
AWS Drives More Than Half of Amazon's Operating Income - petercooper
https://www.lightreading.com/enterprise-cloud/infrastructure-and-platform/aws-drives-more-than-half-of-amazons-operating-income/d/d-id/749196
======
mbesto
_“Percentage margins are not one of the things we are seeking to optimize.
It’s the absolute dollar free cash flow per share that you want to maximize,
and if you can do that by lowering margins, we would do that. So if you could
take the free cash flow, that’s something that investors can spend. Investors
can’t spend percentage margins.” “What matters always is dollar margins: the
actual dollar amount. Companies are valued not on their percentage margins,
but on how many dollars they actually make, and a multiple of that.” “When
forced to choose between optimizing the appearance of our GAAP accounting and
maximizing the present value of future cash flows, we’ll take the cash flows.”
Jeff Bezos is very focused on this “absolute dollar free cash flow metric.”_

[https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-
fr...](https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-from-jeff-
bezos/)

People really need to get off of the "income analysis" trope with Amazon. It's
not how they operate their business, so why do people (analysts and media
mainly) analyze it any other way?

~~~
landryraccoon
There's a tradeoff here. Bezos is of course a world class executive and
founder, but he's underselling the advantage of big margins which is _risk_.

In a downturn, a slight decrease in margins across the board will push a
company on the razor's edge from profitability to unprofitability. Margin
means margin for error - when the company isn't doing well and investors are
scattering to safety and liquidity is nowhere to be found a higher margin
gives your company a buffer when you have to cut.

Of course when revenues are growing like crazy and the economy is gangbusters
it sounds great to cut margins for absolute growth but that's a booming
economy. Things are very different in a downturn.

~~~
mbesto
> when the company isn't doing well and investors are scattering to safety and
> liquidity is nowhere to be found a higher margin gives your company a buffer
> when you have to cut

And how has that worked out for 440 companies that used to be in the F500 that
no longer are there?

> In a downturn, a slight decrease in margins across the board will push a
> company on the razor's edge from profitability to unprofitability.

Except the reason their margins are so low is because they keep feeding
capital into the business to fund new projects.

> Of course when revenues are growing like crazy and the economy is
> gangbusters it sounds great to cut margins for absolute growth but that's a
> booming economy. Things are very different in a downturn.

Yup, you're right, things are very different in a downturn. Great listen about
how NetSuite navigated downturns: [https://a16z.com/2015/05/15/a16z-podcast-
why-saas-revenue-is...](https://a16z.com/2015/05/15/a16z-podcast-why-saas-
revenue-is-worth-more-than-traditional-software-sales/)

~~~
ethbro
This seems like a dilemma between a superior strategy, but only if executed
with discipline.

In reality the majority of businesses which run on large margins get lazy,
allocate capital ineffectively, and underinvest in R&D.

Thin margins force you be lean. Thick margins afford you the opportunity (and
risk) not to be.

------
partiallypro
I do wonder what is going to happen when/if there is more margin compression
in the cloud space. Specifically when it comes to Amazon, because Amazon
really has razor thin margins in its retail sector. Other cloud providers have
high profit margins outside of the cloud (Google, Microsoft, Apple) so they
could still be ok. They all have so much pricing power too, that I wonder if
there is some mutually assured destruction of margin that prevents them all
from competing heavily on price. Or if the space is growing so fast that they
simply don't need to compete on price as much.

~~~
marcosdumay
Amazon has people locked into Lambda, Google and Apple have people locked into
device integration, and Microsoft has people locked into Office and in a short
while Github CI integration.

All three are trying to differentiate more and more (with varying degrees of
success) while they increase the price of the commodity services so it doesn't
compete with the differentiated ones. They will not compete on price with each
other.

I just don't know what will happen if somebody plays an Amazon at the
commodity segment, and go selling services with thin margins.

~~~
crowdpleaser
I've always wondered if FB could get into the cloud game, it seems like they
might have some data center expertise.

However, your comment has me thinking that FB doesn't have a way to lock
people to their cloud - they'd be forced to compete on price more than any
other major cloud provider. Probably not a great business.

But is Apple a cloud provider? I recall they have some data centers but I
thought that it was rumored they used Google Cloud or AWS (or both) too.

~~~
busterarm
Internally, Facebook has always struggled with infrastructure capacity
throughout their history. They still have growing pains as far as physical
space for equipment goes.

When Amazon got into the cloud business, they actually had most all of the
non-software challenges solved already. It turns out that datacenters and
distribution centers go in the same kinds of places and have very similar
kinds of challenges. They benefited significantly from knock-on effects from
running their existing business.

If Facebook got into the cloud game, they would have to learn two new
businesses at once: cloud hosting and industrial real estate.

