
AWS’s Share of Amazon’s Profit - nurbel
https://www.tbray.org/ongoing/When/202x/2020/06/14/Amazon-profit-from-AWS
======
rexreed
He's overly simplifying the contribution to profit by not understanding the
contribution to expenses. It's not his fault because Amazon doesn't break it
out that way. They don't allocate certain expenses to AWS and other expenses
to other branches.

While there's no doubt that AWS is very profitable, to say it contributes a
certain percentage to overall profits probably misses the mark tremendously.

It's probably and most likely very difficult to extricate costs of server
farms that support the retail operation from server farms that host client
services from overall operating costs. You'd need far more detail on gross
margins and tight definitions for contribution of revenue. For example, do
people who order things on Alexa get revenue counted for non-AWS while the
Alexa infrastructure is counted as AWS expense? These are not easy questions.
This is why it's not broken out as you'd like.

I'd wager that the contribution to profits is not as suggested here, but it's
hard to know just how far off the calculation is. And it might not matter.

~~~
Illniyar
I thought Amazon don't use aws for their main product. Do they use it for
alexa?

~~~
jcrites
Amazon runs virtually everything on AWS. There are probably some exceptions
for exotic infrastructure, but the vast majority of compute and storage
systems at Amazon run on top of AWS. There's probably a team using every
single AWS service somewhere in the company.

This doesn't mean that Amazon _only_ uses AWS products, though. Amazon
continues to use e.g. Akamai for static content hosting for some use-cases, in
addition to using CloudFront for other use-cases, and other products beyond
that.

Amazon also uses third-party services. For example, while Amazon has long been
using Chime internally for IM, chat, and voice/video calling (Chime being the
AWS solution for those things), they recently announced a partnership with
Slack [1]. To summarize, Amazon will deploy Slack and use it for chat, while
Slack will deploy Chime and use it for voice/video calling. I believe that
Slack has been running on AWS since its founding [2]. I would hazard a guess
that an undertone of the agreement is that Chime will continue focusing on its
strength (which is voice/video calling for organizations) and probably not
invest a lot in the chat features where Slack is already strong, and vice
versa.

All that being said, certainly not everything runs on AWS across all of
Amazon, which is a big company, with a host of acquisitions like Zappos,
Twitch, Whole Foods, etc., that come with their own legacy or custom
infrastructure.

But bread-and-butter software teams at Amazon all typically run on AWS.

[1]
[https://www.businesswire.com/news/home/20200604005766/en/AWS...](https://www.businesswire.com/news/home/20200604005766/en/AWS-
Slack-Join-Forces-Deliver-Future-Enterprise)

[2] [https://aws.amazon.com/solutions/case-
studies/slack/#:~:text...](https://aws.amazon.com/solutions/case-
studies/slack/#:~:text=Tiny%20Speck%E2%80%94the%20original%20company,offering%20for%20public%20cloud%20services).

~~~
MaxBarraclough
> Amazon continues to use e.g. Akamai for static content hosting for some use-
> cases, in addition to using CloudFront for other use-cases

I find this pretty surprising. Do you know the reason?

~~~
jcrites
I don't actually know the reason. I'll see if I can find out and whether it's
appropriate to share. It's possible that it's a redundancy thing (have
multiple providers so we stay up if one goes down), a performance thing, or it
could be a features thing. I don't know.

I will note that what Akamai is trying to do: serve static content extremely
quickly from locations close to all customers, is a bit different from what
the typical AWS services and AWS region are trying to do. Akamai probably
wants to cache identical content all over the world, in boxes that I would
expect to be present within the network of many different ISPs (just like
Netflix does to serve its video [1]).

In Oct 2019, CloudFront announced that they had 200 different points of
presence (POPS) around the globe [2]. I don't know exactly how to compare
Akamai to CloudFront, but Akamai claims to have POPs in over 130 countries and
in 1,700 networks [3]. Akamai was founded only four years after Amazon and has
been focused on content distribution since then. Just like a company can't
snap their fingers and have Amazon's retail logistics presence, AWS can't snap
its fingers and have CloudFront POPs in every country/network/ISP where Amazon
Retail needs good performance. The answer may be that they're still catching
up.

I'm completely I'm speculating though, and don't have any knowledge about this
beyond the public research that I linked to.

