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Amazon To Cloud Rivals: Try To Catch Us

Amazon Web Services VP Adam Selipsky sits down to talk about's DNA and its low-margin approach to cloud services vs. competitors.

"It will be extremely hard for most companies to drive to the cost structure Amazon has and will continue to improve upon. … We will absolutely continue to drive down our business costs and customer prices," he said.

Still, getting to the heart of AWS' balance sheet is impossible. Amazon delivers low-cost compute cycles because of the way it builds and operates cloud data centers, but Selipsky was not at liberty to divulge any details of how it designs the servers with which it populates them or how it keeps operations staffs small. How, for example, does Amazon solve the problem of chilling the equipment? Does it use the big air-conditioning units known as chillers or some lower-cost method?

"We don't talk about that. We have a lot of our IP tied up in our designs," he said.

That, of course, is in contrast to Facebook, which has published its server designs as part of the Open Compute Project and opened its data centers to inspection tours. Is Amazon watching its power usage effectiveness -- the amount of power actually used in computing out of the total delivered to the data center -- as Facebook is?

Of course, said Selipsky. "We analyze everything. We're highly data driven." But PUE – power usage effectiveness - is another stat he was not at liberty to disclose.

As a result, part of the belief in Amazon's "high volume, low margin" ethos has to be taken on faith. Parent company doesn't directly report revenues for AWS. In the first quarter of 2013, it reported $798 million in revenue in the "other" category, widely believed to mainly represent AWS but the accounting is not precise on whether the parent company's retail cash flow in part supports AWS operations.

Nor was Selipsky prepared to provide such an accounting. Rather, without mentioning names, he wanted to draw a line in the sand and dare would-be competitors to cross it. Amazon continues to build out data centers, adding per day the servers it once took to support the $5.3 billion retail business in 2003. Some of this addition could take the form of upgrading old servers to more powerful models but Selipsky said Amazon is also filling more data center space with equipment. "We continue to expand geographically. We're not done yet," he said. It's already got centers in Northern Virginia as U.S. East, and centers in Oregon and Silicon Valley as U.S. West and GovCloud. Overseas, it's in Dublin, Sydney and Singapore, as well as in two locations in Japan and one in Brazil.

Macquarie Capital says Amazon Web Services had likely revenues of $2.5 billion in 2012 and could be valued as a $19 billion company by 2015. As competitors reach their first billion or struggle to maintain stock value as growth slows, AWS is pressing its case.

High volume, low margin is part of every aspect of Amazon's business. "It's the way we designed our headquarters and offices," said Selipsky. Challenged to illustrate, he says he and other executives work from desks that were originally made from doors as a low-cost office-equipment option. "Those desks are a visual reminder of the early culture of the company," he said.

"It's difficult, retrofitting your company from a DNA perspective," he says to competitors. "If you're looking to make 70%-80% margins," you don't think about costs in such a manner. The scale AWS has achieved and its pace of innovation will continue to be based on that culture. Catch us, Selipsky seemed to say, if you can.

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User Rank: Strategist
5/16/2013 | 7:55:34 PM
re: Amazon To Cloud Rivals: Try To Catch Us
Open source code makes it possible to do both: offer low margin compute cycles and innovate on the types of services available..Rackspace understood the tie as well as it tried to expand cloud services, hence, the vigorous OpenStack Project. Red Hat understands it.HP understands it. But does Microsoft? VMware? VMware will answer that question May 21. Charlie Babcock, editor at large, InformationWeek
User Rank: Author
5/15/2013 | 9:40:23 PM
re: Amazon To Cloud Rivals: Try To Catch Us
This retailer's low margin mindset shouldn't be underestimated, it is foreign to tech rivals. But it's not enough. Dell once had a similar mindset around PCs -- avoid high margins and instead use that margin to beat pricier rivals. But in tech customers expect innovation as well. So far, Amazon has been an innovation leader in cloud as well as a low-price setter. Can it continue to do both?
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