Regardless of what you think about the 37 Signals folks one bit of their advice has always struck me as being particularly insightful and powerful:
Sell your byproducts.
There are two very strong reasons to do this. First, it can be an excellent business. You've created something to solve some problem or remove some pain that your company is feeling, it's extremely unlikely that your company is so unique that it's pain isn't shared by other companies. And it's unlikely your internal tools would be of no interest or utility to other companies.
Second, internal tools are typically of terrible quality. There are various reasons for this but it's a very common pattern due to fundamental pressures and incentives. By selling internal tools you force them to have owners and you force them to have a quality sufficient to be acceptable to the market. This generally vastly increases their quality, which provides a benefit to everyone who uses them, including you.
Except it has been reported by Amazon insiders that AWS is not a byproduct of Amazon's other work but a very much stand alone product with it's own dev group with little connection to devs working on Amazon proper and that Amazon was relatively slow in adopting AWS product for implementing Amazon's internal software.
Amazon always tried to give the impression that they use AWS but (at least in early years) those were half-truths (i.e. statements vague enough that if you squint at it one way you can read "Amazon's internal systems are build in AWS services" and if you squint at it differently, they might just as well say "AWS's servers are hosted in the same data center as Amazon's servers"; public perception was the former and the reality was closer to the latter).
That, of course, doesn't mean that 37 Signals' advice isn't good, just that this is not an example that confirms that advice.
AWS was built in the same datacenters by the same IT engineering team that provided core hardware and networking to the retail website. The top level software APIs were (obviously?) not created before the Amazon retail website.
Amazon IT and AWS invented a virtual machine infrastructure that Retail used as soon as it was available. AWS services were quickly adopted by many teams as well.
AWS has always beeywn the future of Amazon Datacenter IT. Retail is a huge legacy system, so of course Reddit could launch on AWS faster than Retail could fully migrate.
AWS is an externalization of core Amazon technology. Don't get hung up on the fact that Amazon runs on a babysat patched alpha version released before the 1.0-quality version went public. Retail needs some customizations hat your startup doesn't. Really.
This "skunkworks AWS" meme is a story about the business, not the technology.
Yes, this is true. When I first heard about AWS I assumed Amazon was selling excess capacity (because why would an online retailer set out to build something like this?), but in fact, as you say, it was a completely separate project. I've heard from people who used to work at Amazon that they don't use AWS for much there.
I tend to think we use it quite a lot internally. For instance every amazon.com web server has been running on AWS for quite a while now. You'll find more info here.
It should have been obvious for everyone right away that either Amazon was not selling excess capacity or depending on AWS would have been a very bad idea.
If Amazon was selling excess capacity, care to guess what would have happened to peoples services come the christmas rush, or any other crunch time for Amazon?
AWS have always been expensive for capacity you need most of the time compared to renting dedicated capacity elsewhere, as you're not only paying for the capacity, but for enough excess capacity for Amazon not to run into the PR disaster of not being able to handle requests for new instances.
The numbers and plain logic just never matched the perception of Amazon selling excess capacity.
The most amazing thing about AWS was how Amazon managed to get people to see it as the most amazing thing to ever happen for hosting and create the perception that you somehow paid for less, when for most typical web hosting scenarios you pay more for a service that is pretty much promised to be less reliable.
(Note that I use EC2 for some things - it has it's uses, and is a good product, but it was way overhyped)
They didn't have anything internal that had suitable features or quality to sell to the public so they built AWS using the knowledge they'd acquired from building those internal tools. I don't think that's out of the spirit of "sell your byproducts".
Also, in response to pg's post below, Amazon has increased its usage of AWS substantially in the last few years. The main website primarily runs on AWS, many individual services have been migrating to AWS, and S3 is heavily used internally for static storage. It wouldn't surprise me if Amazon was running 100% on AWS within the next few years. Or, you know, so I hear from rumors... <_<
I see their stock crash today as a pretty temporary thing. I bought a lot of shares today around 200 which I hope is close to the bottom of this decline.
AWS growth combined with their new hardware combined with the holiday season should give them a nice boost by early next year.
I like Amazon, but with a PE of 90, I can't make myself buy them.
At some point in the future, when all their growth is behind them and they become a value investment as opposed to a speculative investment, they need to make me between 5% and 10% on my money if I buy the whole company. That's how I evaluate stocks. That means a PE of 10 to 20.
In what year do we believe that Amazon will be making 5X to 9X what it's making now, given it's current maturity? If that year is near, than, sure, perhaps buy here. I just can't imagine that kind of growth for such a large company.
Current revenue growth is around 50% annually; if that continues, it will reach the lower edge of your target (5X) in 48 months. Assuming of course it can maintain its margins.
Am I missing something or don't your assumptions assume that over those same 48 months Amazon's price remains static? Note that any assumption of Amazon's margins remain the same is kind of hard pressed. Their revenues this quarter was 40% greater then the same quarter last year - yet their earnings were down 73%.
