There’s no question Amazon is turning the screws on the $140 billion data center tech industry.
Amazon has grown to become the single-largest player in the rapidly growing cloud industry as its cloud platform, Amazon Web Services (AWS), celebrates its ten-year anniversary.
And in the process, AWS has sent shockwaves through the traditional enterprise sector.
In an interview with Business Insider, Werner Vogels — the CTO of Amazon in charge of AWS — explained why hardware companies aren’t going to get any respite any time soon.
Hardware builders are getting squeezed out the game
Right now, instead of buying all of their own computers, networks and software, businesses large and small are opting to rent it all from cloud computing vendors. That spells bad news for companies like IBM, HP, Dell, EMC, Cisco, the hardware makers selling companies the servers, storage and management software.
Normally, these IT companies would simply shift their sales efforts toward the newer, growing market, trying to sell their wares to the cloud service providers. These providers are building new data centres and installing new hardware at a rapid pace.
The problem is, the cloud providers are building their own instead of buying it all from IT vendors. And they are coming up with new designs for faster, cheaper, more efficient hardware, too. Facebook is a prime example of this with its Open Compute Project, in which engineers openly share their home-grown hardware designs with anyone who wants them and has become an industry phenom.
Likewise, Amazon also designs and builds its own server and network infrastructure to power its AWS cloud.
“To be able to operate at scale like we do,” Werner Vogels explains, “it makes sense to start designing your own server infrastructure as well as your network. There is great advantages in [doing so].”
There are two key advantages for Amazon: Flexibility, and cost. “To be able to create network layouts that are unique for our particular business” is extremely useful,” Vogels says.
“Remember, this whole business is about shifting capex to opex, but Amazon still as to put up the capex, and this is a capex-intensive business for us. So anything we can do to increase the cost-efficiency of our operations immediately benefits our customers,” he explains.
To decode that a little, he’s saying that by using AWS, businesses turn their IT into a monthly operating expense. But Amazon still has to cough up huge chunks of capital expense cash in advance to outfit its data center, so it’s motivated to find ways to do that as cheaply as possible.
He adds: “Our standards are so high we can’t just go with off-the-shelf buildings or networks or power — we really need to make sure we have the highest possible standards.”
And that’s why as IT shifts to Amazon’s cloud, traditional IT players’ slice of the pie is shrinking.
This trend is only going to accelerate
Amazon’s message is particularly worrying for those traditional IT vendors because it doesn’t just apply to itself. By Vogels’ logic, anyone above a certain size will eventually find it better to start building their own hardware.
That’s already playing out with Facebook’s OCP project. Although Amazon hasn’t publicly said it is working with the OCP, just about every large cloud company has signed up, including Apple, Microsoft and, more recently, Google. And so has some very large enterprises like Goldman Sachs. While vendors like Dell and HP are involved in OCP, they aren’t in the driver’s seat. For the first time, that seat is filled with the companies who are using the equipment, not the vendors selling it.
Vogels’ believes the move to the cloud will get even more intense (and most market researchers agree with him).
It has already reshaped how startups are launched.
“The startup world is radically different today than it was ten years ago. A typical investment ten years ago, to be able to get a business off the ground that needs to scale in one way or another, was around $5 million. Today, for $50,000-$100,000, you can get yourself a pretty good businesses started … the rise of the whole startup culture is largely driven by cloud.”
The same thing is happening now to established companies, even those who previously ran their own private data centres.
“Moving over to the cloud allows them [companies] to have their engineers focus on things that matter for the business,” he tells us.
‘This isn’t a winner-takes all market’
Vogels doesn’t think much of some of his competitors, claiming they are all years behind.
Although he wouldn’t name names, most people see the cloud as a race between market leader Amazon, Microsoft and Google, with other players like IBM also in the mix.
“If you look at other cloud providers in the market, there’s quite a few of them still sort of in the phase where AWS was five, six years ago — in 2010 — at the moment we were still much more focused on the infrastructure side of things than the sort of rich collection of services.”
But he acknowledges that there’s room for more cloud providers besides AWS, although he, once again, won’t name names.
“This is not a winner-takes all market,” Vogel says. “I think given the changes we’ve seen in the last ten years it’s hard to predict which are the players that will be left in ten years from now, or who will be the main players in the market. I definitely think AWS will be there, and have a prominent role in that world.”
If Vogels’ predictions are right, it doesn’t matter from the perspective of the traditional enterprise sector who comes out on top: Whoever it is, they will end up building their own tech.
“Do I think there will be less and less data centres over time?” Vogels says. “Yes, absolutely.”
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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