Amazon Web Services

David Rosenthal 0:00 People, turns out, loved the amazon.com episode. That was so awesome. Makes me a little nervous for this one.

Ben Gilbert 0:08 Oh, massively. By far and away, our biggest episode ever. Uh, is this how George Lucas felt when he was doing Empire Strikes Back? [laughing]

David Rosenthal 0:17 [laughing] You did not just compare us to George Lucas, did you? [laughing] I swear we're humble.

Ben Gilbert 0:23 All right, let's do this.

Speaker 0:24 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?

Ben Gilbert 0:41 Welcome to Season 11, Episode 3 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

David Rosenthal 0:56 And I'm David Rosenthal, and I am an angel investor based in San Francisco. Cold San Francisco, here in August. [chuckles]

Ben Gilbert 1:04 [chuckles] And we are your hosts. All right, David, let's say you run a lemonade stand. You sell me the highest quality lemonade you can for the lowest price, one dollar a cup, and when you add up all your costs, the variable ones, like the lemons, and the fixed ones, like the table that you rented, it costs about ninety-eight and a half cents to give me that lemonade. And you're happy with your turn to profit, I'm sure, but man, you are gonna have to sell a lot of lemonade.

David Rosenthal 1:32 So you're telling me I'm amazon.com in the fourth quarter of two thousand and one, which is actually where we're gonna start our story.

Ben Gilbert 1:39 Perhaps. But you discover something interesting. By making all this lemonade, you get really good at the stuff it takes to run a lemonade business, the perfect cups, and ice, and lemons, everything, and it turns out, all that stuff that you just got good at, you can sell to other businesses. And guess what? You realize further that when you sell your services to other companies, when you charge them a dollar, it only costs you seventy cents to make it. So thirty percent margins instead of something like a percent and a half, you're gonna have to sell a lot less of those services than you ever did on lemonade to make the same amount of money.

David Rosenthal 2:17 Well, then, if you told me that, I would dig into it even further, and I would realize that the existing companies that sold stands, and cups, and whatnot, they were actually making seventy percent margins on their stands and cups. [chuckles]

Ben Gilbert 2:33 [chuckles]

David Rosenthal 2:33 And so I would be quite happy to take thirty percent margins and disrupt them, and still do better than my lemonade business.

Ben Gilbert 2:41 Well, listeners, of course, on our last episode, we talked about Amazon's retail business, and today, we are talking about Amazon Web Services, the cloud computing pioneer, and those margin percentages that I just used are the real ones for the retail business and for AWS. AWS's revenue is only about fifteen percent the size of Amazon's massive retail business, but their profits, or the operating income, to be specific, from AWS, are, in total, the same, if not more, than their e-commerce store. I think it's the case that every year since twenty fifteen, when they started breaking out AWS's financials, the total operating income from AWS has actually been bigger than [chuckles] the retail business.

David Rosenthal 3:25 There may have been some quarters where it was off, but generally, that trend is accurate.

Ben Gilbert 3:31 Wild. So we're gonna talk about a completely different type of business today than we talked about last time. Sort of... There's a lot of similarities, and a lot more than you would sort of guess when looking at an online retailer that started as an online bookstore and a cloud computing pioneer. Well, speaking of e-commerce, we have huge news. You can finally, finally buy Acquired merch on the internet. That is available at acquired.fm/store, or click the link in the show notes. You can grab your favorite tee, crew neck, hoodie, tank, or even a onesie, since I know a lot of you out there are like David and have little ones at home. Now, for our presenting sponsor this episode, we have a company that we are very excited about, Fundrise. On our amazon.com episode, they shared some news about a fascinating new product they have called the Fundrise Innovation Fund that enables their customers not only to invest in real estate, but also now private, late-stage growth tech companies, which is, of course, a very interesting place to be investing right now, now that prices are very different than they were six and twelve months ago. We are back today with Ben Miller, CEO and co-founder of Fundrise.

David Rosenthal 4:40 We know that you, Ben, personally love dissecting investing markets from first principles, and you've been noodling on how to disrupt VC for a while. Tell us why you think growth VC in the traditional sense is broken, and why what you're doing with retail investing in private companies is the future.