The question was 'when will Amazon be making 5X what they make now?', and the answer (at current growth rates and current margins) is 48 months. Which is not a long time, thereby explaining the high P/E. If you think the growth will slow substantially or the margins will shrink substantially (or both) in the next 48 months, then the PE is too high. Otherwise, perhaps it's not so crazy after all.
Personally I think that Amazon has essentially unlimited growth opportunity, much higher than even the most amazing, most profitable product companies like Apple or Google. Product companies have a Microsoft problem: after they dominate a given market (and Microsoft pretty much dominated a lot of the most valuable segments of software market) and that market matures into slow growth, they have a very hard time finding new opportunities and consequently only grow with the size of the market, and as we've seen with Microsoft's flat stock price, Wall Street doesn't like that.
To me, Amazon's is Merchant Of Everything, both physical and digital and Everything is a very big market. Amazon grew to its current size by exploiting shift to on-line purchasing but today they're big enough to start taking advantage of their size. Walmart conquered U.S. with lower prices but Amazon can offer even better prices because they don't have to operate physical stores with staff, just warehouses. Amazon is not done until they have a warehouse for each Walmart store, Best Buy store etc. and their competitive advantage grows with every warehouse they build.
And when there are more Amazon's warehouse than Starbucks, there's international market to conquer.
Additionally Bezos has shown that he's very comfortable competing aggressively, running the business at the edge of profitability, which makes sense if you think that Amazon's ultimate ambition is to drive every other merchant out of business by offering lower prices and become the Merchant Of Everything.
Amazon has got to be more sensitive to the vicissitudes of the global economy though. I could never stop using Google or Apple products in my day-to-day. Whereas my entire life is pretty much an uphill battle to buy less shit off Amazon. If push came to shove, the MP3/book/DVD/gadget/clothing purchases would be the first to go. Also if it suddenly got a lot more expensive to ship physical goods, Amazon's core business would take a beating.
Those goods would still have to be shipped to a traditional store, where traditional staff drove in and stood around and dusted it, so you could drive (or whatever) in and get it.
As opposed to drop-shipping the most economical one on demand, and not wasting all the time and shipping stocking places, hoping you'll come in and buy from them before the junk is obsolete.
Stores, except tailors and the like, are dead.
As for their warehouses, cities expand and real-estate, especially when at rock-bottom, is a pretty safe bet compared to renting.
What would you do with that 5%? Would you reinvest it if you don't have any consumption needs now? Amazon is reinvesting their earnings. P/E isn't a good metric for a growth stock.
I think the main thing will be how their margins play out. Amazon is a big enough company that investors expect decent margins even while they're growing rapidly. Perhaps this is an unreasonable expectation, but if so, I think Amazon should be more aggressive about giving guidance.
Are there basically just no margins in their retail business? Are they intentionally depressing profits to keep taxes down? Why isn't there plenty of money there?
Because even if they're investing a ton of money in expanding their distribution system to allow for growth, normally that gets treated as a capital cost and amortized over a period of time, not just expensed in the period they pay the money out. The same is true for upfront investment in their Kindle Fire business (edit: or in AWS infrastructure).
I'm not trying to attack Amazon -- they're a savvy company that has proven to be hugely successful through any number of trials and crises. But it's just not clear to an outsider what's going on with their business at the moment.
I agree with you, I am just betting (hoping?) that the current crash is temporary and they will recover in the near future.
Their revenues are also down significantly (I think it was something around 40%) which can't be explained by large investments effecting their earnings.
amazon's entire focus is on top-line growth. if they have any extra money lying around, they'll use it to make investments, hire people, or lower prices. as far as i can tell, they aren't too interested in profit as long as they can get away with it.
I wondered the same when I recently ordered a mousepad (via one of their partners) for ~$3 with free shipping, but since they used US mail I can understand how they managed it; they can perhaps do the same for small quantities of dental floss.
I mean, somebody got paid to load my 90 yds of Reach onto an airplane in the middle of the night and fly it from Tennessee to California. With virtually no added cost to me, since I have Prime which I share with 5 other people in my family. New economy or not, there's just no way that makes economic sense.
I know the argument is that Prime alters one's spending patterns, and ten paying customers are subsidizing every yokel like me who's too busy/lazy to walk to the drug store. Still it feels like an unsustainable model.
I often wonder if we'll look back on this period as the apotheosis of consumerism, when cheap and abundant fossil fuels made it possible behave like we all owned matter transporters.
I don't know that it's so unreasonable. The floss at the drug store got there the same way, after all, and it's not as though they scheduled the flight especially for you.
Indeed. It would be expensive for me to overnight you some floss. It's not expensive for Amazon to overnight you some floss, because they overnight thousands of packages every day and have some sort of contract that makes that cost a lot less for them.
Can anyone think of any ways to collect data on just how big AWS really is? So far it seems like everyone is just trying to infer based on the "other" line of their revenues and anecdotes from the cloud community.
