Amazon Web Services (AWS) was a little known, infrequently thought about part of Amazon.com Inc (AMZN) until this year. This year was the first time in the division’s nine year history that Amazon revealed its revenue figures and were the numbers ever shocking. In the first quarter of 2015, AWS brought in over $1.5 billion of revenue, a figure which grew to $1.8 billion the following quarter and to $2 billion in the third quarter. More recently, AWS generated nearly $7.3 billion in operating income in 2018, more than half of Amazon's total.What is AWS and why is it so lucrative and successful for Amazon?

Key Takeaways

  • Amazon is one of the world's most valuable companies, but it does not actually make a majority of its income from selling books and other items.
  • Amazon's main profit driver is Amazon Web Services, or AWS - the company's cloud computing and web hosting business.
  • Amazon controlled more than a third of the cloud market in 2018, more than twice its next closest competitor

What Is AWS Exactly?

AWS is made up of so many different cloud computing products and services. The highly profitable Amazon division provides servers, storage, networking, remote computing, email, mobile development and security. AWS can be broken into two main products: EC2, Amazon’s virtual machine service and S3, Amazon’s storage system. AWS is so large and present in the computing world that it’s now at least 10 times the size of its nearest competitor and hosts popular websites like Netflix Inc (NFLX) and Instagram (Subsidiary of Facebook Inc.: FB).

AWS is divided into 12 global regions, each of which has multiple availability zones in which its servers are located. These serviced regions are divided in order to allow users to set geographical limits on their services (if they so choose), but also to provide security by diversifying the physical locations in which data is held. 

48%

AWS has grown an average of 48% over the three years ending December, 2018, booking nearly $26 billion in sales that year.

Cost Savings

Jeff Bezos has likened AWS to the utility companies of the early 1900s. One hundred years ago, a factory needing electricity would build its own power plant but, once the factories were able to buy electricity from a public utility, the need for pricey private electric plants subsided. AWS is trying to move companies away from physical computing technology and onto the cloud.

Traditionally, companies looking for large amounts of storage would need to physically build a storage space and maintain it. Storing on a cloud could mean signing a pricey contract for a large amount of storage space that the company could “grow into”. Building or buying too little storage could be disastrous if business took off and expensive if it didn’t.

The same applies to computing power. Companies which experience surge traffic would traditionally end up buying loads of power to sustain its business during peak times. On off-peak times—May for tax accountants for example—computing power lays unused, but still costing the firm money.

With AWS, companies pay for what they use. There’s no upfront cost to build a storage system and no need to estimate usage. AWS customers use what they need and their costs are scaled automatically and accordingly.

Scalable and Adaptable

Since AWS’s cost is modified based on the customers’ usage, start-ups and small businesses can see the obvious benefits of using Amazon for their computing needs. In fact, AWS is great for building a business from the bottom as it provides all the tools necessary for companies to start up with the cloud. For existing companies, Amazon provides low-cost migration services so that your existing infrastructure can be seamlessly moved over to AWS.

As a company grows, AWS provides resources to aid in expansion and as the business model allows for flexible usage, customers will never need to spend time thinking about whether or not they need to reexamine their computing usage. In fact, aside from budgetary reasons, companies could realistically “set and forget” all their computing needs. (For more, see: Facebook’s Expansion Into China.)

Security and Reliability

Arguably, AWS is much more secure than a company hosting its own website or storage. AWS currently has dozens of data centers across the globe which are continuously monitored and strictly maintained. The diversification of the data centers ensures that a disaster striking one region doesn’t cause a permanent data loss worldwide. Imagine if Netflix were to have all of their personnel files, their content and their backed-up data centralized on-site on the eve of a hurricane. It would be madness.

In fact, even failing a nature disaster, localizing data in an easily identifiable location and where hundreds of people can realistically obtain access is unwise. AWS has tried to keep their data centers as hidden as possible, locating them in out-of-the-way locations and allowing access only on an essential basis. The data centers and all the data contained therein are safe from intrusions and, with Amazon’s experience in cloud services, outages and potential attacks can be quickly identified and easily remedied, 24 hours a day. The same can’t be said for a small company whose computing is handled by a single IT guy working out of a large office. (For more, see: The First Cloud Computing ETF Is Here.)

The Bottom Line

AWS is a cash cow for Amazon. The services are shaking up the computing world in the same way that Amazon is changing America’s retail space. By pricing its cloud products extremely cheaply, Amazon can provide affordable and scalable services to everyone from the newest start-up to a Fortune 500 company.