A look at the market leader and giant "Amazon AWS

BA 626: Term Project
Himanshu Mahadik (Red ID: 819706999)
1. Company Background
410 Terry Ave. North, Seattle, WA
98109-5210.
Website: https://www.amazon.com/
Amazon is a $107 billion (2015) online global giant,
one of the biggest and quickest growing companies in the world,
serving people in more than 180 countries and more than 270 million people around the

world know Amazon as the “everything store” . Amazon is all set to topple its gigantic
competitor: Walmart, in the coming days and as I write this, in 2015, Amazon surpassed
Walmart as the most valuable retailer in the United States by market capitalization, and
is, as of 2016 Q3, the fourth most valuable public company. It is a large conglomerate of
both related and non-related businesses. Since its initial public offering (IPO) in 1997,
Amazon has acquired a number of smaller companies.
(http://www.investopedia.com/articles/investing/091015/overview-businesses-owned-
amazon.asp#ixzz4R63MYdi7). Amazon has a number of products and services available,
including but not limited to: Amazon Prime, Amazon Web Services, Alexa, Appstore,
Amazon Drive, Echo, Kindle, Fire tablets, Fire TV, Video, Kindle Store, Music, Music
Unlimited, Amazon Digital Game Store and Amazon Wireless.
a. The chosen primary product is “Amazon Web Services” (AWS now accounts
for 56 percent of the company’s entire operating income).
(http://www.digitaltrends.com/web/amazon-earnings-report-q2-
2016/#ixzz4R6AA1AV1)
c. Business Type: Retail Trade
Primary SIC Code: 5961 - Catalog and Mail-Order Houses
Primary NAICS Code: 454113 - Mail-Order Houses
2. Market Definition:
a. Product Dimension
To understand Amazon’s product dimensions, we need to first understand its multiple
lines of Business: Amazon segregates its lines of business in terms of product sales,

service sales, AWS, fulfillment, publishing, digital content subscriptions, advertising, and
co-branded credit cards. We will try and simplify these lines of businesses as 1) online
retail, 2) internet services, and 3) the Kindle ecosystem.
And we will focus on AWS (Amazon Web Services) in this paper. Originally developed
as a side business, Amazon decided to lease out its own server space to other small and
big companies and individuals, in exchange to a small service fee to its customers. While
not a core part of the company's strategy, Amazon found itself managing a large number
of servers and internet services in the coming months. Within Cloud Computing, this is
popularly called PaaS(Platform as a Service) and IaaS ( Infrastructure as a service) .It is
a category of cloud computing services that provides a platform allowing customers to

develop, run and manage Web applications without the complexity of building and
maintaining the infrastructure typically associated with developing and launching an app.
The reason why we choose AWS in this paper, as Amazon’s primary product: The
operating income for A.W.S. more than tripled in the quarter to $604 million. The profits
from A.W.S. represented 56 percent of Amazon's total operating income
(http://www.nytimes.com/2016/04/29/technology/amazon-q1-earnings.html)
Further, below we can see Amazon’s YoY Revenue growth as compared to AWS YoY
Revenue Growth. Also, the major competitors of Amazon AWS are Verizon Cloud
Compute, Google Compute Engine, IBM Soft Layer and Microsoft Azure. However there
are others like Joyent, Rackspace and Century Link as well.
http://investorplace.com/2016/05/aws-growth-amazon-amzn-stock/#.WEImGvkrLIV
b. Geographic Dimension :

The AWS Cloud operates 38 Availability Zones within 14 geographic Regions
around the world. https://aws.amazon.com/about-aws/global-infrastructure/
We will focus on the “North American” region for our term project. We note that,
within this segment, customers can find substitutes for AWS within minutes, as
AWS and similar cloud services are offered online and so the customers do not
have to travel to find substitute.
Customer Segment:

Amazon AWS is used by a diversified pool of clients, which range from age
group 14 to 60 plus, including Government (FINRA, Corte dei conti, New York
Public Library, Ministry of Justice), Education (Ellucian, University of Maryland,
College Park, Caltech Guttman Lab, Open Universities Australia) and
Nonprofits (Change.org, International Rice Research Institute, MPAC, Michael
J. Fox Foundation, The World Bank Group), Enterprise, Startups and Public
Sector. https://aws.amazon.com/solutions/case-studies/government-
education/
3. Market Structure
The major competitors of Amazon AWS are Verizon Cloud Compute, Google
Compute Engine, IBM Soft Layer and Microsoft Azure. However there are others like
Joyent, Rackspace and Century Link as well. Thus, there are significant numbers of
competitors with perfectly homogeneous products.
HHI Index calculation for cloud services:
Cloud Computing Company
Percentage
of Market
Share
HHI index
Contribution
Amazon Web Services 31 961
Microsoft 11 121
IBM Cloud and Soft Layer
8 64
Google 5 25

