
Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders - cryptoz
http://www.wired.com/2014/07/amazons_cloud/
======
tootie
Misleading headline. Investors are scared of Amazon's persistent lack of
profits despite their hugely popular offerings.

~~~
adventured
Exactly. Investors are afraid Amazon has found another low profit business to
dominate. If they can't yield even a low margin profit at $80 billion in sales
- eg 3% Walmart style, or $2.x billion in net income - why would anyone
believe they will at $160 billion in sales. Not to mention they're a 20 year
old, unprofitable business.

~~~
rodgerd
And a lot of their profit is essentially reliant on competing by dodging taxes
- their margin advantage to the consumer could, in many markets, simply
disappear with the closure of a few sales or corporate tax loopholes.

~~~
JoshTriplett
Not charging sales tax in a jurisdiction you have no presence in isn't a
loophole, it's an intentional feature at the federal level. States can't
legally tax interstate commerce.

Amazon is only starting to charge sales taxes in states because they're
establishing local presences in those states.

~~~
toast0
They skirted the rules for local presence for a long time too. They had an
engineering office in California, but were not charging sales tax. The office
was a wholly owned subsidiary

~~~
msg
IMHO skirting the rules is legal. If you care about Amazon's behavior because
of the law you should have no problem here. If you care about local presence
for some other reason you should be talking about that instead.

You can't blame companies for operating within the four corners of the law.
Perhaps you would prefer that they break the law.

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ak217
> as [AWS] matures to the size of a company like VMware

LOL. VMware has never been able to hold a candle to what AWS is doing. To draw
an equivalency between the two is misleading.

The true danger to AWS is not coming from any of their competitors (Azure is a
long way from not sucking, and the Google challenge, while serious, only
supercharged Amazon's growth).

Their true danger lies in the fact that Amazon doesn't treat their
engineering/product employees well enough. The AWS products will suffer from
high turnover and poaching if they don't address this.

~~~
cwyers
Azure and Google are good enough in the eyes of a lot of people to compete,
and Amazon believes this to be true, otherwise they wouldn't match price cuts
the other two make. They have.

The problem for Amazon is that Microsoft and Google don't need to profit on
Azure and Google Compute the way Amazon does. Microsoft can sell Azure
services at low margin and make the rest of their money selling Visual Studio
and MSDN subscriptions and whatever else to developers working on sites hosted
on Azure, and selling Office 365 and whatnot to companies shifting their in-
house resources towards the cloud. Microsoft sells a lot of complements that
mean it can get away with selling services on Azure at close to cost and still
make money. Google's in a similar position, in that it has other complements
(AdWords, services like Maps, Android, etc.) for developers working on its
stack, and it has enterprise products like Google Docs as well. Amazon
meanwhile is selling AWS products but no strong complements. So being dragged
into a pricewar with Google and Azure means a very real chance that they
continue to not make a lot of profit on AWS, even if they beat Microsoft and
Google.

------
BrainInAJar
that's a little misleading. From the article:

> Yesterday Amazon said that while its cloud business grew by 90 percent last
> year, it was significantly less profitable.

Investors aren't scared because AWS is growing too fast, they're scared
because profits aren't growing along with it

------
Ovid
A fairly vacuous article, but here's the takeaway:

> The company is taking losses to invest in the future, and Amazon’s 10
> percent stock drop today shows that some investors are uncomfortable with
> that.

While its tough to be sure exactly what motivated that drop, the reasoning
sounds accurate. More importantly, it shows a huge part of why public
corporations in the US are so broken and may actually be hurting the US's
competitiveness.

In a recent study
([http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959125](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959125))
entitled "The Dark Side of Analyst Coverage: The Case of Innovation", the
researchers found that publicly traded companies who attract the attention of
financial analysts are less innovative. Why? Share prices.

For many in upper management of these companies, their compensation is tied to
share prices. Management works hard to keep their share prices high. Further,
if share prices drop too much, the Board might decide it's time to start
firing their "inefficient" managers. In a worst-case scenario, if a company
has value but their share prices continue to drop, they leave themselves
vulnerable to a hostile takeover, thus risking everyone's job.

In a publicly traded company, everyone is working together to prop share
prices up. How do they do that? Amongst other things, they're much more risk-
averse. Taking a risk is a strong signal to the market that you might fail and
they reward you with lower share prices. That's why the above paper found that
public companies produce fewer patents and of lower value: everyone is so
focused on short-term goals that long-term opportunities are at odds with
their mandate of maintaining shareholder value.

