The Rise of AWS

Amazon Web Services (AWS) provide IT infrastructure platforms to hundreds of thousands of businesses in more than 190 countries around the world. AWS is the leader of the cloud infrastructure services market, possessing 33% of the worldwide market share. The success of AWS can be attributed to specific advantages related to the AWS history, architecture, and cost.

Amazon formally launched AWS in 2002 as a free service that allowed companies to incorporate Amazon.com features on their own websites. In 2006 AWS formally launched with its first cloud products, enabling businesses to build their own applications using Amazon’s infrastructure. In 2008–2009 Google and Microsoft entered the cloud services market, trailing AWS as the market leader. In 2009, AWS launched its Virtual Private Cloud service offering, giving customers and companies private, self-contained partitions of AWS datacenters. In 2012, AWS hosted its first developer conference, highlighting the growth of its user community. In 2013, AWS launched data warehousing services, and won a $600 million contract to build a private cloud for the CIA. In 2014, AWS achieved revenues of $4.6 billion. In 2016, AWS expanded its infrastructure internationally, and later posted revenues of $12.2 billion. In 2018 AWS expanded its service offerings to include on-premise hybrid cloud products. In 2019 AWS revenue reached $27.5 billion.

AWS was an early entrant into the cloud infrastructure services market. As a result, they reaped the benefits of higher returns and survival rates. AWS has benefited from brand loyalty by shaping customer expectations about the technology’s form, features, pricing and other characteristics. They benefit from technological leadership by making it difficult for competitors through patents, copyrights, and unique first mover capabilities. As an early entrant, AWS has also benefited from expensive buyer switching costs (i.e., the initial cost of the acquiring the IaaS services, complements purchased for the technology, time spent becoming familiar with the operation of the technology, etc.). Once customers construct their IT infrastructures using AWS, it becomes increasingly difficult and expensive to switch to any other competitor services down the road. The history of AWS has attributed to its success.

The AWS infrastructure has been architected to be one of the most flexible and secure cloud computing environments available today. It is designed to provide an extremely scalable, highly reliable platform that enables customers to deploy applications and data quickly and securely. (Amazon Web Services, Inc. Jan 2020a) The AWS IaaS is comprised of Regions, Availability Zones, and Services. 23 AWS Regions are distributed around the world. Regions vary based on proximity, cost, services offered, Service Level Agreement (SLA), and regional regulatory compliance. Each region is isolated from other regions, providing fault tolerance. Availability Zones (AZ) are logical building blocks that makes up an AWS Region. There are 69 availability zones; each region has multiple AZs that provide data backup and redundancy functionality.

Within each Availability Zone, AWS offers three classes of Amazon Elastic Compute Cloud (EC2) instances; On-Demand, Reserve, and Spot instances. EC2 is a web service that provides secure, resizable compute capacity in the cloud. With On-Demand EC2 instances, customers pay for compute capacity by the hour with no long-term commitments. Customers can increase or decrease compute capacity depending on the demands of there application and only pay the specified hourly rate for the instances they use. The use of On-Demand instances frees customers from the costs and complexities of planning, purchasing, and maintaining hardware and transforms what are commonly large fixed costs into much smaller variable costs. On-Demand instances also remove the need to buy “safety net” capacity to handle periodic traffic spikes. On demand instances are recommended for applications with short-term workloads (such as a four-month project) that spike periodically, or unpredictable workloads that can’t be interrupted. On demand instances are also suitable for workloads such as development and test environments, which run longer than a block of Spot Instances and are often shorter than the time required for application of a Reserved Instance. (Amazon Web Services, Inc. Jul 2018) Reserve instances provide customers with a significant discount (up to 75%) compared to On-Demand instance pricing. Customers have the flexibility to change operating system types and tenancies while benefitting from Reserved Instance pricing. Spot Instances are available at up to a 90% discount compared to On-Demand prices and let customers take advantage of unused EC2 capacity in the AWS Cloud. Customers can significantly reduce the cost of running their applications, grow their application’s compute capacity and throughput for the same budget, and enable new types of cloud computing applications. (Amazon Web Services, Inc. Jan 2020b)

