Why AWS Won
Next, a few words about AWS. AWS remains the clear cloud infrastructure leader with a significant leadership position with respect to number of customers, size of partner ecosystem, breadth of functionality and the strongest operational performance. These are important factors for why AWS has grown the way it has over the last several years and for why AWS has almost doubled the revenue of any other provider. I've talked to many AWS customers over the years and continue to do so. And while all these factors I mentioned have been big drivers of the business' success, AWS customers tell us that as importantly, they care about the very different customer focus and orientation in AWS may see elsewhere. Andy Jassy, CEO, Q2 2023 Amazon Earnings Call
Over the last few weeks, I've been discussing the competitive positioning between AWS vs Azure. My central point has been that, for cloud infrastructure businesses like AWS, Azure, and GCP, creating an open ecosystem that emphasizes empowering small software businesses to bring their big visions to life over the course of a couple decades will be seen as the long term winning strategy.
I do not believe relentless vertical integration, alongside targeted replication of the best software businesses will yield the largest infrastructure ecosystem long term. Aggressively vertically integrating, aggressively replicating smaller software businesses' winning ideas, aggressively creating a closed-vertically integrated ecosystem may yield decent results in the near term, but, ultimately, the largest public cloud infrastructure business will be built by way of an open, partner-centric, empowering orientation & mindset.
I have contended that Microsoft (MSFT) has been caught in something of an Innovator's Dilemma where it's serving two masters simultaneously:
- 1st Master: Focus on its legacy application software business and cause rapidly growing, smaller software businesses to not want to do their business with Microsoft, leading to lower long run TAM for Azure, or...
- 2nd Master: Focus on its IaaS/PaaS (Azure) business (via creating an open, partner-centric ecosystem) and risk growth stagnation for its legacy application software business.
In some sense, it cannot do both simultaneously, though it has tried, and, to be sure, it's done a great job. I think Microsoft will continue doing so, but I also think there's a reason AWS is nearly twice the size of Azure and it's home to the most dynamic, rapidly growing software businesses on earth.
More than 90% of the startups on the Cloud 100 run their businesses on AWS … These leaders could choose any cloud provider, and they choose AWS. AWS re:Invent in review: Highlights for customers in retail and CPG | Amazon Web Services
And it makes sense: AWS' CEO does not often appear on CNBC vocally touting its software application business that competes with the young 30 something or 40 something year old's software startup. AWS' CEO is not vocally touting its new product that will kill that software startup's growth.
Microsoft is publicly in direct, constant, and intense competition with what could be its best customers long term, who would serve to drive durable long term growth for Azure in the decades ahead.
Here is the Cloud 100 referenced above:
To be sure, in recent years, AWS has begun vertically integrating more and more software products; however, there's a decision that both AWS and Azure must make:
- Further vertically integrate software application businesses to create growth for their software application businesses, or focus on being a partner-centric, open ecosystem that welcomes and empowers the youngest and most innovative software companies to its platform.
In my eyes, the latter orientation is the right path to take, though it requires a bit more of a long term mindset, and the more open platform will likely capture the largest market share of a TAM that could be vastly larger than most appreciate today.
Cloud Infrastructure TAM Could Reach Trillions In The Next 10-20 Years
With all of these ideas in mind, I do not believe AWS has reached its terminal growth rate at 12%, and it's quite possible that it reaccelerates growth into the second half of 2023, especially in light of some of the commentary we received on the Amazon Q2 2023 earnings call.
So again, if we rewind to our last conference call, we had seen 16% AWS revenue growth in Q1, and the growth rates have been dropping during the quarter. And what I mentioned was that April was running about 500 basis points lower than Q1. What we've seen in the quarter is stabilization and you see the final 12% growth. I will stop for a moment and just put that in perspective. So again, last Q2 last year, we had close to $20 billion of revenue and we grew that $2.4 billion. So that's -- while that is 12%, there's a lot of cost optimization dollars that came out and a lot of new workloads and new customers that went in. So there was -- on our base, it's very large numbers. And when customers start to -- that cost optimization work, they can take some of their spend down for a while as they do that, and we help them do that and been part of our DNA ever since we started AWS. So that's all good. What we're seeing in the quarter is that those cost optimizations, while still going on, are moderating and many maybe behind us in some of our large customers. And now we're seeing more progression into new workloads, new business. So those balanced out in Q2. We're not going to give segment guidance for Q3. But what I would add is that we saw Q2 trends continue into July. So generally feel the business has stabilized, and we're looking forward to the back end of the year. Brian Olsavsky, CFO, Q2 2023 Amazon Earnings Call
To close, I wanted to share a data point with you that I believe is worth monitoring.
Cloud software marketplaces on public clouds, such as AWS or Azure, have been growing rapidly. This will be a trend to monitor in the years and decade ahead:
GMV For 3rd Party Software Marketplaces On AWS, Azure, And GCP