If we could somehow collect information on the power usage of their data centers i think that would be the most accurate measure. You might be able to do that by using a thermo camera to determine how much heat is dissipated by their cooling systems.
If we could generate random IP samplings by crawling, and if the IP addresses are linearly incremented, then we would have a problem analogous to the German tank problem (http://en.wikipedia.org/wiki/German_tank_problem) allowing us to compute the minimum variance estimate of the total number of IPs from a random sampling as: max(IPs observed)*(1+(number of IPs observed)^-1)-1.
Their servers send an indication in the http headers:
Server: Apache/2.2.21 (Amazon)
I guess you'd need to crawl the web and look for those headers. Or maybe you could look at IP addresses? It would certainly be difficult to do with any kind of accuracy but you could probably get some decent estimates if your sample size was large enough.
Very large numbers of Amazon servers are used for something else than cranking out HTTP pages. Expect a lot of them to be crunching numbers for bio-informatics problems, physics simulations and so on. That's why there is a CUDA enabled instance.
Rendering web pages is actually one of the worst use cases for Amazon from a bang-for-the-buck perspective, especially when you factor in bandwidth.
When people are building 30,000 core compute clusters [1] on EC2 - presumably with zero publicly available web servers, I'd be very interested in any methodology that provides reasonable estimates of revenue based on public web servers.
I don't know where you got that header; S3 returns Server: AmazonS3 and http://aws.amazon.com returns Server: Server. I would suspect a lot of their backend services use custom HTTP servers, and maybe a small handful actually use apache. Moreover you'll be completely missing backend servers that have no public IP at all...
I haven't used AWS in a while. Is there a pattern to the AWS IP addresses? (e.g. are they using a set of specific blocks? ...that seems too simple). The other interesting data point would be how much AWS resource is consumed by Amazon itself. I understand that they have been moving big pieces of infrastructure onto AWS over the past couple years.
(You probably have to have showdead on to see me because I'm hellbanned. I've emailled pg to try and get this fixed, and had no response. If you happen to see this, please check my comment history to realise that I'm not at all a troll, and consider upvoting me on the offchance it will get my account back into positive karma land. Thanks!)
There was an interesting comment from the stack overflow guys that they guessed that using AWS could cost them 4x more.
The evernote guys are another high profile team that went their own way.
I wonder what that says about the margins for AWS, or is the AWS architecture not actually a more efficient use of hardware, power etc compared to old school setups at co-lo's.
There are several reasons why AWS does (and should) cost more than a generic solution.
1. If you just look at the cost of bandwidth and hardware, there's no doubt you can find cheaper solutions in the commoditized basic hosting market. AWS solutions, however, remove a lot of manual work that goes into setup, configuration and maintenance of servers. If you're a startup, it costs you (a lot of) money to hire those people. It also cost you time wasted not working on the core of your service. Up to a certain size, the fixed costs of additional personnel heavily outweigh higher bandwidth costs. Evernote and Stackoverflow have extremely high traffic and might have crossed the threshold at which it's profitable for them to look for savings in hosting bill. A vast majority of startups is not in that position.
2. Unique services demand a premium. Most of the hosting companies provide commoditized services. AWS is much more unique.
3. Services higher up the stack demand a premium. The most basic hosting service offers you a bit of physical space in their building and only give you power for the server and network connectivity. Amazon provides a wide variety of services on top of that. Developing those services and keeping them working is much more costly than just ensuring power is on and network is up. They have to charge more (they have higher costs) and they can charge more (they provide a richer service).
4. Ultimately, the prices are set by the market. We can't really say anything about whether Amazon is more efficient at using hardware or power than, say, SoftLayer, based on their prices. First, their services cost much more to provide. Second, they are free to set their margins at whatever level they please. They could run the service at a loss or they could charge an outrageous premium. We don't know. People are clearly willing to pay for AWS services so at the very least they've set the prices in a way that, given additional benefits, is competitive with traditional server hosting.
Well, I was ultimately commenting on margins. Since we agree that at scale, DIY is cheaper, that implies to me that AWS margins are healthy.
On point 2&3, there are plenty of cloud offerings, the more you use premium features, the more you are locking yourself into to one provider.
I would say that the greatest additional benefit over traditional hosting is low startup cost and autoscaling. But once you're established, if you're using those premium features, you're stuck, so your business better have high margins too.
Sell your byproducts.
There are two very strong reasons to do this. First, it can be an excellent business. You've created something to solve some problem or remove some pain that your company is feeling, it's extremely unlikely that your company is so unique that it's pain isn't shared by other companies. And it's unlikely your internal tools would be of no interest or utility to other companies.
Second, internal tools are typically of terrible quality. There are various reasons for this but it's a very common pattern due to fundamental pressures and incentives. By selling internal tools you force them to have owners and you force them to have a quality sufficient to be acceptable to the market. This generally vastly increases their quality, which provides a benefit to everyone who uses them, including you.