Speaker 5:00 When you wanna start a big business, you find a big problem. You find something that's broken. Twenty percent of the upside of a company's success goes to the people who work at the VC fund, twenty percent of carried interest. So who creates the value? People who build the company, people who invest in the company. So the team, in my view, creates the value. They put in two thousand five hundred hours a year. How many hours does a typical VC put into a company? A hundred? Fifty? So that's, like, two percent of what a typical employee does. So what happens when, like, a sector is, like, overcompensated, overpaid? It gets overcrowded, or it gets overfunded. It gets undisciplined. When you look at twenty twenty-one, you can see it in what's happening in venture, is because it's overcompensated, it's basically gotten messed up. So we basically created the Fundrise Innovation Fund with the idea of eliminating the carried interest, give it back to the team, give it back to the employees. So obviously, capital deserves a good return for taking the risk.... but twenty percent of that return shouldn't necessarily go to GPs who didn't actually put up the money, didn't actually do the work. In the long term, markets get more efficient, so probably those returns get split between the investors and the team members. But our mission is basically to lower basically the fees of the intermediaries and increase basically the benefits to the people who are taking the risk and doing the work. And that is really, I think, the future of venture. I mean, it's like a nightmare for the venture guys. The worst thing that could ever happen to them is to lose their twenty percent carried interest. It's the most disruptive thing we could do, if you think about us being a disruptor. But yet, the future of markets is markets become more efficient. The vast majority of public stock managers do not take a twenty percent carried interest. It's not justified by the efficiency of the market. And when the venture industry started thirty, forty years ago, the market was inefficient. There was very little money, and it was justified. But as the market's gotten much, much larger, huge, and all the data, every company, it's all available to anybody, it's just not justified anymore. So you can do the job and still have successful amount of profits without taking the twenty percent carried interest. I mean, the biggest public asset manager is BlackRock, and you don't see them taking a carried interest, right? They have, uh, AUM fee, but by having really good efficient systems and scale, they're a great business. And so it's structure and incentives dictate behavior. It's like what Charlie Munger says, and so we're trying to restructure the whole venture industry.

Ben Gilbert 7:43 Our thanks to Fundrise, the largest private investment platform in the world for retail investors. If you wanna join the over three hundred and fifty thousand individuals investing with Fundrise, you can click the link in the show notes. And if you're a founder and you wanna get in touch about having the Innovation Fund participate in your next funding round, email notvc, that's notvc@fundrise.com. After you finish this episode, come discuss it with David and I, and thirteen thousand other smart members of the Acquired community at acquired.fm/slack. And if you're dying for more Acquired in the meantime, go check out The LP Show by searching Acquired LP in any podcast player. The next episode is with David's partner in crime and Kindergarten Ventures, Nat Manning, talking about his company, Kettle, and how the business of reinsurance works. That, of course, is already live if you are a paying LP, which you can become at acquired.fm/lp. Now, without further ado, David, take us in. And listeners, as always, this show is not investment advice. David and I may, certainly do, have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

David Rosenthal 8:56 Well, we left off the amazon.com episode in 2007 with the sort of Sony PlayStation-like coda of the Kindle story and the new chapter, one might say, that it seemed at the time to the outside world that Amazon was opening as a true technology company with the Kindle. I believe the quote from Eric Schmidt in The Everything Store was, "The book guys finally got technology." [laughing] And of course, as we talked about, Jeff Bezos always got technology. This was not a shift. And in particular, this was not anything new because of everything we are going to talk about on this whole separate episode today. So to do that, we need to rewind back, as I said above, to the end of 2001, kinda early 2002, the immediate post-dot-com bubble popping crash era. And Bezos and Amazon, as hard as it is now to remember, he was like an embattled CEO at this point. They had just gotten rid of COO Joe Galli. The board has brought in Coach Campbell. Amazon's fighting for its life against both eBay and Wall Street.

Ben Gilbert 10:13 Is it insane to think that the board was sort of in the place with Jeff Bezos, thinking, "We really need some adult supervision to be a, uh, scale CEO and help this guy out"? Frigging Jeff Bezos! Obviously, that did not pan out, and Bezos came valiantly riding back in and ran the business for another twenty years.

David Rosenthal 10:32 Another twenty years, until handing the reins to somebody else, who we're going to spend a lot of time in just a little bit here talking about, of course, current Amazon CEO Andy Jassy.

Ben Gilbert 10:47 Yep.

David Rosenthal 10:48 So I don't even know what the right word is to use to describe AWS. I was gonna say, I wrote behemoth in my notes.

Ben Gilbert 10:55 Pioneer, inventor.

David Rosenthal 10:57 I don't think there's anything you can say that captures how big and how important AWS is. It is one of the biggest and most important businesses, technologies, products of the modern world.

Ben Gilbert 11:15 Yep, no doubt.

David Rosenthal 11:17 I don't think it's controversial to say even much more so than amazon.com.

Ben Gilbert 11:22 Yeah. I mean, it's interesting. During the pandemic, you could argue that amazon.com was more important because everybody needed to sort of buy goods and get them at home.

David Rosenthal 11:30 But everybody also needed to be on the internet, and the internet [chuckles] runs on AWS.

Ben Gilbert 11:35 Yeah.

David Rosenthal 11:36 So today, we're gonna tell that story. It's funny, as we did the research... So there's no, like, everything store book dedicated to AWS. There are a lot of very disparate resources and stories out there, and there actually are quite a few conflicting and competing stories about what the true origin is of AWS. You might say it has a cloudy origin. See what we did there?

Ben Gilbert 12:03 Ayoo.