Within each EC2 instance, AWS offers a variety of tools and services for customers to build their infrastructures according to industry best practices. AWS offers the Trusted Advisor services which is an online tool that acts like a customized cloud expert, helping customers configure their resources to follow best practices. Trusted Advisor inspects customer AWS environments to help close security gaps, and finds opportunities to save money, improve system performance, and increase reliability. (Amazon Web Services, Inc. Jan 2020a) AWS also offers the AWS Device Qualification Program to help customers select hardware/software components that have been designed and tested for AWS interoperability. Qualified components can get customers to market faster and reduce operational friction. (Amazon Web Services, Inc. Dec 2019a)

AWS infrastructure tools and services fall into the following categories: Computing & Network, Security, Storage and Content Delivery, Management, and Application services. Computer and Network services include the Elastic Compute Cloud (EC2), which is a resizable compute capability that allows clients to obtain and configure virtual servers; Lambda, which is a compute platform for back-end web development; Load-Balancing, which distributes incoming application traffic across multiple EC2 instances; Elastic Beanstalk, which is a web app cloud migration tool that manages resource provisioning, load balancing, auto scaling and monitoring; Virtual Private Cloud (VPC), which provisions logically isolated sections of the AWS cloud where specific resources can be defined (e.g. IP ranges, subnets, route tables, network gateways, etc.); Direct Connect, which establishes dedicated network connection from on-prem hardware and software to AWS instances; and Route 53, which is a scalable Domain Name System (DNS).

Storage and Content Delivery services include Simple Storage Service (S3), which is virtual storage of any object type for backup, recovery, nearline archive, analytics, applications and distribution; Glacier, which is a storage service for long-term backup; Elastic Block Store, which is persistent block-level storage volumes for use with EC2 instances; Storage Gateway, which integrates on-premise SW applications with cloud-based storage; and CloudFront, which is a content delivery web service. Database types include relational, NoSQL and Caching. Analytic services include Real-Time, Data Warehouses and Data Workflows. Application services include queuing, orchestration, app streaming, transcoding, email, and search. Deployment and Management services include containers, DevOps tools, resource templates, usage tracking, and monitoring/logging.

Security and Identity services include Identity and Access Management (IAM) and Key Management Services (KMS) that create and control encryption keys; Directory Services that integrates on or off-premise Active Directory; Certificate Manager that manages SSL/TLS certificates, and Web Application Firewall (WAF) that allows and blocks designated web traffic to web applications using customizable security rules. In AWS Regions, DDoS attacks are detected by a system that automatically baselines traffic, identifies anomalies, and, as necessary, creates mitigations. This mitigation system provides protection against many common infrastructure layer attacks. AWS Shield Standard defends against most common, frequently occurring network and transport layer DDoS attacks that target web site or applications. This is offered on all AWS services and in every AWS Region, at no additional cost. There is no charge for inbound data transfer on AWS and customers do not pay for DDoS attack traffic that is mitigated by AWS Shield. (Amazon Web Services, Inc. Dec 2019b) AWS operates under a shared security responsibility model, where AWS is responsible for the security of the underlying cloud infrastructure and customers are responsible for securing workloads deployed in AWS. (Amazon Web Services, Inc. Jan 2020a) AWS operates, manages and controls the components from the host operating system and virtualization layer down to the physical security of the facilities in which the service operates. AWS helps relieve customer burden of operating security controls by managing those controls associated with the physical infrastructure deployed in the AWS environment that may previously have been managed by the customer. (Amazon Web Services, Inc. May 2017) AWS computing environments are continuously audited, with certifications from accreditation bodies across geographies and verticals, including SOC 1/SSAE 16/ISAE 3402 (formerly SAS 70), SOC 2, SOC 3, ISO 9001 / ISO 27001, FedRAMP, DoD SRG, and PCI DSS Level 1. (Amazon Web Services, Inc. Jan 2020a) The customer assumes responsibility and management of the guest operating system (including updates and security patches), other associated application software as well as the configuration of the AWS provided security group firewall.

