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How Amazon's strongest business could help it control the future

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About 100 aspiring start-up founders and team members gathered at Amazon's Sydney office on Park Street this week. 

Top venture capitalists such as Blackbird's Samantha Wong and AirTree's James Cameron, and other industry figures, traded war stories and shared their views on the best ways to fund and grow a tech business. 

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Contrary to the narrative that has haunted much of corporate Australia over the past year – that Amazon is finally coming to these shores in the next few months – Amazon is already here, and has been for a while. 

Arguably its most transformative (and certainly its most profitable) business unit – Amazon Web Services – has been up and running in Australia for five years now. It counts many of our best known companies (Qantas, Atlassian and Fairfax Media) as clients. 

The event in Sydney this week provided an insight into AWS, one of the key pillars of Jeff Bezos' $US520 billion ($677 billion) corporate empire, and a critical part of the AWS strategy – it wants to make itself indispensable to the next generation of the world's great companies.  

With an estimated 35 per cent global share of the market it operates in, it is well on the way to achieving that aim.

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AWS provides "cloud computing" services to companies big and small. Its biggest "client", it is often said, is Amazon's own e-commerce operation, the business for which the Seattle giant is best known.

Essentially, AWS allows a firm to rent much of the digital infrastructure it needs to operate (including servers, and the databases and applications that run on them) from one of the world's most successful tech companies. 

AWS services include everything from storage to security and even artificial intelligence capabilities.  

Outsourcing this infrastructure and these functions, rather than trying to build them in-house, frees up resources, which a company can redeploy into more important, value-adding activities. For start-ups, typically losing money as they scale, and sometimes still striving to find a fit between their product and a market, this can be hugely beneficial. 

"You really want to focus on what your business actually does," Chris Sharkey, the chief technology officer of Autopilot, a marketing automation start-up, told me on the sidelines of the event. "Servers and all of that is fun to talk about, but it really doesn't make that much actual difference to your business, unless it goes wrong."

Seductive appeal

The seductive appeal of AWS was perhaps best illustrated when Netflix (a company that prides itself on its technical prowess) migrated the guts of its streaming service from its own infrastructure to Amazon's. 

This is why they are such an extraordinary business – the likes of which we've never seen before.

Andrew Macken, Montaka Global

In Australia, almost all of the discussion surrounding Amazon has centred on its impact on the retail sector. Earlier this week, a federal government minister warned it would "monitor Amazon closely" to ensure it would not rack up losses to undercut competition.

Yet many investment analysts believe AWS is where the real value in Amazon lies.

Since the company started splitting out AWS as a separate entity in its financial results in mid-2014, Amazon shares have more than doubled, easily outpacing the broader US market. Its most recent financial results explain why. 

Last quarter, AWS generated $US2.98 billion in operating income, more than double the profit generated by Amazon's US retail operations, and completely offsetting the losses it generated from retail in international markets. 

But AWS' growing dominance has created some unease. 

For example, Chamath Palihapitiya, a respected start-up investor who runs venture fund Social Capital, has described AWS as a "tax on the compute economy" (which is somewhat ironic since Amazon itself doesn't pay much tax). 

He argues Amazon's e-commerce business was really just a way of "dog fooding" their real raison d'etre: AWS.  

Start-ups are an important customer cohort for AWS. The company estimates that 42 of Australia's top 50 tech companies use AWS.

Amazon courts emerging tech firms with generous credits for AWS services, which can total thousands of dollars. These grants helped Autopilot relocate many of its operations from San Francisco to Sydney, Sharkey says. 

The rise of AWS has helped underpin the start-up boom under way here and around the world. Due in no small part to AWS, it is now cheaper and easier to build a global business than ever before. 

But it also means Amazon's technology is embedded into the beating heart of more and more companies, including existing competitors (like Netflix) and start-ups that, in theory, might eventually pose a threat to its dominance. 

Does this mean AWS could be a trojan horse for Amazon to stifle its competitors? Or rather, that it has a vested interest in the long-term health and success of its customers? 

"I think AWS makes Amazon an effective shareholder in every business that sits on its platform," says Andrew Macken, a portfolio manager at Montaka Global, which holds Amazon shares. "This is why they are such an extraordinary business – the likes of which we've never seen before."

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