, such as Amazon's S3, is also considered to be part of the infrastructure segment
Key Player •
Google (GOOG) - Apps Engine
•
Amazon.com (AMZN) - EC2
•
Microsoft (MSFT) - Windows Live
•
Salesforce.com (CRM) - Force.com
•
NetSuite (N) - Suiteflex
•
Mosso - Mosso, a division of Rackspace
•
Google (GOOG) - Managed hosting, development environment
•
•
International Business Machines (IBM) - Managed hosting Terremark T erremark Worldwide (TMRK) Managed hosting
•
Amazon.com (AMZN) - Cloud storage
APPENDIX G: AMAZON (AMZN) HISTORICAL PERFORMANCE
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APPENDIX H: CLOUD COMPUTING INDUSTRY OVERVIEW
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REFERENCES
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Spann, S. E-Commerce – Amazon – Corporate Culture. September September 2004. Website: http://wiki.mediaculture.org.au/index.php/Amazon_-_Corporate_Culture, accessed July 9, 2008
ii
Amazon 2007 Proxy
iii
Plummer C.D. et al. Gartner's Top Predictions for IT Organizations and Users, 2008 and Beyond: Going Green and SelfHealing. Gartner Research. January 2008. iv
Greenfold development is when you have to recode the application from the ground up due to a lack of portability. portability.
v
‘Hamilton, D., D., ‘Cloud computing’ computing’ seen as next wave for for technology investors. June 4, 2008 Financial Post. Website: http://www.financialpost.com/money/sto http://www.financialpost.com/money/story.ht ry.html?id=562877 ml?id=562877.. Accessed July 15, 2008. vi
Farber, D. Yahoo Yahoo Looking to Unleash Its Cloud Computing Infrastructure. June 26, 2008. Website: http://news.cnet.com/8301-10784_3-9978409-7.html?hhT http://news.cnet.com/8301-10784_3-9978409-7.html?hhTest=1. est=1. Accessed July 10, 2008 vii
Brand Finance 250, The Annual Report on the World’s Most Valuable Valuable Brands. January 2007. Website: www.brandfinance.com
viii
Google unlocks its data centers. centers. April April 08, 2008. Website: http://www.roughtype.com/archives/2008/04/google_unlocks.php. Accessed July 15, 2008
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Iansiti R. and Levien R. Strategy as Ecology. Ecology. March 2004, Harvard Business Review. Review.
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Kawamoto D., July 29, 2005. Amazon Web services marketplace patent published. Website: http://news.zdnet.co.uk/internet/0,1000000097,3921 http://news.zdnet.co.uk/ internet/0,1000000097,39211251,00.htm 1251,00.htm
Understanding the Cloud Computing/SaaS/PaaS markets: a Map of the Players in the Industry, Accessed July 1st: http://dev2dev.bea.com/blog/plaird/ http://dev2dev.bea.com/blog/plaird/archive/2008/05/understanding_t.ht archive/2008/05/understanding_t.html ml Amazon Web Services, Accessed on June 15th http://www.amazon.com/Simpl http://www.amazon.com/SimpleDB-AWS-Servi eDB-AWS-Service-Pricing/b?ie=UTF8&node= ce-Pricing/b?ie=UTF8&node=342335011 342335011 Data excerpted from: DataMonitor: Business Information Center, Center, Amazon.com Amazon.com Inc. June 2007. Website: www.datamonitor.com. Accessed June 2nd, 2008 DataMonitor: Business Information Information Center, Google Inc. Inc. June 2007. Website: www.datamonitor.com. Accessed July 7th, 2008 James Hamilton Blog, perspectives : Accessed July 2nd http://perspectives.mvdirona.com/2008/05/ http://perspectives.mvdirona.com/2008/05/21/CloudComputingGrowthRate.aspx 21/CloudComputingGrowthRate.aspx