AWS IaaS allows for dynamic scaling of resource capacity as demand increases, allowing business to expand their technical infrastructures quicker and cheaper. AWS Auto Scaling allows customers to scale components in their architecture, and automatically increase the number of resources during demand spikes to maintain performance, and decrease capacity when demand subsides to reduce costs. Auto Scaling is triggered using scaling plans that include policies that define how to scale (manual, schedule, and demand) and the dashboards and alarms to monitor those metrics. (Amazon Web Services, Inc. Jul 2018)

The cost of using AWS resources is cheaper than the cost of maintaining traditional on-premise technical resources because IaaS expenses focus on the consumption of resources, not maintaining hardware. AWS offers customers tools to verify this cost savings benefit. The AWS Cost and Usage Report tracks AWS customer usage and provides estimated charges associated with that usage. Customers can configure this report to present the data hourly or daily. It is updated at least once a day until it is finalized at the end of the billing period. The AWS Cost and Usage Report gives customers the most granular insight possible into their costs and usage, and it is the source of truth for the billing pipeline. It can be used to develop advanced custom metrics using business intelligence, data analytics, and third-party cost optimization tools. (Amazon Web Services, Inc. Mar 2018b) The AWS Budgets tool sets custom budgets that trigger alerts when cost or usage exceed (or is forecasted to exceed) a budgeted amount. Budgets can be set based on tags and accounts as well as resource types. The EC2 Right Sizing tool analyzes EC2 instance utilization data and receives reporting recommendations for right sizing EC2 instances. The tool recommends instances that better match customer usage. The Cost Optimization Monitor tool automatically processes detailed billing reports to get granular metrics that can be searched, analyzed, and visualized in a customizable dashboard. (Amazon Web Services, Inc. (Mar 2018a)

The various pricing options of AWS instance types and services lower the Total Cost of Operation (TCO) of IT infrastructures for AWS customers worldwide. TCO can be calculated by analyzing costs related to labor, network, capacity, availability, power, servers, and space; i.e., how much is spent on maintaining an IT environment, how much bandwidth is needed, what network gear is needed; the cost of overprovisioning for peak capacity, less capacity, and anticipating next year’s capacity needs. TCO encompasses disaster recovery, average and peak power utility bills, cooling/HVAC costs, and parallel redundancy power costs; average server utilization, the cost of overprovisioning for peak loads; and data center space and lease expiration costs. (Amazon Web Services, Inc. Feb 2017) AWS losers the TCO of IT infrastructures for customers all over the world.

AWS allows customers to pay as they go, pay for what they use, pay less as they use more, and pay even less when they reserve capacity. (Amazon Web Services, Inc. Jun 2018) By paying for services on an as-needed basis, customers can redirect their focus to innovation and invention, reducing procurement complexity and enabling their business to be fully elastic. IT infrastructure costs are traditionally tied to a quarterly or yearly hardware procurement investment. IT purchases are typically funded for a few big purchases that are typically overprovisioned as a result of planning up front for spikes in usage. The traditional funding models makes it difficult to quickly test new ideas. Traditional IT infrastructure teams either architect within the limitations of existing investments or request the deployment of additional, capital-intensive resources that were often spread across many projects and organizations. (Amazon Web Services, Inc. Mar 2018a) AWS IaaS allows resources to be spun up and down as new services are designed and then decommissioned. AWS IaaS replaces upfront capital infrastructure expenses with low variable costs that scale with customer businesses. AWS grants customers the ability to try out new services without investing in large upfront, sunk costs (costs that have already been incurred and can’t be recovered). (Amazon Web Services, Inc. Feb 2017) With AWS IaaS, businesses no longer need to plan for and procure servers and other IT infrastructure weeks or months in advance. Instead, they can instantly spin up hundreds or thousands of servers in minutes and deliver results faster. (Amazon Web Services, Inc. Jan 2020b) AWS customers don’t pay for IaaS services when they’re not running. By turning off instances not in use, customers can reduce costs by 70 percent or more compared to using them 24/7. This enables customers to be cost-efficient and, at the same time, have all the power they need when workloads are active. (Amazon Web Services, Inc. Jun 2018) AWS IaaS grants customers the flexibility to initialize resources and services at any time and pay only for what they use. (Amazon Web Services, Inc. Mar 2018b)