[1] [https://openconnect.netflix.com/en/](https://openconnect.netflix.com/en/)

[2] [https://aws.amazon.com/blogs/aws/200-amazon-cloudfront-
point...](https://aws.amazon.com/blogs/aws/200-amazon-cloudfront-points-of-
presence-price-reduction/)

[3] [https://www.akamai.com/us/en/resources/visualizing-
akamai/me...](https://www.akamai.com/us/en/resources/visualizing-akamai/media-
delivery-map.jsp)

------
mbesto
Profit can be a really weird number, especially when it comes to data centers.
So looking at pure earning statements numbers is likely going to be misleading
no matter how you try to look at (unless you actually look at bank statements,
you can create as many interpretations as you want).

First, data centers require A LOT of upfront capital. This capital is then
capitalized over years, which is how it ultimately affects "profit". So
depending on the capitalization schedule, how much they are investing in
future growth, etc. will all affect this number. It's why, in short, Bezo's
doesn't ever look at these numbers, but instead free cash flow (FCF).

“Percentage margins are not one of the things we are seeking to optimize. It’s
the absolute dollar free cash flow per share that you want to maximize, and if
you can do that by lowering margins, we would do that. So if you could take
the free cash flow, that’s something that investors can spend. Investors can’t
spend percentage margins.”[0]

So, the real metric to look at is the FCF/DCF generated by AWS. If we had that
number, I think you could basically conclude that it's "printing money".

[0] - [https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-
fr...](https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-from-jeff-
bezos/)

~~~
rb808
"printing money" yes today, but if GCP/Azure or something else comes in and
competes heavily the margins could easily shrink to something negative.

~~~
vl
There are so few clouds, that it doesn’t work like this. When I saw it first
hand the way it was done is prices were set to match competition. Occasionally
somebody would reduce the prices, and others would match it. Since offerings
are not exactly the same, there are variations, but overall for basic services
like VMs and storage neither cloud will give you significant advantage in
price.

------
swyx
I'm not sure if this helps or hurts Tim's assertions (not mentioned in this
piece, but from context he wants AWS to be spun off into a separate company).
if AWS' share is so high, would AMZN shareholders approve a spinoff? does it
matter since they get ownership of new-AWS anyway? unclear

whatever it is I think Tim has a research agenda here and we shouldn't be
surprised to see him come up with a more forceful blogpost on the topic soon.

~~~
biggestdecision
But also, what synergy do the tech giant and retail giant parts of Amazon
have?

If the two parts of the business don't really gel, what's the benefit of
keeping them together in one company?

~~~
jkingsbery
(I'm an engineer at Amazon, but I don't speak on behalf of the company, I'm
just sharing my experience)

Here are a few different ways that AWS and Retail interact:

1\. The obvious that everyone knows: Retail uses AWS's products, providing
feedback and ideas for new services and features.

2\. Employee transfers: it's quite common for people to move between Retail
and AWS and vice versa, and they bring what they learned in one org to their
new org, helping to spread information about best practices.

3\. Other employee knowledge transfers: I've personally benefited from
engineers in AWS sharing their knowledge about general engineering topics on
internal interest mailing lists or through tech talks.

4\. Best practices: there are some differences, but AWS and Retail operate
similarly in many ways: use of 6-pagers for sharing ideas
([https://www.linkedin.com/pulse/beauty-amazons-6-pager-
brad-p...](https://www.linkedin.com/pulse/beauty-amazons-6-pager-brad-
porter/)), weekly review of metrics, hiring tools and practices being just a
few examples.

~~~
scarface74
This is all a Devils Advocate post. I have no reason to complain about my
(future) compensation. Working in the consulting division allowed me to make
$BigTech money as an “Enterprise Developer” without studying a single
algorithm, and being able to work completely remote from a low cost of living
area....

As a soon to be employee on the AWS side and speaking very selfishly, I could
see it benefiting AWS employees tremendously being separate from the low
margin retail side. They would probably have benefits and compensation more in
line with the other BigTech companies.

Employees at AWS definitely wouldn’t be as limited in what they can contribute
to their 401K because they are considered Highly Compensated Employees and the
contribution rate is weighed down by factory workers.

------
orf
> So, if this graph is right, then over the last couple of years, somewhere
> between 50% and 80% of Amazon’s profit has been due to AWS.