Salesforce 4 16
Hewlett Packard Enterprise 3.5 12.25
Adobe 3 9
Oracle 2.8 7.84
SAP 2.6 6.76
Rackspace 2.5 6.25
Workday 2.4 5.76
Service Now 2.2 4.84
NetSuite 2.1 4.41
Other 1 2 4
Other 2 1.9 3.61
Other 3 1.8 3.24
Other 4 1.7 2.89
Other 5 1.6 2.56
Other 6 1.5 2.25
Other 7 1.4 1.96
Other 8 1.3 1.69
Other 9 1.2 1.44
Other 10 1.1 1.21
Other 11 1 1
Other 12 0.9 0.81
Other 13 0.8 0.64
Other 14 0.7 0.49
Other 15 0.6 0.36
Other 16 0.4 0.16
1272.42
HHI Index
Product Similarity:
Primary services offered by all above competitors are compute, storage, databases and
networking. Thus, all of them provide the same service for PaaS and IaaS. They share
the common elements of a public cloud: self-service and instant provisioning, auto

scaling, plus security, compliance and identify management features. For “compute”,
AWS’ main offering is its EC2 instances, which can be tailored with a large number of
options. It also provides related services such as Elastic Beanstalk for app deployment,
the EC2 Container service, AWS Lambda and Auto scaling. AWS “storage” includes its
Simple Storage (S3), Elastic Block Storage (EBS), Elastic File System (EFS), Import
/Export large volume data transfer service, Glacier archive backup and Storage Gateway,
which integrates with on premise environments. AWS and Microsoft have also added
machine learning tools and a number of features targeted at the Internet of Things, while
customers can tap either cloud to variously build a mobile app or even create high
performance computing environment depending on their needs. While, these products
offered by both firms are quite similar, AWS relies on its price listing of a few cents for
Giga bytes of memory (EC2 is about 80 cents per hour per eight-CPU box), which attracts
its customers, which is it unique selling point.
However, AWS capitalizes on the diversified locations and the cost structure offering
to its customers unlike its competitors. It has been estimated that “AWS has more than
10 times the compute capacity of its all of its 14 closest rivals combined”.
(http://www.computerworlduk.com/it-vendors/microsoft-azure-vs-amazon-aws-public-
cloud-comparison-which-cloud-is-best-for-enterprise-3624848/)
It also offers an online calculator, using which one can calculate monthly AWS
expenses and thus allocate resources strategically.
http://calculator.s3.amazonaws.com/index.html
According to SEGA, a video game developer headquartered in Tokyo, Japan, it opted
for AWS because it is a market leader offering low barriers to entry and a rapidly evolving

feature set. The AWS Cloud allows them to have flexibility in their deployments and
scaling that traditional server hosting does not.
AWS Economics creates, what it calls the "Low costs due to high volume" scenario.
The global scale and operations of AWS support lower costs and higher efficiencies than
those in most on-premises data centers. These efficiencies are a result of overall supply
chain optimization, high levels of automation, and volume-based purchasing. To support
it, AWS has developed hardware and software that is optimized for large-scale clouds
(https://d0.awsstatic.com/whitepapers/introduction-to-aws-cloud-economics-final.pdf).
Now this creates "barriers of entry" for other competitors, who cannot replicate similar
offering, due to either nonexistence of infrastructure or inefficiency and inability to offer
such kind of pricing models to its customers.
We can see that there are three areas that pose a real barrier to entry in case of cloud
computing:
1.Financial: Huge financial investments are necessary to get robust data center ready
and further to keep it open and handle maintenance. Further investments are required to
place data centers across continents and several mergers or collaborations may be
required to hire land for setting up additional data center.
2. Technical – With cloud computing solutions, your in-house security techniques are
used outside the company firewall.
Companies wanting to implement cloud as SaaS and PaaS need the assurance of
security of their data and do not want any threat and malpractices to their data from
hackers and so offering cloud services have to take additional care of technical security
measures involved.

