While AWS can credibly claim to be cheaper, cost isn't what's driving its expanding empire. Innovation is.
Despite early marketing hype, public cloud computing has never been popular because it's cheap. Ultimately, the real driver of public cloud computing services — like Amazon Web Services (AWS) — is convenience, but undergirding that convenience is profound, relentless innovation.
While AWS has competition from Microsoft and Google now, no one yet has managed its ability to drive innovation at a frenetic pace.
Not so cheap after all?
Lately, AWS has come under attack from competitors like Google and Microsoft, who are willing to offer significant price discounts, and also from startups and others who believe that they can more cost efficiently run their own infrastructure.
Leading this latter pack is investor Brad Feld, who argues:
"Once a company hits $200k / month of spend on AWS, the discussion starts about building out your own infrastructure on bare metal in a data center. This ultimately is a cost of capital discussion and I've found massive cost of capital leverage to move away from AWS onto bare metal. When you fully load the costs at scale, I've seen gross margin moves of over 20 points (or 2000 basis points - say from 65% to 85%). It's just nuts when you factor in the extremely low cost of capital for hardware today against a fully loaded cost model at scale."
David Mytton, founder and CEO of Server Density, piles on, holding that "Once you really scale AWS et al. don't work (support, cost, control) except for flexibility," meaning that the only real benefit of public clouds at significant scale is their flexibility. (Adrian Cockroft, Netflix's former cloud chief, supplies information that calls such calculuses into question, but we'll let them stand for now.)
Small wonder, then, that early arguments for public cloud computing suggest that AWS and other cloud services are cheaper — but more current arguments insist that while cloud computing may not be cheaper, public cloud spending is more predictable and shifts the spend from CapEx to OpEx.
This is an important shift, but it's not sufficient. After all, it doesn't really explain why so many companies rely on AWS. The AWS customers aren't lighting their money on fire and laughing as it burns. Instead, they're motivated more by business agility — by convenience — than by money, as Redmonk analyst Stephen O'Grady highlighted years ago.
But what makes AWS, in particular, so convenient? To discover this, it's critical to look at what the company is engineering.
As Randy Bias, CEO of Cloudscaling, rightly argues, one genius of AWS' business comes from its economies of scale, but that doesn't mean what most think:
"Unfortunately, many folks... fall into the trap of assuming that 'economies of scale' == 'buying power'. Buying power can be an element of achieving scale, but it is seldom a structural or sustainable advantage, certainly not against other large businesses who can command similar quantities of capital.
"No, the real economies of scale that are relevant here are the tremendous investments in R&D that have led to technological innovations that directly impact the cost structures of Amazon Web Services [and other cloud providers]."
As he concludes, public cloud "isn't a game of buying power or outsourcing. It's an innovation game and that's it."
That innovation game has been won so far by Amazon. As Cockroftargues, AWS is "years ahead" of its competitors. Having built perhaps the most visible example of a massive application running on AWS, Cockroft should know.
Amazon's game to lose
Of course, AWS now has significant competitors that can afford to invest heavily in R&D, but everyone else has a lot of catching up to do. Impossible? No. Difficult? Oh, yes.
Let's put this in perspective. As AWS senior vice president Andy Jassy declares, "We are iterating and adding features at a very fast clip. Just since last February, in 13 months, there are 56 new features alone in Amazon RedShift." Now, multiply that pace of innovation across 1,400 AWS products, and you get a feel for just how hard it is to catch AWS.
It's easy to drop prices. It's much harder to build something that enterprises seem content to pay for, and even to pay a premium for. AWS has done that and hence remains the public cloud to beat.