David Rosenthal 12:04 Ayoo. [chuckles]

Ben Gilbert 12:05 It is true. As we were doing the research, you know, of course, David and I read both of Brad Stone's excellent books. I watched the PBS FRONTLINE documentary, which, of course, has a very specific angle that they're trying to take on the company. And you sort of read any of these Amazon analysis pieces-... they're like ninety-five percent about the retail business, and they'll talk about things like the relationship with employees and the big New York Times piece that came out in twenty fifteen. And they'll talk about the relationship with the warehouse workers, or, "Is this good for the world?" And everyone indexes on that, which is important and deserves all the attention it's got. But almost none of these spend a material amount of time on AWS, other than mostly an apocryphal founding story, which is not even really how it happened.

David Rosenthal 12:51 So we identified, you're referring to one origin story of AWS. We identified not one, not two, not three, but four [chuckles] separate origin stories, and we're gonna tell them all here. I think there is something important to learn about what AWS is, and about Amazon, and about Amazon culture in all of these. So let's start with the first, and most obviously untrue one, [laughing]

Ben Gilbert 13:19 [laughing]

David Rosenthal 13:19 which is ironically also the one that the layperson believes the most.

Ben Gilbert 13:24 Yes, because it's tempting. I mean, it's like an, "Oh!" Like, it's too convenient.

David Rosenthal 13:29 Yes, and that story is the excess capacity narrative. So the way this story goes is that right around this time, two thousand and one, two thousand and two, two thousand and three, Amazon.com, the retail business, like all retail businesses in America at least, is highly seasonal. They have huge spikes of traffic and demand in Q4 for the holiday shopping season, and that's when most of, maybe not most, but the largest share of any quarter revenue happens in Q4.

Ben Gilbert 14:02 So much so that for the first at least five years of the business, there was a rule in November and December that you could not commit new code to production.

David Rosenthal 14:11 That's right.

Ben Gilbert 14:13 It was so all hands on deck that no new features were allowed unless it was a red flag bug fix.

David Rosenthal 14:19 Oh, and we didn't talk about this in the Amazon.com episode, but for years and years and years, the executive team, and the business side of the company, and the engineers, everybody would go work in the warehouses in Q4.

Ben Gilbert 14:32 That or customer service. Oh, how times have changed. Can you imagine someone sitting down in Day 1 North or Doppler being told that they have to go pick and pack for a while?

David Rosenthal 14:42 I think for a while they continued to do it even when it wasn't necessary, just as, like, a culture thing, but obviously, those days are gone now. So the urban legend is that because of this dynamic, Amazon had this brilliant realization around then, again, when they're trying to achieve profitability, that they had excess technical infrastructure capacity in their IT operations during quarters one through three. So they had to build out for the peak demand of Q4, all the traffic on the website, all the transactions happening, but the rest of the year, all that capacity was just sitting there, and so they decided, "Let's rent out that capacity to other developers." Brilliant, brilliant! We are gonna turn a large expense line in the business into a revenue line.

Ben Gilbert 15:32 Magic. And of course, this falls down in two enormous places. One is, if you've ever been inside a pre-cloud technology company, you know that-

David Rosenthal 15:43 It doesn't work that way. [chuckles]

Ben Gilbert 15:45 Yeah, you can't just say, like, "Oh, cool, like, the servers aren't in use right now, and there's nothing highly customized about these servers, and they're not tightly coupled to our applications in any way. So we'll just make it so that anyone can very easily just run their applications on it, and there's enough security set up correctly so that anyone can just get access to our data center, and the network hardware sort of understands how to serve other tenants other than us." None of that existed, and none of that was true, so there's just no way you can be like, "Oh, yeah, other companies just started using our infrastructure, and it was pretty rip and replace."

David Rosenthal 16:17 In a pre-cloud infrastructure world, you installed your software, your code base, on your servers [chuckles] that you owned. The Amazon.com code base was literally installed on a bunch of boxes that they owned. You couldn't just rent out the capacity.

Ben Gilbert 16:35 Until two thousand, they were servers from Digital Equipment Corporation, DEC. They were DEC Alpha servers. These were unbelievably high-margin servers that you, I believe, leased from the manufacturer. It was the same business model that IBM had forever and Oracle has or had forever, where you get this highly bundled hardware, software platform that you would use to run your applications, and they would make eighty percent gross margins on these things. There was this massive markup. They were monolithic, and to be honest, the thing that really changed all this was Linux. When Linux came out, and you could do the stuff that you used to need Unix workstations for on an open-source operating system, well, then everything changed, 'cause you can go buy a whole bunch of different hardware, put Linux on it, and then write your own applications. And so this laid the groundwork for maybe infrastructure doesn't have to be as insanely expensive, and all the profit pools from all of this infrastructure don't have to be captured by, say, a DEC or an Oracle or an IBM, and this would lay the groundwork for a lot of things to come, including, frankly, just saving Amazon as a company. I mean, in two thousand, they almost went out of business because they were so tight on cash, and they were spending so much on infrastructure, that this sort of move to the open-source ecosystem and doing a massive rewrite of all of Amazon.com to run on Linux and run on these... They did this big deal with HP, run on HP servers.

David Rosenthal 18:06 Right, rather than DEC.