3. Operational/Organizational: cloud computing is still new to the software
professionals and so addition trainings have to be provided to implement them. Thus,
companies offering cloud services like AWS, have to train professionals so that its
customers gain Operational/Organizational efficiency.
Performance management down to the end-user is also very difficult. What works well
at your main facility might not be working well with your other outlying facilities –
(https://www.virtual.com/blog/detail/cloud-computing-solutions-barriers-to-entry-that-
need-consideration/210/#sthash.Q1N28JwC.dpuf)
At the same time, Amazon AWS offers a simple, consistent, pay-as-you-go pricing
model, demonstrating “the importance of non-price competition”, which seems to be
lauded by its customers and the effect is seen in chart below “Cloud Infrastructure Service
Revenue Growth”. Amazon AWS has more revenue than four of its competitors
combined! AWS uses its other ancillary amazon online and delivery service to brand its
AWS service.

4. Market Demand
a. Shifters of Product Demand
 Increase penetration to IT to promote AWS
As more and more businesses move applications out of their data centers in a bid to
cut costs and increase agility and at the same time outsource labor and services and
concurrently serve on a global platform, the AWS provides the most efficient and the
cheapest way to just rent AWS servers, use them, ramp them up when there is high
demand, mount up new stations when need arises or cut down on servers when
companies see a slack; this can be done using the AWS just at the click of a button, which
is the unique selling point of AWS. AWS can thus, increase penetration to these small
and big IT companies globally firms to promote AWS and thus increase revenue. Further,
this is what AWS specializes in and what customer want and AWS has thus changed, the

customers “tastes and likes” in this cloud computing segment, shifting their attention from
instead of going and buying a new computer, laptio or a server, managers can just login,
to AWS and configure a new EC2 for a new joinee, which makes it simple. Thus, AWS
has made an unique effort to naturally enter into the customers “perceived” set by using
the “Amazon” brand and extending economies of scale, which we will discuss more in
coming sections.
 Market AWS using Consulting Partners firms
(https://aws.amazon.com/partners/premier/):
Amazon has a great outreach with respect to consulting companies due to its
diversified business. It can easily use these connections and persuade consulting
companies like Gartner, Accenture, Capgemini, Cognizant, McKinsey & Company
Deloitte Consulting LLP, Booz Allen Hamilton to promote and spread the advantages,
features and great pricing offered by AWS to their clients, so that it can further increase
its customer base and in turn revenue. By increasing and investing in these actions, AWS
can increase the demand for its cloud services manifold.
 Increase Advertisement of AWS :

http://www.fool.com/investing/general/2015/03/07/3-things-amazon-investors-
need-to-know.aspx
We can see from above histogram that Amazon is increasing and heavily investing
in its advertising and marketing expense. It can also make use of advertising AWS
through its own subsidiaries like Amazon.com. It is estimated that it has about 183
million visitors monthly. This can serve as a great marketing channel. It can also
advertise using other social networking channels such as Facebook, Twitter, You
tube, LinkedIn and further, TV commercials as well.
b. Demand shifter differences across customer segments

We know that different IT firms have different infrastructural needs and different
budgets. Also, companies in different domains need different amount of compute
and storage capacities. An online gaming company will keep increasing use of
AWS whereas a marketing firm may only use large amount of AWS resources only
when it gets huge marketing orders from its customers. Thus, these can be very
important demand shifters for AWS.
Further, a shift in demand may also occur due to a change in government
regulation in a certain country. There can also be a shift of business due to
instability at a local or geographical region of a country and some of AWS’s clients
may suddenly stop using AWS. Some other economic or factors like natural
disaster may also influence a shift in demand. Thus, demand shifters differ across
the various customer segments.
c. Observable variable for each demand shifter.
Amount spent on advertising and marketing expense for “Increase penetration to
IT to promote AWS” can be tracked from the company’s annual report. R&D
expense to develop and promote better compute and storage technology can be
tracked from the company’s 10-K report. A snap shot of how Amazon spends its
money is shown below (http://adage.com/article/digital/amazon-loses-126-million-
marketing-expenses-rise-40/294316/):

5. Market Supply
a. Shifters of product supply:
 Change in Cost of raw material:
The resource cost of raw materials is inversely proportional to the price AWS
will offer to its customers. If resource cost of producing the hardware for
compute and storage decreases supply will increase.
 Update or innovation in technology:
Again, if new technological innovations take place, and further the price of raw
material decreases, this will be a shifter of product supply.
 Entry of new cloud storage companies:
Consider that some new super giants come into the competition an start offering
cheaper cloud compute and storage, then competition will stiffer, the customer will
gain as he will have to pay few dollars for the same amount of service.