Curiously, it looks like public corporations can share the same defect that
democracy does: people can vote. Sadly, democracies produce mediocre
politicians because average voters have average intellect (duh) and can't
evaluate brilliant candidates ([http://www.livescience.com/18706-people-smart-
democracy.html](http://www.livescience.com/18706-people-smart-
democracy.html)). Rhetoric takes the place of thoughtfulness and we see this
with corporations, too.

Frankly, I have no idea how to avoid these dilemmas but pretending they don't
exist is surely not good.

------
chatmasta
I sincerely wonder what percentage of institutional investors have any
semblance of a fucking clue what "the cloud" actually stands for, or for that
matter, that Amazon is even in the cloud business. I talk to friends in
finance all the time who have no idea that Amazon is more than just an
e-commerce website. Granted, they do not specialize in tech, and no 22-25 year
old analyst is making any real investment decisions, but the general sentiment
makes me wonder.

Who are the people responsible for tech sector investing at large investment
banks? Do they know anything about the operational details of "the cloud," or
is their knowledge limited to marketing gimmicks and enterprise parlance?

The fact is, the technical details of cloud businesses are what differentiate
them, and ultimately what sway engineering decision makers one way or the
other in terms of choosing an offering. Yet I get the feeling that the
investors in these cloud companies have no fucking clue what any of these
technical details are.

Wall Street is a joke.

~~~
jzwinck
If you (or someone you know) understands the cloud better than the existing
investors and analysts, perhaps you should be trading shares of cloud
companies yourself. Of course, if a deep technical understanding of such
things does greatly influence long-term market value, you can expect there to
be some competition doing the same thing already.

There are undoubtedly less-informed participants in every market...otherwise
very few trades would ever occur.

------
eurleif
When a business first buys into cloud computing, they're likely to compare
prices between providers. But I think once most businesses are using a
particular provider, they're going to have too much inertia to switch based on
a minor difference in price.

Cloud computing is still sort of new. A lot of businesses are still switching
from other options, and the cloud industry as a whole is growing rapidly as a
result. But that will slow down at some point. That sounds to me like the
right time for Amazon to start profiting.

------
adventured
"After all, if chipmakers deliver more and more transistors every two years,
Amazon should be able to do more computing for less."

Pretty bad conclusion by the author, particularly given this is Wired. If chip
makers deliver more transistors, customers of AWS will use them all up, Amazon
will not be able to just sit on their hands and offer up the same computing at
a lower total cost.

~~~
autokad
If amazon charges 10 $ for 10 Ghz, and by mores law the price to deliver 10 Gz
is reduced by half, then Amazon should be able to do more computing for less.
Without competition and with Moore's law, Amazon can can offer lower prices
AND increase its bottom line due.

~~~
adventured
That assumes customers do not eat all the computation gains. That's an
incorrect assumption, cloud customers will always eat all computation gains.
Every unit of extra power a customer can get at zero additional cost, they
will consume. It's a corollary to Moore's Law, and it's why customers bother
to upgrade processors each generation.

In the time Amazon's cost for 10 Ghz went down by half, the demand for
processing doubled.

~~~
clarky07
That's good news. If they offer X processing for the same price and demand
doubles that means revenue doubles. If they get 2x supply for current 1x price
then they just made more profit.

Just because computing gets cheaper doesn't mean they have to offer it for
cheaper. It's likely competition will force the price down, but the point the
parent is making is that the price of service doesn't have to come down as
fast as the cost of service does. That would imply more profit without raising
prices, merely holding them steady while costs go down.

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djhworld
Can anyone explain what they mean by this?

"It’s invented and then built a nearly $5 billion cloud computing business
catering to fickle software developers"

~~~
glibgil
Amazon built AWS. AWS does $5 billion in business. AWS has the variety and
depth of services that software engineers expect.

~~~
themartorana
More importantly, it has managed to replicate the entire hosted rack
experience without requiring a company employ staff to manage it. Rackspace is
nice but they use OpenStack, which still struggles behind the plethora of
networking options and protections AWS has - including VPCs, load balancers,
firewalls, subnets both private and public, and so on.

There's very little I can't virtualize in AWS that I might find in a typical
rack at a co-lo facility, and in that, AWS has no competitors.

(There are other offerings with varying degrees of awesomeness - Softlayer
comes to mind - but bang-for-buck, my company still bets on AWS. My only gripe
is I/O and the need for local-SSD-fast disk access for clustered KV database
stores, which may finally cause us to start looking elsewhere.)

~~~
enjo
The other thing Amazon has done is build a service that managed to be both
extremely complex (meaning I have a lot of control over it), but relatively
straightforward for a novice sysadmin to actually use. This is clearly
something they are investing a ton of time in these days. The web interface is
getting a lot better.