Ben Gilbert 18:08 That frankly saved the company from a cost perspective during that really tight time.

David Rosenthal 18:11 But that is not virtualized cloud servers. [laughing]

Ben Gilbert 18:15 [laughing]

David Rosenthal 18:15 That's not what we're talking about with AWS. Here's the other reason why this excess capacity myth is a myth.

Ben Gilbert 18:22 ... how is Amazon supposed to serve their AWS customers if all of them are on excess capacity during Q4 at all?

David Rosenthal 18:30 [chuckles] Right.

Ben Gilbert 18:30 Like, let's say I'm Netflix, and I just took a dependency, and all of my streaming is happening on AWS. Is Amazon just gonna tell me I can't do it during Q4 when they need the servers? It's ridiculous.

David Rosenthal 18:41 [laughing] No holiday movies. Can't watch Die Hard at Christmas.

Ben Gilbert 18:45 Ugh. So it is a very convenient narrative when someone's trying to solve the puzzle of: how did this internet retailer turn into a real technology company? Oh, they had all these extra servers. Dispelled.

David Rosenthal 18:58 So the best and final word on this that we have to put here, 'cause it literally is from part of the horse's mouth itself, comes from Werner Vogels, the, at the time, AWS CTO, now CTO of all of Amazon, who wrote flat out in a Quora post in 2011, quote, "The excess capacity story is a myth. It was never a matter of selling excess capacity. Actually, within two months after launch, AWS would have already burned through the excess amazon.com capacity. Amazon Web Services was always considered a business by itself, with the expectation that it could even grow as big as the amazon.com retail operation." Hmm. Maybe, maybe.

Ben Gilbert 19:44 The other interesting thing to point out is it doesn't give Amazon enough credit about their intentionality-

David Rosenthal 19:49 Yes

Ben Gilbert 19:49 -and strategy.

David Rosenthal 19:51 It short sells Amazon.

Ben Gilbert 19:53 Yeah. They had this extra capacity, this cost center that they were using. Well, two things: one, technology was never a cost center for Amazon. They never looked at it like, "Oh, we have an IT department." They always thought about themselves as a technology company, so it was always thinking about, "Okay, in eighteen months, Moore's Law is gonna make it so we have twice as much compute. What crazy, cool stuff can we do with that?" They always looked at technology as an investment, not a cost center. And the other thing, to your point, that it sells them short on is, as if this wasn't an intentional strategy. This was an incredibly intentional strategy and a brand-new business school case study-type laser focus on an emerging market that they had reason to believe that they could create.

David Rosenthal 20:34 Okay, that's origin story number one. Origin story number two, we're gonna get into this a lot more, and, you know, I didn't even really realize before diving into this, the depth of innovation of what AWS was and what Amazon was doing and led them to it, is so beyond anything else that was happening at the time. This is a true fundamental innovation. So let's get into it. Remember from the Kindle Coda vignette, how, uh, it was one of those crazy stories about who was responsible for the inspiration for the Kindle, and it turned out it was Tesla founder, Martin Eberhard?

Ben Gilbert 21:13 Crazy! He had invented the first e-reader that wasn't quite viable yet and tried to sell it to Amazon and tried to get investment from Amazon. And Amazon said: "No, we'll wait till the world shifts a little bit, different technology. It's actually something we can own outright, rather than funding and potentially having competitors use, too." And of course, that would be a few years later, and Amazon would create the Kindle internally.

David Rosenthal 21:35 So there is a similar sort of figure involved in inspiring the vision for AWS, and that is Tim O'Reilly. And for anybody of a certain age, you certainly remember the O'Reilly programming books, the O'Reilly conferences, and in particular, for me, I mean, they were the organization, and Tim, as the leader of the organization, championed the whole idea of Web 2.0.

Ben Gilbert 22:06 For sure. I mean, I remember first reading, I think, the PHP book that they put out, and then when Web 2.0, this sort of idea of, you know, I can consume on the web, but also I can post on the web, and that sort of led to social media, and one of the key enabling technologies in all that is AJAX. And I remember reading the O'Reilly AJAX book of, wow, I can use, what is it? Asynchronous JavaScript and XML to make dynamic web pages without needing to refresh. That was truly magical at the time.

David Rosenthal 22:37 And there were a few core tenets that they sort of defined as what Web 2.0 meant. Part of it was in opposition to Web 1.0, which they considered static, and so Web 2.0 was dynamic, like you're saying, but that wasn't all of it. Another huge part of what they meant by Web 2.0 was what they called participatory culture and interoperability. And they meant that both users on websites could interact with the website. So you had Flickr, you would upload your photos, and you would interact and change the website, or Google Maps, of course, was such a canonical Web 2.0 project. But even more than users interoperating and interacting with Web 2.0 sites was other developers. Remember mashups, Ben?

Ben Gilbert 23:34 Like mashing up APIs?