I don't think that they would be able to obtain good pricing on either real
estate or server hardware. Their current hardware vendor can't absorb that
large of a scale out.

~~~
deanCommie
> When Amazon got into the cloud business, they actually had most all of the
> non-software challenges solved already. It turns out that datacenters and
> distribution centers go in the same kinds of places and have very similar
> kinds of challenges. They benefited significantly from knock-on effects from
> running their existing business.

That sounds good in a blurb in CIO Magazine but is likely completely
disconnected from reality.

The complexity of building a cloud provider is not primarily in the physical
management of physical assets in a big box building.

~~~
busterarm
Having worked in several industries before landing in software development, I
can tell you that the most common form of hubris we have as an industry is in
thinking that our domain is where the hardest problems live. Or in thinking
that the level of difficulty of our challenges has a 1:1 correlation with
those of the business.

Building data centers is hard because there are not a lot of places that you
can build them effectively. Large scale, specialty real estate deals are the
kind of thing that effect a company's financials in a big way and for a long
time -- much longer than the market cycles where you determine whether or not
to continue or abandon your hypothetical, nascent cloud offering service --
and are exactly the type of thing that market investors will pillory your
company for if you fuck up.

If you're Amazon and you're starting off in the datacenter game and it doesn't
go well, you can always transition the property into a distribution center.
Those are useful to you anyway.

If you're Facebook, what are you going to do? Who are you going to sell this
$800-1200/sq ft (that is the cost of building a turnkey DC and puts AMZN's
largest datacenter somewhere between 172-258mil and that's just one of them)
"big box" to? They should make a multi-billion dollar investment for that and
hire a global enterprise sales organization on top of that to sell it?

Maybe it's not so much that what CIOs say is divorced from reality but that
they see reality at a scale that you don't. Their abstractions may not make
sense to you.

------
partingshots
When you’ve got Kubernetes on top, it literally makes zero difference who the
underlying cloud provider is.

And thank god Kubernetes exists. Not about to waste my time relearning the API
of every new cloud offering a company wants me to try.

~~~
paulddraper
Sort of. It depends if you want to use Kubernetes to operate your own S3, your
own RDS, your own SQS, your own Kinesis, your own Cloudfront, your own
DynamoDB, etc.

If you have the dev resources to do that, great. But lots of other players
will prefer to use off-the-shelf stuff from cloud providers.

~~~
partingshots
I think that’s a different question you’re answering though. For sure,
continued automation is 100% the modus operandi. I wouldn’t be surprised if in
the future IT departments don’t really exist anymore.

But even with “off-the-shelf stuff”, your site reliability engineers would
still be using Kubernetes as the primary language to communicate. Or I guess
you could go all cutting edge and go one layer up with Istio instead. In that
case then, Kubernetes is still there hiding underneath.

~~~
bilbo0s
Until Amazon, Microsoft, or Google move up the stack.

(Or maybe all three. They really are eating the industry, but they add value
so, yeah, I guess they deserve their rent. Just sucks for anyone else in that
space.)

~~~
ham_sandwich
I think it’s inevitable. Cloud providers will continue to move up the stack so
other firms can focus more resources on their unique and differentiated
offerings. It just seems like in the future most companies shouldn’t have any
notion of servers/containers etc, they will only focus on their core business
logic. We’ll just keep going upupupupup.

------
altmind
so, with operational margin 28.42%, aws outruns apple with operational margin
22.72%.

if you've told me aws takes more premium on their products than apple per $, i
wouldn't believed.

~~~
babaganoosh89
You should compare AWS's pricing vs dedicated providers, it's near a 3x
difference compared to OVH last time I looked.

~~~
cpncrunch
The reason they can get away with this is because they make it so difficult to
figure out the total price.

~~~
Matheus28
Yep. A lot of the cost is hidden in their bandwidth costs, it's extremely
overpriced.

------
kgwgk
US retail also drives more than half of Amazon's operating income.

~~~
SketchySeaBeast
Wait a second....

~~~
sokoloff
It's surprising, but correct.

In 2018-Q4, North American retail drove $2.25B (59%) of OI; AWS drove $2.18B
(58%) of OI. International retail lost ($642M) (-17%) of OI.

[https://ir.aboutamazon.com/static-
files/a5035fcd-5646-45df-b...](https://ir.aboutamazon.com/static-
files/a5035fcd-5646-45df-b1ad-cef3f376a61a)

------
vira28
Don't see much discussion around AWS support. Man, In my opinion its not AWS
is great, its more about GCP & Azure are not even good.

~~~
scarface74
Do you work for a company that has a business support plan?

------
roadkillon101
AWS is a byproduct of Amazon's e-commerce business, that became a viable
service of it's own. It was a brilliant move to monetize the excess compute
power Amazon had to have on hand for it's e-commerce business. Without the
e-commerce business, AWS wouldn't exist.

~~~
throwaway2048
This is a myth, and it needs to die. AWS was not designed for amazon's
infrastructure, nor was it spare capacity of said infrastructure at any point.
It was built from the ground up to be an independent service selling to third
parties, on independent servers in independent data centers.

It took many years for amazon.com retail stuff to migrate to it, and
supposedly some parts still aren't migrated.