b. Changes in supply shifters in the last 3 years and reactions:
 Reduction in Price due technological improvements:
If we look at the computing power -- "Floating Point Operations Per Second". A
GigaFlop (or Gflop) is a billion FLOPS, then we can see in the below image that price
of GFLOPS has
been decreasing
as a function of
time.
At the same time there has been an entry of several players in the field of cloud computing:
Amazon AWS has reacted pretty early
to this shift and passed on the savings and
cheap prices of computing at the highest speed
onto the customers and below we can see how
it reduced the price of its offerings across
different products it offers for EC2, S3, Cloud Front, Tax, Glacier and others platforms.

It is specifically due to this factor of realizing market potential early and reacting
to it that Amazon AWS is currently the market leader and has highest share of
revenue: (Credit: Gartner)
6. Production
a. Economies of Scale:

The expansive list of tools and services, along with its enterprise-friendly features
make AWS a strong candidate for large organizations. Its huge - and continuously growing
- infrastructure provides economies of scale that enable AWS to cut prices. AWS has
developed hardware and software that is optimized for large-scale clouds. It has
channelized manufacturers of customer servers and net gear, delivering capabilities
required for largescale deployments. Similarly, through direct purchases of disk, memory,
and CPU, AWS can drive economies of scale that are otherwise difficult to replicate.
(https://d0.awsstatic.com/whitepapers/introduction-to-aws-cloud-economics-final.pdf).
b. Economies of Scope:
Amazon is lately known as “The Walmart of the
web”.
It has such a strong supply logistic chain that only
this company can vouch for “Prime FREE Same-
Day/One-Day Delivery”. It produces Kindles,
Tablets, delivers almost any book to you and now
it is entering the grocery line, which can deliver
almost any of the domestic and needy stuff to its
customer’s doorsteps within hours. But what
competitors need to understand is not only does Amazon have cloud data centers across
the globe (which is actually warehouses of data center, storage and maintenance) but it
also has physical warehouses of products and goods we order frequently from Amazon,
which enables it this one day delivery. Thus, its services ranges from Digital Games &
Software to Amazon Echo: Alexa, who tells you what the weather is today! Amazon has
successfully executed and empowered the ‘economy of scope’ and is strategically
placed to be the next super giant not only in the world of retail but also software industry.
What’s more Amazon is innovating the way we shop: Introducing Amazon Go
and the world’s most advanced shopping technology :
https://www.youtube.com/watch?v=B10Edqo-gLU
[Image]http://www.slideshare.net/tutor2u/economies-and-diseconomies-of-
scale-26781899

7. Product Elasticity
a. Price Elasticity for Amazon Web Services:
 Number of available substitutes :
There are several available close substitutes for AWS in the market: Microsoft
Azure, IBM Soft Layer are the biggest rivals of AWS. We know, the more available close
substitutes, the more elastic the demand is and so cost conscious customers especially
the IT firms, which depend heavily on saving valuable hardware resources, use cloud
computing resources, could switch easily to a closer substitute if the price increased,
which in this case makes the demand elastic.
 Time period of adjustment :
31
11
85
4
41
CLoud Infrastuture Services:
Percentage of Market Share
Amazon Web Services
Microsoft
IBM Cloud and SoftLayer
Google
Salesforce
Rackspace, Hewlett Packard
Enterprise, Oracle and Other
20 companies

We know the locud configurations can change at the click of a mouse button, so the actual
“time period of adjustment” is just a change of the web address, which is no time! And as
closer substitutes are readily available IT firms can easily switch if the price increases
and do not have to wait which in this case, makes the demand elastic.
 Durability of product.
Companies build AWS servers so that they can duplicate and save back up and have
replication and vaulting and enhances performance and services. But to have this, AWS
has to ensure integrity of data at the same keep data stores secure from threats. If any
mishandling of data takes places, it can be huge issues for AWS, thus the durability factor
is of utmost importance to AWS.
 Percent of consumer budget.
We can see that today IT
companies typically spend 20-
25% on Cloud Recourses,
which is projected to double in
the coming decade.
Thus, we can also see
that 'Price Elasticity Of
Demand' is, if ‘a small change
in price’, is accompanied by a large change in quantity demanded, the product is said to
be elastic (or responsive to price changes), and in the case of AWS and cloud computing,

we can see that the prices are already very low (for few cents one can work on Giga bytes
of memory) and there is enough demand from all corners of IT world, thus the demand is
elastic, in this case.
b. Price elasticity variation by customer group
AWS has students, individuals of almost all ages, government officials, small
business, med size IT firms and at the same time huge IT companies as its
customers. Thus, it effectively offers cheaper and affordable options to its
smaller customers whereas discounts for larger customers, who purchase
licenses and bulk orders.
C. Pricing Power:

