Amazon IT Services: No Longer An Oxymoron

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As basic cloud services have become accepted by enterprise IT, they've threatened themselves with a premature obsolescence. They've maintained their built-in requirement for self-provisioning and their unvaried means of operation -- the "one automated service fits all" mentality. Enterprise IT doesn't work that way. It tries to customize each product to its own needs.

Amazon Web Services, the firm that pioneered cloud service creation, for a while insisted IT learn its ways -- and to some extent that's still the case.

But AWS has started to realize it can go a lot further in cloud services if it better understands IT. Amazon faces "a market moving well beyond the standalone public cloud services it pioneered nearly a decade ago," said Technology Business Research cloud practice manager Allan Krans in an Aug. 17 report, "A Need for Growth and Profit is the Mother of AWS Reinvention." It's needed to reorient itself to think about how the services it creates could become regular add-on IT services.

At its Re:Invent user conference last November, AWS demonstrated how it was expanding its catalogue of services to be more attractive to the enterprise. Rumors suggested that AWS had hired 150 enterprise IT experts, and that rumor didn't have to be accurate for it contain a grain of truth. However it had happened, Amazon showed that it had come to value enterprise expertise and was seeking to deepen its ability to connect with enterprise IT.

[AWS revenues are a big piece of Amazon's business. See Amazon AWS Revenue Reveals Cloud Powerhouse.]

It was probably almost inevitable that Amazon would move in this direction. Book sales were a good first market for Amazon, with potential revenues in the hundreds of millions, as was general retail with likely revenues in the multi-billions of dollars. But IT revenue potential lies in the multi-billions as well.

Krans discusses Amazon's response in his Aug. 17 report. He wrote, "Amazon emerged surprisingly agile while adjusting its business model. For nearly every area of weakness in the original AWS business model, enhancements or investments were made."

Among other things, Amazon's previous insistence that the customer come to Amazon.com and learn how to access its services was partially replaced by a combination of a field sales team and an inside sales team. It trained partners in how to present its services, so that each customer wouldn't be on its own as it approached the Amazon learning curve. For the largest enterprise clients, "it created a small team of consultants ... To offset traditional IT experience and leadership, AWS poached talent from established IT industry leaders and hired former CIOs," Krans said.

If Amazon gets good at IT, that's potentially disruptive to established IT vendors, predicted Morgan Stanley back in May 2013, InformationWeek reported.

Barron's Tech Trader Daily columnist Tiernan Ray responded to that Morgan Stanley report by saying Amazon is "an emerging IT mega-vendor," and it could take away 3% to 17% of spending with traditional IT vendors as it matures.

Nothing has changed since then, other than Amazon has read its own reviews and started to make them come true. Krans views Amazon, AWS's parent company, to be hampered in this process by its own culture of price cutting, low margins, and low profits when it comes to competing in IT services.

If Amazon wants to compete in IT, it faces Oracle, IBM, Microsoft, SAP, VMware, HP, and other traditional IT vendors whose margins and profitability for core services look nothing like AWS's margins and profitability. To plow the same effort into new products, services, and support, Amazon will need higher margins in IT services.

That process may already be underway. At Re:Invent 2014 last November, InformationWeek noted a change in attitude by AWS management, saying "Amazon Focuses On New Services, Not Price."

Krans thinks that AWS leadership has come to realize that. "The change in strategy is evident in AWS, with less focus on price and on being 'the biggest' competitor in the market. In IT, AWS is a $5 billion business growing at double-digit rates, but it is still just scratching the surface of the opportunity."

In my opinion, Amazon will compete in IT with both moderate service prices and service innovations. The most recent example is the Aurora relational database system. It's a version of MySQL, but re-engineered to be a distributed version that can scale up for extremely high volume needs.

Amazon didn't need to venture into this space. It already had a wide selection of database offerings but Aurora is a new kind of system, one tailored to what Amazon can do and one that IT competitors, such as Oracle, IBM, and SAS, are unlikely to do with their own systems.

If it works as advertised, Aurora may be a candidate to replace some uses of Oracle, DB2, SQL Server, and other relational systems as a much lower-priced cloud service. We'll see. But the fact that Amazon dares venture into this highly competitive space with a new offering suggests where the IT market is headed: more moderately priced cloud services that integrate with other services already in the cloud.

What Amazon can do in relational databases, it has already done in data warehousing, big data management, and real time data streaming, capture, and analysis.

When IT finds such services on Amazon, it is solving two problems at once. It's building containment around its capital budget costs and it's containing future integration costs. Each new Amazon service tends to work with existing services.

And that's the compelling card for an expanding cloud services vendor to play in the IT market today.