AWS Downtick Quick View : Deutsche Bank

Earlier this week Business Insider reported on an analyst note out of Deutsche Bank’s Lloyd Walmsley concerning a pull back on AWS growth for Q2:

AWS Downtick Quick View

Why AWS Growth May Be Different Than What Is Expected

For readers of Cloud City Ventures, this news should not be a surprise. As we wrote about earlier this year, 2017 and 2018 will present major headwinds to sustained growth of AWS consumption as more enterprises adopt AWS at rates that will be naturally different than that of startups that drove the early AWS growth cycle. We wrote this article and it should provide more context than what we are seeing in the coverage of the Deutsche Bank note:

 

In the article above I captured ten reasons why enterprise growth would be different. Here is a list of my observations of enterprise IT that contrast greatly with startups that consumed public cloud in the first decade on their own:

  1. Enterprises are more likely to have political structures that they want to preserve in some way when migrating to public cloud instead of re-imagining a new organizational support structure built on top of public cloud.
  2. Enterprises generally fail to grasp that public cloud was originally intended for companies that were building their own software and that software developers skill sets need to be extended into traditional IT operations teams to maximize investment return, even if these enterprises are not developing their own software. Most enterprises don’t invest fully in the notion of Infrastructure as Code and can spend 50-100%+ more than they should leaving them to make comments like “Cloud is more expensive than we realized when we got started.”
  3. Enterprises are likely to view migrating or moving to public cloud as a task solely for IT operations. The reality is that it takes a broad level of support from all stakeholders at the executive level.
  4. In my experience, less than 30-35% of enterprise employees can transfer their traditional IT skills and learn the new skills that are required to successfully and efficiently use public cloud within an 18 month period. New hires are needed.
  5. Enterprises have made, and in some cases continue to make, investments in traditional infrastructure (firewalls, security software, etc.) that they want to use in public cloud environments and most of these products were never designed to go to public cloud.
  6. Successful transformations for enterprises moving to public cloud can take 24-36 months and almost always happen much slower than enterprises expect.
  7. Turnover for cloud engineers is higher in most enterprises, compared to startups, due to the more mature cultures and difficulties in transitioning to “cloud-native teams.”
  8. If you are an enterprise that is not developing your own software, you will not achieve the same benefits of public cloud to your business model that companies that were built on top of it like Netflix or Instagram. This increases the risk that the economic case that was made to move to cloud will not be fully realized.
  9. If you are an enterprise that wants to start this process tomorrow, your internal team is most likely not prepared to be successful on their own. You are now competing for cloud operations talent that is most likely more expensive than you are budgeting. Most great cloud services companies also don’t have cloud engineering talent not already working on other client projects.
  10. “It is not necessary to change. Survival is not mandatory.”- Dr Edwards Deming Some Enterprises have processes and cultures that are so entrenched that public cloud providers, and especially cloud services companies, must not waste business cycles attempting to fit a square peg in a round hole. It sounds simple but when you are public cloud sales exec and you only have a few accounts, it may not be possible to successfully play all of the hands you are dealt.




Public Cloud Is Still The Future & AWS Is Still The Leader

Readers of the Deutsche Bank note on Amazon should not take away that AWS is losing its leadership position in the market. All public clouds will be subject to the same conditions as described above as enterprises move more workloads to public cloud.

Amazon is expected to announce quarterly earnings on Thursday, July 27 after the bell. As we covered in April, AWS reported:

  • AWS, the world’s largest public cloud, reported revenue of $3.66B in 1Q17.
  • Trailing Twelve Month (TTM) revenue totals $13.3B.
  • AWS 1Q17 operating income was reported at $890M, up 48% Y/Y. 4Q16 operating income was $926M.
  • AWS operating margin declined for the second quarter in a row to 24.3%, vs. 26.6% (3Q16) and 26.2% (4Q16) in the past two quarters.
  • Amazon reported growth of AWS revenue was at 43% Y/Y; $3.66B in 1Q17 compared to $2.57B in 1Q16.
  • Amazon data and subsequent analyst conference call instructions specifically stated that all comparisons would be discussed in Y/Y terms.

Cloud City Ventures will be covering AWS earnings next week and will provide an updated view based on the Deutsche Bank note.




Matthew Scott