Amazon revolutionized the cloud service provider (CSP) market. They performed their own research and development, and reaped the benefits of increased sales growth rates, sales from new products, and profitability. They did not collaborate with other firms for this product; they did not risk partner malfeasance, nor did they have to share control or rewards. Due to the complexity of the IaaS product, Amazon had to use multiple sources of information and ideas in order to create a profitable innovation. As a well-established firm, Amazon independently developed the IaaS technology and laid claim on the dominant design of that technology. The AWS IaaS dominant design commands the majority of the CSP market share because it bundles together a combination of features that best fulfill the demands of the majority of the market. AWS profits can be attributed to increasing returns to adoption (i.e., learning effects, and network externalities). The more a AWS IaaS is used/adopted, the more it is developed and the more effective/efficient/valuable it becomes. As the AWS IaaS technology is used, greater knowledge and understanding of the technology accrue, which may then enable improvements both in the technology itself and in its applications. The increasing returns of adoption of AWS IaaS are also a biproduct of network externalities, i.e. positive consumption externalities. The benefits from using AWS increases with the number of AWS users. By using AWS, customers achieve a lower variable cost than they can get on their own. Because usage from hundreds of thousands of customers is aggregated in the cloud, AWS can achieve higher economies of scale, which translates into lower pay as-you-go prices. (Amazon Web Services, Inc. Jan 2020b)

AWS’s strength includes its activities that contribute to the overall value produced by Amazon, i.e. inbound logistics, operations, outbound logistics, marketing and sales, service, procurement, human resource management, technology development, and infrastructure. Amazon’s competitive advantage is it’s ability to cohesively leverage all its resources around a unified vision that is difficult for competitors to imitate. Amazon will continue to increase the overall value its IaaS platform by continuing to provide complementary goods; i.e. additional goods, peripheral devices and services that enable or enhance the value of Amazon’s technologies. Amazon will continue to build coalitions around their IaaS platform and address customer and merchant concerns, such as accessibility, convenience, risk, fraud, ubiquity, and cost. In 2019 AWS partnered with VMWare and launched Outposts servers, which are pre-configured on-premise servers delivered to customer datacenters to run AWS applications in a cloud-native manner. Outpost servers extend AWS into customer data centers and edge environments for the first time.

Despite its past success and positive outlook, the future progress and profitability of AWS can fall victim to incumbent inertia. Moving forward, competitors may be able to benefit from R&D investment of AWS, fine-tune the technology to customer needs as the market becomes more certain, avoid any mistakes made by AWS, and adopt new and more efficient production processes. AWS must avoid the tendency of first movers to be slow to respond to changes in the industry environment due to their large size, established routines, or prior strategic commitments to existing suppliers and customers.

AWS is the leader of the cloud infrastructure services market. This technology provides virtually and physically dedicated hardware, software, and data storage space to customers worldwide. The history, architecture, and cost of this technology have propelled it to the vanguard of the CSP market. AWS was an early entrant in the cloud infrastructure services market, allowing them to possess the dominant design of the IaaS technology. The AWS architecture is designed to enables customers to deploy applications and data quickly, securely, and cost-efficiently. The AWS pricing structure lowers the Total Costs of Operation and operational overhead for customers, compared to traditional data centers. AWS is poised dominate this market for years to come as long as it continues to adopt new and more efficient production processes. The future is bright for this technology.

References

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