~~~
rvz
Which Amazon has thanked _almost_ everyone and their grocery stores for
jumping on their bandwagon and spending nearly all their VC money on these
services.

Those without any significant revenues will have a hard-time paying up that
huge AWS bill if they dared to use K8s or auto-scaling features. I would not
want to look at the balance sheet of a companies accounts or quarterly
earnings if they cannot generate lots of revenue to pay that AWS bill.

~~~
echelon
Under these circumstances, how is AWS lock-in and cost escalation any
different from Oracle of the past?

Why would any startup shackle themselves to AWS or any cloud when it's not
portable?

Lambdas, in particular, seem like the worst idea in the history of ideas. Once
your org adopts them, how do you keep track of these mysterious, business-
critical pieces of functionality? How do you ever plan to port them to
something else? It seems like you become an Amazon customer forever.

I am incredibly skeptical of cloud at this point. If the other infrastructure
and platform concerns of OS upgrades, patches, etc. were handled in an
automated way, I'd strongly consider running Kubernetes on bare metal. Data
centers and colocation all the way.

I'm eager for self-management of k8s, DBs, Redis, etc. to be automated with
tooling. On-prem, but easy to maintain.

edit: wow, from +3 to 0 after an hour. I maintain that I articulated my
opinion well in an unbiased way.

~~~
jfim
> Why would any startup shackle themselves to AWS or any cloud when it's not
> portable?

Depending on the startup, that may make sense if it allows for fast iteration.

If a startup is trying to achieve product market fit, having a huge AWS bill
is a good problem to have, since it means the product is actually successful.

~~~
ezeev
If you're building on AWS properly, your usage scales with demand. So a huge
bill should mean you have huge demand.

~~~
dx034
Only servers used for client requests. Dev and integration environments but
esp data crunching can be a lot more expensive than serving web requests. And
they're hard to keep cheap if you scaling is easy.

------
julianeon
50 years from now, historians will say...

Amazon's online store was basically an incubator that allowed the company to
pivot to its real profit center: virtualized online services for startups and
companies seeking to move to the cloud.

~~~
hangonhn
Or that AWS reduced the cost of its retail operations (no store, no real
estate, no staff, etc.) so dramatically that it drove out nearly all its
competitors that it became the universal intermediary between buyers and
sellers. The profits from its retail operations allowed it to reinvest in its
data centers that it achieved ever greater economies of scale. The two arms of
Amazon were synergistic.

------
askjdlkasdjsd
To anyone who wants to learn more I highly recommend
[https://www.profgalloway.com](https://www.profgalloway.com) \- Basically a
bunch of idealogy around why the big four need to be broken up.

------
legitster
This drives me mad. I have no idea why Amazon even bothers with the retail
side. It barely pays for itself, they are already the biggest player by a
mile, and there is no horizon in which economies of scale start paying off
(the uptick of demand from Covid probably _lost_ them money!)

The only thing that makes sense to me is some political long play. The Amazon
retail operation employs a lot more people in a lot more places than just the
coast. I think leadership has realized they need to be seen as a job creator
by politicians in order to join the "big boy industry" club. Which is why
Amazon doesn't mind paying their warehouse workers more than all the other
guys.

To that end, the Amazon.com is just a giant, self-funded employment program
designed to make Amazon a bigger company.

~~~
crazygringo
> _It barely pays for itself_

Because they're constantly reinvesting for even bigger economies of scale.

All investors are well aware that Amazon can start turning on major retail
profits at any time it chooses.

But the more it grows first, the more entrenched it is, the fewer competitors
remain, and the even larger those future profits will be.

Seeing as AMZN's stock price has increased roughly 25% since COVID started, it
doesn't seem like investors think it "probably lost them money".

You don't seem to actually understand Amazon's business model at all, so
please don't get too mad about it. :)

~~~
legitster
"Constantly reinvesting for even bigger economies of scale."

This may have made sense 5 years ago, but this doesn't make sense when their
margins have only gotten lower and their number one expense is employees,
which is a marginal cost. They are well into the "diseconomies of scale"
territory. And there are more competitors now then when they started!

> You don't seem to actually understand Amazon's business model at all

Source: I have worked in and out of the Amazon ecosystem for 5 years.

~~~
notyourwork
> Source: I have worked in and out of the Amazon ecosystem for 5 years.

In and out of Amazon or Amazon's eco-system. You should qualify this as they
are very different perspectives.

