Amazon Web Services – the giant of cloud computing – is on track to do $10 Billion in revenue this year. Yet, rumors swirl that Apple may take a huge chunk of business away from them and Dropbox has definitely left AWS. Is something wrong at AWS? Wait, Salesforce.com (SFDC) – the granddaddy of applications in the cloud – and AWS just announced a strategic relationship where SFDC plans to run its entire suite of services in AWS. What does this tell us about the market? Should you be concerned if your company uses or plans to use AWS?
Many folks thought that AWS was a money loser or maybe just a break even venture for Amazon until it was broken out separately in the parent company’s financials. The scales fell from our eyes. It turned out that not only was it a behemoth, it was a very profitable behemoth powering a great deal of Amazon’s overall bottom line. Its latest operating margin is about 29% or a whopping $687 Million in the last quarter. If you are a big customer of AWS that margin is coming out of your pocket.
The rumors swirling around Apple and the actual departure of Dropbox has a lot to do with that extra margin that they could keep. While this makes straightforward economic sense it is not for the faint hearted. There are two big challenges.
First, building and operating a cloud platform at anywhere near the efficiency of AWS requires scale – you have got to be big and be able to manage that. Dropbox manages to do both. It is one of the largest file sharing offerings in the world so it has scale. The people who designed the new Dropbox cloud came from Google. So they had been to the movie before and knew what they were getting into.
Second, there is the risk that you won’t be able to maintain your scale. This is what Zynga faced when it too left AWS for its own cloud only to have to return when its business prospects dimmed and there wasn’t enough demand to justify doing it in house. To some extent, Dropbox faces a similar risk as AWS itself, Microsoft, Apple and others encroach on Dropbox’s offerings with their own.
So much for the traditional Economics 101 on vertical integration to capture the margins of your suppliers in order to enhance your own – what is going on with the Salesforce deal? More economics and a little quid pro quo is the answer. In announcing the expanded relationship Salesforce pointed to using AWS for its international expansion and that all of Amazon has adopted the Salesforce offering suite across its operations.
Only 20% of SFDC’s revenues come from outside the US. That is not small but it is fragmented by the various country and regional privacy and data location requirements. These mandate cloud providers data centers must be resident in country. Salesforce’s business in any one country is just not big enough to meet the scale needed to justify the investment. Meanwhile AWS has been building out new data centers at a very strong clip just to meet these requirements. All in all it’s a good complementary relationship. Plus SFDC gets the Amazon mothership as a client.
Cloud is the new foundation for the digitization of our lives. Companies are increasingly turning to it and AWS’s growth prospects continue to shine. There is little worry that it is going away anytime soon. You can do cloud yourself but only if you have the massive scale and talent to make it work. Otherwise, think about using a public cloud provider. Even somebody like Salesforce, who pioneered Software as a Service, ran the numbers and concluded it made more sense to go with AWS internationally.
By John Pienka
(Originally published June, 9th, 2016. You can periodically read John’s syndicated articles here on CloudTweaks. Contact us for more information on these new programs)