David Rosenthal 23:36 Yes. So Web 2.0 mashups were such all the rage, and Google Maps was, like, a core part of this. People would take the Google Maps API and build all sorts of other websites using Google Maps' data and content underneath it, or, you know, Flickr had an API. It was APIs, it was interoperability, it was anybody can access. It's democratizing what we've built.

Ben Gilbert 24:01 Totally. It's so funny to hear all the crypto people today talk about composability. I feel like the old man yelling from tree or, "Get off my lawn," person, but it is very clear that people did not experience the 2006 to 2010 era of the exact same promise. But instead of smart contracts or composability on blockchains, people were saying, "It's a RESTful API. It has CRUD operations to create or read or update or delete things on a service. So if you're authenticated, then you don't need to necessarily use a web UI. You can just use the API, and you can upload a photo programmatically, or you can fetch your entire list of tweets programmatically." It was like all the web, instead of being in these siloed applications, was magically free for data to sort of move about in a utopian way without anybody's capitalist intentions getting in the way and siloing the data all to themselves.

David Rosenthal 24:59 ... So in the early days of all this, I think it was early 2002, Tim O'Reilly flies up to Seattle and meets with Jeff Bezos. And the reason he wants to come see Jeff, they've had a sort of checkered history in the past. You know, O'Reilly has not always been the biggest fan of Amazon. He's a book publisher, obviously, so he has some feelings.

Ben Gilbert 25:22 [chuckles]

David Rosenthal 25:23 But he wants to make the pitch to Jeff that Amazon should embrace Web 2.0 and transform amazon.com into a participatory website.

Ben Gilbert 25:36 And this is a great idea. Being a Web 2.0 company means that you can do business with other companies without needing, like, a BD agreement in place. You don't actually need a partnership agreement. You basically can just publish your API. You can say, "Pay as you go, and here's how you pay, and here's how you get an account, and we can shut down your account if we need." But you can get API access to do business with us programmatically through this application programming interface, and it's great. Maybe no one or two companies will ever even need to talk to each other, which means you can do business with thousands of companies out there, not just a few that your BD people cherry-pick.

David Rosenthal 26:14 Yes, and Jeff totally gets it. He gets this in so many ways. Amazon.com has this obvious business use case for APIs and allowing other developers and other websites to access data and content from amazon.com, which is they have a giant affiliate program [chuckles] that's called the Amazon Associates program.

Ben Gilbert 26:39 And they've got a catalog of every uniquely identifiable product in the world, certainly in the media space, but at this time, growing into many other categories, too. So wouldn't it be nice to access that authoritative catalog to fetch an image and display that image on my website if I'm trying to tell people, "Hey, go buy this CD"?

David Rosenthal 26:57 Display the CD right there and then share the revenue with Amazon.

Ben Gilbert 27:00 It's good for both of us if I can do that.

David Rosenthal 27:03 So after this meeting, Jeff does two things: one, he completely embraces this idea, and Tim and O'Reilly, he invites Tim up regularly to Seattle, has him speak at All Hands within the company, evangelize this idea of Web 2.0 and APIs within Amazon. Two, he starts a new team within Amazon to do just what Tim is suggesting. They build APIs that let any website developer plug into the amazon.com product catalog, do everything you just said, Ben, and the stated goal and mission of this team is to make amazon.com APIs available to developers and, quote, "Let them surprise us with what they build." That same year, you know, this is Amazon, they move fast, they hold a conference for developers in 2002. A total of eight people attend the conference.

Ben Gilbert 28:02 [laughing]

David Rosenthal 28:02 They announce to the world the launch of this new division within Amazon that is called Amazon Web Services.

Ben Gilbert 28:11 So to your point here, this is not an important thing in the world yet. Amazon having a developer conference with eight people there, I mean, you look at re:Invent now, and I think it has 100,000 people who watch the keynote. Very different world.

David Rosenthal 28:28 Yes, very different world and very different product. This is called Amazon Web Services, but it is not [chuckles] cloud-based IT infrastructure. It's other developers using the amazon.com product catalog, and indeed, it lives, Amazon Web Services lives within the Amazon Associates program, [chuckles] and that is run by a guy named Colin Bryar, which is very, very fun because Colin goes on to do many things, including recently co-authoring the book Working Backwards, which is a great book we used for a source in both this episode and the previous episode on amazon.com. But for now, in 2002, Colin technically becomes the first head of AWS.

Ben Gilbert 29:17 Wow! And it was just within Amazon Associates at this point, 'cause the whole point in this origin story, the scope of the ambition of AWS, was to make available assets of amazon.com to our affiliates, to Amazon Associates, who want to basically fetch images and items from the catalog and have that information passed along when someone purchases something to share some revenue. That was the scope of the ambition based on where it lived in the organization.

David Rosenthal 29:48 Now, all of that is absolutely true. There is no element of myth or falsehood [chuckles] to anything in this second origin story here, and now we'll sort of transition from number two to number three together. But what I think is so important about number two, even though it leads to AWS, that is the creation of AWS, but not the AWS we know and love, but it's this idea of Web 2.0 and APIs that really starts to take hold, at least in Jeff Bezos's mind.

