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Charles Babcock
Charles Babcock
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Why Amazon's Cloud Business Is Like Kindle Sales

Amazon Web Services is cheap upfront, and Amazon only gets paid if people keep using it, CEO Bezos says.

It wasn't part of the Vogels-Bezos discussion, but to do so, Amazon followed the path recommended in The Innovator's Dilemma by Clayton Christiansen: it created a separate unit, isolated it from the main organization and rewarded it for its ability to pursue an opportunity other than that of the main business.

"First of all, innovation is a point of view. You have to actually select people who want to innovate and explore. Being a pioneer, an explorer, isn't for everybody. Some people wake up in the morning and they get their energy, the thing they think about in the shower is who are three companies we're going to kill this year. That's the conqueror mentality, it's a competitor-focused mentality instead of a customer-focused mentality.

"When you attract people who have the DNA of pioneers, you build a company of like-minded people who want to invent, and that's what they think about when they get up in the morning ... If you're the right kind of person, you like to invent, you like change, that's just fun ... over the last 18+ years, we've attracted a bunch of people who like to do it.

"There are a couple other things that are not as fun. One of them is, you have to have a willingness to fail. You have to have a willingness to be misunderstood for long periods of time. If you do something in a new way, people are initially going to misunderstand it relative to the traditional way. They'll be well-meaning critics who genuinely want the best outcome, but they're worried ... And there'll also be self-interested critics who have a vested interest ... If you never want to be criticized, then don't do anything new," Bezos said.

In this segment, he was directly answering Wall Street critics who have put pressure on Amazon by asking when the company will stop investing so much for the future and realize more profit. Bezos doesn't like this criticism, but he can live with it, given the nature of his company. He responded further by saying innovation is the only way to continue to discover what's useful to customers. At the end, he said, don't chase a wave, hoping to gain profits. Instead, do what you're passionate about, and wait for the wave to come to you.

"Successful invention is invention that customers care about. It's actually relatively easy to invent new things that customers don't care about. For successful invention, you have to increase your rate of experimentation. You have to think about, how do you go about organizing your systems, your people, all of your assets ... to increase your experimentation. If you double the experiments per year, you're going to double your inventions," Bezos said.

What he didn't say was the AWS experiment has its own expenses, and it's possible in doubling experiments to also double expenses without gaining offsetting revenue. AWS is doubtlessly a revenue producer. I've heard estimates that say that it will produce $1-$1.5 billion in 2012, and there's a chance revenue will grow rapidly from this takeoff point. But Amazon's reports don't give us a glimpse of the relationship between revenue and expenses.

Nevertheless, Bezos said repeatedly that he runs a high-volume, low-margin business. And to do so, you must practice certain disciplines that some of Amazon's higher margin competitors -- Oracle, Microsoft and Google spring to mind -- don't necessarily have to practice.

"Let's put it this way, in old days, you might be best advised to put 30% of effort and energy into building a product or service and 70% into shouting about that service. That has flipped around. The balance of power is shifting from the providers of offerings to the consumers of offerings. I believe that's a great thing for society. I believe it's even a great thing for the providers of services, provided the companies acknowledge it and embrace it. If you have a business model that relies upon your customers being misinformed, or let's just say incompletely informed, you better start working on changing your business model," Bezos said.

Brave words from a founder who is proud of the company he's created.

It remains to be seen how far Bezos and Vogels can drive the AWS experiment, but it's clear the battle lines have been drawn with the old, high-margin software companies, such as Oracle and Microsoft, and the new high-margin Web services companies, such as Google. And throw in Apple as a high-margin device maker as well.

If Amazon really is discovering the long-lasting flywheels of the coming era, its revenues will more than match its commitments. And competitors will find it tough to move in on a low-margin firm that is constantly realigning its goals with its customers. This was Amazon's first big, public statement of how its new cloud computing business is a natural outgrowth of its overall culture and approach to business.

Bezos seemed to be saying that AWS, far from being a stepchild, is a long-term extension of what the parent company is all about. And despite the critics, Amazon will find ways to make it work.

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User Rank: Ninja
12/10/2012 | 7:16:05 PM
re: Why Amazon's Cloud Business Is Like Kindle Sales
Bezos is one of the world's greatest salesmen. As an innovator, he's not as great as is being stated here. One fact about innovation is its success in changing the way things are done. They've has some success in that, but not uniquely.

But what he prefers to gloss over, and those who interview him gloss over as well, is that he badly underestimated the expenses his business would need. Lets be honest here, his original concept was to have a small staff handling the web site, and sales, while product shipment would be handled by manufacturers and wish fulfillment companies. They quickly discovered that it wasn't to be. Their expenses opening and running product warehouses and shipment centers has cost them dearly. These expenses will never go away. The larger they become, the more centers they will need to open. Their expenses will always remain high.

As for them selling Kindle readers and tablets, remember his words carefully. In sales parlance, "near breakeven" means loss. It doesn't mean breakeven. So they are taking a loss on all their Kindle sales. If they are duplicating that performance for their cloud services, that's breaking rule number one in class 101 economics, which is to never take a loss on one product in order to make a profit on another, or on the same, later on. This doesn't equal the razor and blades for obvious reasons, or what should be obvious reasons.

I have little confidence that Amazon will ever make real profits, and that gives me a nervous feeling about those profitless products and services. There is only so long before you must raise prices substantially, or discontinue the product or service. Which will it be?
Multicloud Infrastructure & Application Management
Multicloud Infrastructure & Application Management
Enterprise cloud adoption has evolved to the point where hybrid public/private cloud designs and use of multiple providers is common. Who among us has mastered provisioning resources in different clouds; allocating the right resources to each application; assigning applications to the "best" cloud provider based on performance or reliability requirements.
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