How Amazon AWS Got Started

How Amazon AWS Got Started: From 2006 to 2018, Dan Rose was a critical part of the Facebook (FB) executive team. As the Vice President of Partnerships, many credit Rose as the driving force behind Facebook’s growth into the social media giant it is today. However, Rose didn’t get his start with Mark Zuckerberg.

Before joining Facebook, Rose helped Amazon through a key period – the sudden collapse of the dot-com bubble. He was the first person named to the then-new Kindle team, and he had a front-row seat as Amazon (AMZN) transformed data center technology forever. 

As Rose tells it, the story behind Amazon Web Services, better known as AWS, is the stuff of tech legend. It came about as a Hail Mary during one of Amazon’s darkest times. No one realized AWS would play a key role in the company’s future. 

Since its launch roughly two decades ago, AWS has carved out a large share of the computing cloud market practically by accident. It’s another example of Jeff Bezos’ entrepreneurial mind at work, delivering solutions to problems that consumers didn’t even realize they had. 

Amazon in 2000: An Emerging Online Retailer with Overwhelming Expenses 

Dan Rose started with Amazon in 1999, just before the dot-com bubble burst. When internet stocks crashed in 2000, Amazon was in a difficult spot. Capital markets were lean, and the company was burning through $1 billion per year. Rose explains that as an e-commerce company, Amazon’s biggest expense was its data centers – in this case, costly Sun Microsystems servers. 

At the time, Sun Microsystems was one of the most valuable companies in the world with a market cap of more than $300 billion. Amazon relied on Sun servers, because they were the most reliable in the business.

At the time, Amazon’s biggest concern was site stability – downtime cost sales in an already fragile emerging e-commerce market. The fact that Sun servers cost more than competitors’ was offset by Amazon’s fear of going dark. 

As startup internet companies failed throughout 2000, Sun servers were available for pennies on the dollar. One thought was to buy them up and build an indestructible data center. However, Rose explains, Jeff Bezos decided to go a different way. He was willing to risk everything to eliminate the need for third-party servers altogether. 

Then-Chief Technology Officer Rick Dalzell came up with the idea to transition from Sun Microsystems servers to HP/Linux kernel. It’s worth noting that this was considered a bold, high-risk move at the time. Linux kernel was just six years old. It was released the same year Amazon was born. 

It took more than a year to complete the transition from Sun to HP/Linux. During that time, product development had to pause and no new features launched. It was a shaky period for Amazon. Revenue growth slowed to a crawl and the company had to raise prices to keep cash burn as low as possible. 

Rose says Amazon was within a few quarters of going completely bankrupt, but they couldn’t reverse course. Once the project was underway, the only option was to move forward with the change. 

Everyone pitched in to get the job done, knowing it was a life or death situation for Amazon. If they were successful in making the transition, infrastructure costs would drop by more than 80 percent. If the transition failed, the site would be incapable of functioning, and that would be the end of Amazon. 

The Launch of Amazon Web Services

Given that Amazon’s market cap exceeds $1.5 trillion today, the project clearly succeeded. When the switch flipped, Amazon’s capital expenditures went down immediately. More importantly, the infrastructure that Amazon engineers had developed was infinitely scalable.

The company would have no trouble handling huge surges in web traffic during the holiday season, and the expense of doing so was far lower than it had been with the Sun system. 

Everyone relaxed – for a moment – but then Jeff Bezos came up with a new and even more brilliant plan. Since the server capacity was designed to accommodate the amount of traffic Amazon gets during six peak weeks at the end of the year, there were 46 slower weeks when it would be underutilized. Bezos realized this excess capacity could be rented to other companies, generating a new source of revenue. 

The concept worked, because the company was also in the process of reducing internal dependencies. The adjusted model was capable of delivering siloed infrastructure to outside organizations.

If Bezos’ idea gained traction, he believed it would usher in a new generation of internet companies, as they would no longer be required to build their own data centers to launch their businesses. 

AWS Creates an Infrastructure Revolution 

When Amazon created AWS, there was no cloud computing. This was the first attempt at what is now considered the industry standard. It did more than cement Amazon’s place in the world of technology – it reduced barriers to entry for other entrepreneurs and ushered e-commerce into the mainstream. 

Today, anyone can start an e-commerce business with no experience or expertise in technology. Online retailers are back to being just retailers instead technologically-savvy retailers. Innovators are taking advantage of the easy access to cloud-based infrastructure, and the market for cloud computing is growing at a rapid rate. 

In 2019, the global cloud computing market was valued at approximately $321 billion. It’s expected to rise at a compound annual growth rate (CAGR) of 18 percent, and the total value is projected to be over $1 trillion by 2026. 

Competing with the Tech Giants 

When Jeff Bezos created Amazon, online retailers were – by definition – technology companies, too. By taking Amazon into the cloud computing infrastructure space with AWS, Bezos ensured that Amazon would remain a tech company. Now, Amazon is competing for cloud computing infrastructure market share with two of the world’s most sophisticated tech industry leaders: Microsoft and its Azure product, along with Alphabet and its Google Cloud. 

For the moment, being first on the field with a strong cloud computing infrastructure solution has worked in Amazon’s favor. AWS holds a commanding lead with a 31 percent share of the market. Microsoft Azure is in second place – its share of the market comes in at approximately 20 percent. Google Cloud is quite a bit behind with just 7 percent of market share. 

There is no doubt that AWS will hold onto its lead for years to come. Being first in the industry has its perks. That’s a good thing, because Amazon has come to rely on AWS revenue. For the fourth quarter of 2020, AWS brought in $12.7 billion – an increase of 28 percent over fourth quarter 2019’s $9.95 billion. 

That figure constitutes approximately 10 percent of Amazon’s total fourth quarter revenues, and it makes up 52 percent of the company’s operating income. During the fourth quarter earnings call, Director of Investor Relations Dave Fildes pointed out that AWS’ revenue growth is accelerating. That’s a promising indication that AWS is not in any danger of losing ground to Microsoft Azure or Google Cloud in the near future. 

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