Ben Gilbert 30:22 And we have not once in this story said the phrase cloud computing or the cloud. We've said web services, and I think people today have heard AWS so many times that they sort of forget that it's a little bit of a misnomer. It's still called Amazon Web Services, but the vast majority of what is happening when customers are paying the ludicrous amount of revenue to Amazon to access AWS is not web services. It is not these RESTful API endpoints that you use to fetch and post information.

David Rosenthal 30:53 Fun side barb: Do you know the origin of the term cloud as applied to IT infrastructure?

Ben Gilbert 31:02 Oh, I do not!

David Rosenthal 31:03 This is so cool. It started-... at General Magic.

Ben Gilbert 31:09 Really?

David Rosenthal 31:10 Yeah, how crazy is that? The Apple spin-out that invented the iPhone 20 years before the iPhone. As part of what they were doing, they also wanted to have, you know, the internet sort of barely existed, so I don't think they thought of it as the internet, but a distributed, always accessible back-end IT infrastructure for all the services that were gonna be on the mobile device. And so they started calling what they built for that a cloud infrastructure that the devices could access.

Ben Gilbert 31:42 General Magic was a pioneer in so many ways. It's amazing.

David Rosenthal 31:45 Such a pioneer. Okay, so back now to Amazon. They've launched Amazon Web Services, Web 2.0, you know, blah, blah, blah. Like, that's cool, but that's not what anybody is really focused on at Amazon. They're focused on, there are a lot of problems within the company, and arguably, the biggest problem is that the code base of amazon.com that Michelle Kappen designed back in 1995 has been, you know, amazing. He made so many great technical decisions that we talked about on the amazon.com episode. He designed it for how websites were built in 1995, [chuckles] which was small teams, not at scale, and monolith software code bases. Everything we talked about in the beginning of the episode. All of amazon.com, at this point, when it's now, you know, a multi- multi-billion dollar company, is running on one monolithic software code base. [chuckles]

Ben Gilbert 32:48 Yeah, I do know, after talking to some folks who were early Amazon engineers, around the summertime, they would start looking at what is the server that would be available on the market going into Q4 that is the baddest-ass thing we could possibly buy, and they would just buy the most expensive, suped-up server they possibly could from Deck or whoever else, and they would just try to make it through Christmas.

David Rosenthal 33:16 Yes, Amazon would do code freezes going into the holidays. And think about this, this is just so foreign to everything we think about with technology companies now and how things run, and it's all thanks to AWS. You had to do a code freeze heading into the holidays because as you were adding new features and new elements and new teams... And remember, Amazon, at this point, they've got A9, they're working on search. Lab 126 is just kind of starting up, getting going. They've got all of these teams, huge numbers of engineers and product managers, that are building features, adding features, needing to access various parts of the site. Anytime you add one of those to the monolith software code base, it could break everything. [chuckles]

Ben Gilbert 34:01 Yeah.

David Rosenthal 34:01 And so you had to do a code freeze, and it gets to a point where, remember, Amazon, as a company now, is trying to focus on profitability, efficiency. It gets to the point where the company just literally grinds to a halt. There's a lot of good stuff in the Working Backwards book about this, about how hard it became to get anything done and built at Amazon because of this rat's nest of complexities involved on the technical and infrastructure side.

Ben Gilbert 34:30 And as we're articulating problems here that were happening, one of them is, of course, you're gonna tip the server over if you add any additional complexity. The other of which is Amazon is doing the Amazon thing, and they're trying to enter new businesses and new categories. They're trying to grow, and they're trying to grow because the way that they've designed the business, as we mentioned in the last episode, the cashflow.com idea, where they're spending supplier money to grow before they're paying suppliers. Basically, they're investing the float in growth, so they do have to keep growing because they have bills coming due. And so they're continuing to look for new categories to expand into. They're looking around, they're seeing competition everywhere, so they're just trying to get big fast. So you have the issue of, well, we don't wanna commit more code and tip the server over, which, of course, means you can't launch these new businesses, you can't continue to grow, and you can't bring on more customers, 'cause more customers is more traffic, which is also gonna tip the server over.

David Rosenthal 35:31 Let's just take one incredibly illustrative example, the marketplace business. When Amazon figured that out, that was transformative. That was high-margin revenue. That was how they competed with eBay. Well, technically, to do that, they had to re-architect how the buy button worked on the website. Now, imagine with a monolithic software code base, what was involved in that?

Ben Gilbert 35:57 You just get so slow in your actual software development, and therefore, slow to ship, and therefore, slow to innovate because you're afraid of, uh-oh, what did this other team commit to the code base here? What does that assume? Can I trust the contract that this function had is still true, or did someone update this function in a way that was tightly coupled to the requirement that they had for their thing? And before you know it, the code is making a bunch of assumptions all over the place, and if you go try to change anything, it's all so brittle that you basically need to talk to people, a bunch of people, before you're ever editing code because you might break something.