~~~
nothrabannosir
I mean, I'm gullible so I believe you, but I also believe Steve Yegge who
wrote about this:

 _> Well, the first big thing Bezos realized is that the infrastructure they'd
built for selling and shipping books and sundry could be transformed an
excellent repurposable computing platform. So now they have the Amazon Elastic
Compute Cloud, and the Amazon Elastic MapReduce, and the Amazon Relational
Database Service, and a whole passel' o' other services browsable at
aws.amazon.com. These services host the backends for some pretty successful
companies, reddit being my personal favorite of the bunch._

[https://plus.google.com/+RipRowan/posts/eVeouesvaVX](https://plus.google.com/+RipRowan/posts/eVeouesvaVX)

(posted in 2011, and he claims he left amazon 6½y before that)

You sound confident so I'm sure there's something to it. But on the other
hand, there's loads more, similar comments in that memo.

And Steve, well, Steve is known to be quite the iconoclast. I never took him
to suffer fools gladly.

~~~
erik_seaberg
I don't personally know but
[https://www.networkworld.com/article/2891297/cloud-
computing...](https://www.networkworld.com/article/2891297/cloud-
computing/the-myth-about-how-amazon-s-web-service-started-just-won-t-die.html)
makes some strong claims otherwise.

And if AWS were just Amazon's spare capacity, who would bet on their stuff
staying up through cyber monday or prime day?

~~~
ascorbic
Nobody is claiming that it's _still_ just spare capacity, just that it started
as that.

------
Wordball
Mackenzie Bezos now drives half of Jeff's income

------
RickJWagner
I'm a recent convert to 'Boglehead' investing. Among the principles Bogleheads
follow, we don't like to pick individual stocks-- index funds are far safer.

But I cheat a little. One of my small holdings is Amazon. They look set to
dominate in multiple arenas. Fingers crossed at least one pans out!

------
empath75
AWS, Facebook and amazon are going to get absolutely crushed if there’s a
recession that triggers a tech industry pullback. All the VC funding that goes
to these hot tech companies goes to Facebook and google for ads and AWS for
server space.

In addition, kubernetes is going to start squeezing aws’s profit margins,
particularly ec2 as people move to commodity k8s hosting.

~~~
benburleson
Is the implication that people/businesses will stop developing and using web
services? I just don't see how we can go back now. Further, web tech is
cheaper to scale than anything else, so when the wallet tightens it seems
that's where budgets would focus.

Also, AWS moves faster than web tech on the whole, so even if the general
shift to k8s continues, AWS will be there to make it easier than rolling your
own, and at a price point that's "worth it."

~~~
zawazzi
Historically, teams would just make their existing servers last longer.
Considering most of AWS premium services have an open source alternative,
guessing most people will port to containers. Built on open source has been
their source of strength but is also their achilles heel. They shortened the
learning curve on to their platform and off of it.

~~~
whoisjuan
That's a complete no-sense. When you buy from a public cloud you buy
reliability, availability, security and support.

The service layer is just an add-on. Part of their premium. Even if you go
full open source you still need infrastructure to run it and that's exactly
what companies don't want to do and won't do anymore, and the reason why AWS
and Azure are massively successful.

~~~
zawazzi
I think I must have miscommunicated my position. I'm not reflecting on cloud
as whole, but how AWS is particularly vulnerable to a tech sector downturn. In
the event of economic downturn, existing cloud customers will optimized costs
(pre-cloud they would have avoided infrastructure upgrades, now they will
focus on different cost structures). My belief is that generic services, such
as storage, compute, ect. will priced like commodities because the market is
more efficient since multiple cloud provider have the same service. Tools like
terraform allow easy enough cloud configuration porting that cloud providers
have little pricing power for these products. One area of cost optimization is
to utilize generic cloud resources instead of AWS specific services (where I
see many of my costs). Many of the services that generate positive cashflow
for AWS seem to be built on top of open source which means that converting
existing costly services can be converted to use generic resources with out
too much implementation difficulty.

I'm only a developer so I'm sure I'm missing Operations and Business
perspectives. Would love to learn more.

~~~
owenmarshall
Those positive cash flow services are managed. It’s cheaper to run your own
Postgres instance in EC2 than it is to run RDS, _until you have to pay someone
to operationalize it._

You pay $.09 an hour more for an RDS m5.large than you do for an EC2 m5.large.
What kind of DBA can you get for $67 a month? That’s maybe one hour of a good
DBA’s time per month, tops.

Now, someone will correctly point out that you can run way more compute on a
colo’d server than an EC2 instance and they’d be right. But when you realize
you’re paying AWS for hypervisor patching, network automation - I’ve worked in
places where a security group change in AWS was equivalent to a two week
servicenow ticket with the network team - ...

The business perspective to AWS is that you bake operational costs into the
product _and stop paying people that generate those costs._ Not good for
sysadmins who aren’t willing to change, but it’s where we are. And it’s why
you can’t just say “open source makes this convertible without difficulty” -
somebody’s still gotta manage those services ;)