AWS is currently the market leader in cloud computing with 31% of market share, which
is far greater than combined with its closest competitors and thus, it operates in a
monopolistic competition market, so it has so much control over price, that it also offers
a 12 months free use of its 8GB - EC2 version and so it demonstrates tremendous
economies of scale therefore it can be assumed that the marginal cost of producing and
maintaining is one of the lowest among its competitors. Because of its lower marginal
cost, AWS is able to charge less than competition if desired. AWS also enjoys huge brand
recognition, on the back of Amazon. This brand equity allows AWS to extract more
consumer surplus than a generic brand would. With marginal costs one of the lowest in
the industry and a perceived value higher than the rest of the market, AWS has quite a
bit of room to manipulate it’s pricing, especially for orders in bulk.
8. Antitrust [https://en.wikipedia.org/wiki/Amazon.com_controversies] :
Amazon has attracted criticism from multiple sources, where the ethics of certain
business practices and policies have been drawn into question. Amazon has faced
numerous allegations of anti-competitive or monopolistic behavior, both in and out of court.
This includes documented instances of price differentiation, enforcement of controversial
patents against competitors, attempts to prevent discounted direct selling by publishers, and
a declared intention to cease working with third-party print on demand services in favor of
its own. In 2002, Amazon faced a challenge to the legitimacy of their Canadian operations,
although that case was subsequently dropped. A 2009 ruling in Japan found that the
company, which had tried to avoid paying corporate tax in the country, was in fact liable to
pay. Controversy over taxation has arisen on multiple occasions: It was reported in 2012

that Amazon is under investigation in the UK, while in the US the company has attracted
criticism for only collecting sales tax from customers in five states. Compounding these
problems, there have been reports of poor treatment of workers, with allegations of summary
dismissals for health problems and anti-unionization tactics including mass layoffs.
Amazon generated more than £3.3bn of sales in the UK but paid no corporation
tax at all on the profits, and that it was under investigation by the UK tax authorities.
In another case, in October 2011, actress Junie Hoang filed Hoang v. Amazon.com,
a $1 million lawsuit against Amazon in the Western District Court of Washington, for
allegedly revealing her age on the Internet Movie Database, which Amazon owns, by using
personal details from her credit card.
In all of the above cases, Amazon acted unethically and had to pay for its blunders,
and no one can argue that this was against the law.
More Sources:
https://earlymoves.com/2016/06/17/amazon-expects-to-sell-10-mio-echo-devices-next-
year-probably-due-to-internationalization/
https://earlymoves.com/2016/05/25/why-amazon-echo-and-alexa-dont-need-to-fear-
google-home-and-an-apple-siri-sdk/
http://www.businessinsider.com/how-many-amazon-echo-smart-home-devices-have-
been-installed-2016-6
https://en.wikipedia.org/wiki/Amazon.com
https://www.wired.com/2016/04/whoa-amazon-isnt-just-making-money-making-ever/

IMP: http://www.businessinsider.com/amazons-profits-what-people-dont-understand-
2013-10
VIMP: http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-
model-narrative
https://www.wired.com/2016/06/amazon-echos-head-start-biggest-advantage/
http://www.digitalbusinessmodelguru.com/2013/07/analysis-of-amazon-business-
model.html
https://aws.amazon.com/about-aws/global-infrastructure/
http://www.computerworlduk.com/it-vendors/microsoft-azure-vs-amazon-aws-public-
cloud-comparison-which-cloud-is-best-for-enterprise-3624848/
https://d0.awsstatic.com/whitepapers/introduction-to-aws-cloud-economics-final.pdf
Shifters of demand and supply:
https://docs.google.com/presentation/d/1OiyrYP66jlTZUwa6QuzC-
XGiXbUdebtuvknYpJrcjZE/edit#slide=id.i344
http://www.itproportal.com/2014/07/16/the-growth-of-on-demand-cloud-computing/

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