David Rosenthal 36:36 Yes, and this is not just Amazon. This is every internet company. And the first companies to get to this kind of scale were like Amazon. It was this time. There were no internet companies of this scale before, and everybody is realizing you run into this brick wall, just from a complexity standpoint, when you reach a certain scale. This is a huge problem. Jeff is so focused on this, and not only Jeff, his new assistant at this time is focused on this, his new technical assistant, his shadow, who is, at this point in time, Andy Jassy, who was the first.... A lot of listeners maybe don't know about this, but anybody familiar with Amazon or who worked at Amazon knows Jeff's shadow. That's a legendary role to have.

Ben Gilbert 37:24 Which was a Microsoft thing before. Bill Gates' TA was sort of the blueprint for this.

David Rosenthal 37:30 Right, technical assistant. Exactly. So the reason that Jassy becomes Jeff's first shadow is Jassy, he was a Harvard MBA, he had been a product line launcher. He'd launched music for Amazon. He ended up in the marketing department after that. And then two thousand, two thousand and one dot-com crash, Amazon axes the whole marketing department. [laughing] 'Cause, you know, we're not doing ads anymore, we gotta get profitable. And Jassy was gonna get laid off with the whole department, but Jeff liked him, and so Jeff said, "I'm gonna save Andy."

Ben Gilbert 38:05 Wow!

David Rosenthal 38:05 "He's not gonna get laid off. I'm gonna find something for him to do. While we're figuring this out, let's take this technical assistant idea from Microsoft. He can come be my shadow," and he creates the role for him.

Ben Gilbert 38:16 And Andy's background is not technical up until this point. He becomes the technical assistant. He's brilliant, but he came in as one of the MBAs who was a category launcher when they were figuring out music, and electronics, and all these different verticals that they were going into. I can't remember which one Andy launched, but he was the launcher for-

David Rosenthal 38:34 He did music.

Ben Gilbert 38:34 Music, for one of those. And I think fairly recently, like within the last five years before this, he had considered a career in the sports industry.

David Rosenthal 38:44 Oh, yeah, he wanted to be a sportscaster.

Ben Gilbert 38:46 Yeah. He's, like, a well-known sports nut, has his basement tricked out as a sports bar, and almost took that career path. So we're not talking about a distinguished engineer at Amazon who's taking this technical advisor role because they're this technical luminary. It's a really smart guy who's just a very malleable, facile person.

David Rosenthal 39:05 Yeah, it was just an excuse to keep Andy in the company and give him a job. But this is now the biggest problem in the company that Jeff is focused on and that Andy's focused on, and this is where all these threads come together. I'm just kind of in awe thinking about this. If I were looking at this problem of my technical, you know, infrastructure has ground to a halt, we can't ship anything, communication is so hard in the company, the natural thing to do, and I think what most companies would do and did try to do at this point in time, is, "Okay, we gotta improve our communication. We need better coordination loops, more communication, tighter communication, more coordination between teams. We need to build out our engineering management discipline here. We need to build out our processes. We're gonna get really efficient to be able to solve this complexity challenge."

Ben Gilbert 39:58 And at Microsoft, when they encountered this problem a decade or two earlier, they invented the program management role. That was basically-

David Rosenthal 40:05 Ah.

Ben Gilbert 40:05 -the responsibility is... It was twofold. It was, there are not enough unicorn people out there who are 10X developers and also unbelievable sort of communicators, and so we'll just hire communication mouthpieces for the 10X developers. We can recruit these four sigma IQ engineer-type people, typically terrible communicators, and so let's just attach a PM to every dev, or a PM to every-

David Rosenthal 40:29 Ah

Ben Gilbert 40:30 ... two to five devs, and that way, they'll have communication associated with what they're doing, and all the PMs can talk to each other-

David Rosenthal 40:37 That's so funny

Ben Gilbert 40:37 ... and they can figure out what's happening between these two teams, and then they both go write specs, and the engineers write their engineering documents, and then, boom, we're off to the races. And the PMs can just keep talking it out to make sure that we're all on the same page.

David Rosenthal 40:49 Now, I don't know this. You may, 'cause you were one of these people.

Ben Gilbert 40:51 That was my job, yeah. [laughing]

David Rosenthal 40:53 Great. Was the Microsoft PM program, and it was program management, not product management, was that the origin of the modern Silicon Valley product manager?

Ben Gilbert 41:02 Well, it is specifically the origin of program management.

David Rosenthal 41:06 Mm-hmm.

Ben Gilbert 41:06 Microsoft considers product management a marketing function.

David Rosenthal 41:10 Ah.

Ben Gilbert 41:10 So it's owned in the marketing org, and is much more go-to-market oriented, whereas Microsoft's program manager is in the engineering org. It's on the same comp ladder and same promotion ladder as engineering.

David Rosenthal 41:22 That would be a fun, maybe special, to do with somebody of, like, let's trace the history of PM in tech in Silicon Valley.

Ben Gilbert 41:29 And let's be specific about what the P stands for there, since it can be very different things.

