Andy Jassy addressing attendees at Re:Invent

Why is Amazon.com going to kick the butt of Microsoft, IBM and everyone else in cloud computing for a long time to come?

Amazon Web Services chief Andy Jassy essentially laid out the case today at the company’s Re:Invent conference in Las Vegas, telling some 20,000 attendees that the company’s focus on high-volume, low-margin businesses is absolutely its strategic advantage.

According to Jassy, it’s all about the margins. Amazon, he said, thrives on low margin businesses where most “old guard” technology companies don’t like going in that direction.

“So, if you ask yourself: Why are these old-guard technology companies so desperately trying to get you to buy the private cloud? Why? And I think the answer is the economics of what we are doing are extremely disruptive for old-guard technology companies. These are companies that have lived on 60 to 80 percent gross margins, for many, many years.”

Jassy then listed quotes from three executives at large technology companies (which he did not name specifically) — pointing out how they were trying to hold on to the margins they’ve had for the past 30 years.

“High margin businesses have been around forever in lots of industries, and they are obviously a very valid and successful business model. It is just not ours. It is radically different to run a 60 to 80 percent gross margin business then a high volume, low margin business. And, if you believe like we do, that the vast majority of computing is moving to the cloud over the next 10 years, it stands to reason that cloud computing is going to be a high volume, low margin business. If you run a high volume, low margin business … you think about your pricing differently, you think about your cost structure differently, you think where you spend your innovation cycles differently…. Now, Amazon, every business we run is a high-volume, low-margin business. We like those businesses. We are very comfortable running them. And we have that DNA. I think most of the old-guard technology companies, who are running 60 to 80 percent gross margin businesses, don’t like those businesses and that’s why the are pushing the private cloud so hard, because it doesn’t disrupt their existing business models. But, I think those companies over time will see, that the world is moving in the direction that AWS is pointing. And then it will be interesting to see how many of those companies will be good at operating high-volume, low margin businesses, because you don’t flip a switch over night and become great at operating high-volume, low-margin businesses. They are completely different operating characteristics.”

So, what’s AWS doing to make sure it stays in front? Well, it continues to cut prices, making it harder for rivals to compete. Today, Jassy announced yet another price cut, telling attendees that it is reducing costs of Amazon S3 by about 25 percent.

Amazon’s Andy Jassy interviewing Netflix CEO Reed Hastings

That marks the 23rd price reduction for AWS since in the past few years, with Jassy saying that the reductions come “largely in the absence of any competitive pressure to do so.”

Netflix CEO Reed Hastings, a big user of AWS who later appeared on stage with Jassy, thanked Amazon for yet another price reduction.

“Wow, a 25 percent price cut, I feel very welcome,” said Hastings. “You saved us a fortune by just starting the day off.”

Even though Netflix competes with Amazon in some realms, Hastings noted that he hopes to have the streaming media company be the largest business in the world that runs 100 percent on AWS by the end of next year.

He added that the more Amazon.com competes with Netflix in video streaming, the better “symbol” Netflix becomes that it is “safe to be on AWS.”

In addition to the price cut, Amazon.com also announced a new service called Redshift, which it described as a “petabyte-scale data warehouse service in the cloud.”

Comments

  • Joe

    It’s interesting to hear this guy say that Amazon “thrives” on their low margin business model, given that it’s not working for anyone who cares about profit. Over the last 12 months they brought in $57.26 billion in revenue, and only $40 million in income. That’s a ridiculously low amount of income on that much revenue. Compare that to Google, Microsoft, Apple, IBM — you name it. Google had over 250 times more income on even less revenue. Microsoft had 390 times more income on less than twice the amount of revenue as AMZN. IBM had over 300 times more income on about double the revenue. For less mature companies, driving margins low to gain market share might be a reasonable strategy until you become dominant and you can increase margins, but Amazon hasn’t been a startup for a long time and they haven’t increased margins. And very few startup companies have revenue even remotely close to what Amazon has. Their investors haven’t cared much about profit, but they have been patient for a very long time. Will be interesting to see if that ever changes.

  • http://twitter.com/deejayoh Dennis Oldroyd

    Amazon only “thrives” in a low margin environment because the market is somehow happy to give them a 200+ PE multiple when everyone else gets 15-20. Prediction: AMZN PE multiple will drop long before their margins improve.

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