AWS Earnings Validate Hybrid IT’s Staying Power
When Amazon revealed its much-conjectured earnings and growth for its public cloud service, Amazon Web Services (AWS), it disclosed some surprising information in its quarterly earnings report. Indeed, AWS pulled in a significant profit, boasting a 16.9 percent operating margin and surpassing the $5-billion revenue mark for the prior 12 months.
Amazon’s strong operating margin for AWS confirms what ScienceLogic Commercial has known for quite a while: The public cloud business is not only growing but is actually accelerating at a rapid pace. AWS is seemingly leading the IaaS pack in regards to mindshare and revenue. It's got a secret sauce and isn't afraid to use it.
Not only does AWS see significant revenue gains; it also has a positive operating income. To help put this in perspective, analyst firm Structure Research took a comparative look at Rackspace, a successful managed hosting provider turned cloud service provider (CSP). In 2014, Rackspace generated $1.79 billion in revenue with an operating income of $163.5 million, which works out to an operating margin of 9.1 percent. CSPs have long discussed avoiding price wars with AWS, and now we see validation points for such a position.
How did AWS manage to achieve such low margins and high success rates? That’s the million – or multi-million in this case – dollar question. The answer, in part, can be found in the annals of AWS’ history.
In the beginning, AWS constructed a resource pool of infrastructure so large and so convenient that it created the perception of limitless storage and compute. This perception helped establish the first web-scale service offering, which ultimately defined a “cloud service.”
AWS successfully pioneered the web-scale service offering because Amazon was large enough to subsidize the cost of building this service without sensitivity to over- and under-provisioning. Without that weight on its shoulders, AWS could fluidly scale service and pricing offerings as its customer base transformed from short-term renters to long-term tenants.
The key to AWS' success may have been as simple as a fresh perspective. AWS and its employees saw the market – and its challenges –through a new lens. The industry presented different problems and AWS' vantage point allowed it to create a new set of tools that could solve these problems and identify areas of opportunity at a rate that outpaced nearly every legacy solutions provider. Because of this, AWS smoothed out its churn, increased customer stickiness, and can drive every penny of profit back into the business to increase efficiency and scale. AWS’ success catalyzes the need for CIOs to take a good, hard look at their current infrastructure and develop a strategy to distribute workloads across a hybrid IT environment sooner rather than later.
Problems and Solutions
Every time an enterprise IT department had to deploy a new application, or needed to refactor or revamp legacy business workloads, it took weeks, if not months of planning, procurement red-tape and provisioning cycles, and rarely was the ability to project IT and network capacity requirements accurate. As a result enterprises typically suffered from over-provisioning (cost inefficiencies) or under-provisioning (for performance degradation). The latter extreme was more common. AWS intended to forge a resource pool of infrastructure that was so large and conveniently available that it created the perception of limitless storage and compute; in short, the first web-scale service offering. In doing this, AWS effectively defined what a cloud service is, and made the bar very hard to meet.
As enterprise IT teams sought faster and more convenient options for test and dev workloads, as well as staging, they began exploring the hosting world that SMBs had used for years. Large organizations were afraid of being locked into new outsourced vendor fabrics and cookie cutter schemas. To address this, AWS developed a utility-like cloud computing resource paid for by the hour that disrupted the hosting and IT markets. Initially, it seemed an inexpensive offering for DevOps guys with short-term compute and storage needs. However, as organizations began considering it as a longer-term solution, it quickly became costly. AWS responded by readjusting pricing levels, and adding more tools to the resources they made available. AWS wanted to go from being viewed as a framework for development to a giant box of useful and convenient tools for developers to use as needed.
Fast forward a decade, and the enterprise market is moving from tactical use-cases for test and dev plus staging to full-scale production environments. That initial churn-happy, loyalty-free customer base is converting to a stickier, steadier flow of enterprise workloads, with much heavier demands on optimizing resources per workload. Rather than creating a rigid technology fabric, AWS facilitates a marketplace and ecosystem of partners to give customers a choice of tools and easily consumable enterprise-grade services. Options range from general-purpose micro EC2 instances (such as the t2.micro) to large storage optimized instances (such as the d2.8xlarge instances) and graphics specialized instances (GPU instances), optimized for whichever workload or IO requirements the enterprise needs.
Many businesses increasingly must comply with any combination of regulations like HIPAA, SOX, PCI-DSS, and FISMA. The average business does not employ specialist security officers, let alone compliance specialists. In addition, few service providers wanted the liability of taking on the full responsibility for compliance.
AWS offers shared responsibility for anything hosted on its infrastructure. The company created assurance programs ranging from HIPAA and FERPA through to FedRamp and FISMA compliance. Similarly AWS promises to continue ramping not just certification, but service development on all these fronts. For example, it formed AWS CloudHSM to help meet corporate, contractual, and regulatory compliance requirements for data security by allowing things such as encryption key controls by the consuming company itself. AWS CloudTrail is a web service that records all aspects of AWS API calls, making it available for compliance auditing.
The earnings report does more than praise Amazon for a job well done; it has seen an impressive 102 percent year-over-year increase in S3 data transfer, and a 93 percent increase in EC2 instance usage compared with the last reported quarter.
The earnings report validates the rapid adoption of public cloud services across organizations, and illustrates the power of leveraging new solutions. AWS is pitching a 90 mph curveball at traditional IT ecosystems, and you do not want to swing and miss leveraging this new wave of technology.
About the Author:
Antonio Piraino is chief technology officer at ScienceLogic. Previously, he was vice president and research director at Tier1Research, a division of the 451 Group, where he focused on managed services and cloud computing. Following a decade in the Internet sector, he was made a member of The Society of Industry Professionals. He is a regular speaker at managed hosting, virtualization and cloud computing conferences.