David Rosenthal 41:33 Yeah, yeah. Okay, so that's what most companies would do, even incredibly successful, brilliant, smart companies and founders like Microsoft, Bill Gates, et cetera. That is not what Jeff and Andy decide to do.

Ben Gilbert 41:49 How about less communication?

David Rosenthal 41:51 How about no communication? [laughing]

Ben Gilbert 41:54 [laughing]

David Rosenthal 41:55 So this is where the Tim O'Reilly Web 2.0 influence comes to play in such a bigger way for Amazon and for the internet. Jeff has been exposed here, and Andy, too, as his TA, to this concept of Web 2.0 and this concept of APIs, and Jeff just makes this incredible leap and says, "We should use APIs internally, and if we make everything a, quote, unquote, hardened interface," was the Amazon term for this, "hardened API interface, we can blow up all of this. We're gonna say, 'No communication.' You cannot talk to anybody. Everything you do internally must be done via APIs, that then anybody else can access whatever they want. They don't have to talk to you."

Ben Gilbert 42:49 It makes sense. I mean, if you are thinking about your company like an entrepreneurial organization, or perhaps better put, a group of individual startups all operating in a very nimble, entrepreneurial way, well, then, you kind of should think about them as separate companies. And if all these startups out there are communicating with each other without a BD person, and they're all just-... pinging each other's APIs, and commerce is flowing, and things are getting built, maybe that's the right internal model, too, for the modern next-generation type of company.

David Rosenthal 43:25 Academically, thinking around this was in process, but I think Amazon is really the first company that did this in practice. This comes to be called service-oriented architecture. So instead of a monolithic code-based software architecture, service-oriented architecture is this: every small team, every individual feature is its own architecture, [chuckles] completely separate from everything else.

Ben Gilbert 43:49 And it's worth teasing out. One is a sort of human cultural thing, which is basically trying to reduce the issue of Metcalfe's law, where every time you introduce a new person, there becomes an N-squared relationship to all the people that they could communicate to within the organization. So this is, like, an exponentially worse issue as more people join the company. So there's sort of this, like, cultural element that you're talking about there. The services-oriented architecture thing is sort of the engineering counterpart to that same mental model of, "Okay, well, now we actually are going to build each one of these things as a completely separate application that then I'll interact to create the user-facing thing."

David Rosenthal 44:26 Yep, the APIs. So there is a legendary, legendary post about... This is one of the top all-time posts in the history of the internet.

Ben Gilbert 44:38 Is this the Steve Yegge?

David Rosenthal 44:40 This is the Steve Yegge rant- [laughing] ... by then Google engineer at the time. This post happened much later, but about this period in time at Amazon. He had been working at Amazon at this time and then moved over to Google later. Shout-out to Jeremy Diamond-

Ben Gilbert 44:54 Yep

David Rosenthal 44:54 ... in the Acquired Slack for reminding us about this. [chuckles]

Ben Gilbert 44:57 The funniest thing is the way that this got public, by the way, is he was at Google, and they had just launched Google Plus, and he meant to post it internally, but it turned into a external Google Plus public thing. And it obviously went viral, 'cause if you hear, "This person meant to email their own internal organization, and instead, they leaked it out on the internet because the product is so poorly designed that this person who was working on the product could not determine the difference between internal posting and external posting," that is just like catnip.

David Rosenthal 45:26 Yeah, the meta story to this post is just as good as the actual post itself. So Steve, in this piece, he starts off, and it just illustrates the difference between Google culture and Amazon culture so clearly. He starts off just bashing on Amazon culture [chuckles] like they don't care, but he talks about the hardened interface, that that's how Amazon thought about things. He talks about Rick Dalzel. I don't think we mentioned in the previous episode, Rick was an Army Ranger before going to work at Walmart, and that he would just terrorize everybody, all the developers, and he himself was a hardened interface, and Amazon is so terrible-

Ben Gilbert 46:04 [laughing]

David Rosenthal 46:05 ... and Bezos is so terrible, and they're so mean, and blah, blah, blah, blah, blah, all this stuff. But it's all just a warm-up to the main point of the post, which is where he says, "Look, Amazon gets everything wrong. We're better at everything at Google. But there's one thing, there's one very, very, very important thing that Amazon kicks our ass in, [chuckles] and it's this..."

Ben Gilbert 46:27 And I think this is, like, twenty ten-ish to anchor this time period.

David Rosenthal 46:30 Yeah, twenty ten, twenty ele- it was whenever Google-

Ben Gilbert 46:32 Yeah

David Rosenthal 46:32 ... Plus launched, so it feels about right. Steve writes that Jeff and Andy, uh, you know, as part of this, sent a memo out to the whole company at Amazon. It was a big mandate, and, quote, "Jeff's big mandate went something along these lines. One, all teams will henceforth expose their data and functionality through service interfaces. Two, teams must communicate with each other through these interfaces. Three, there will be no other form of interprocess communication allowed, no direct linking, no direct reads of another team's data store, no shared memory model, no backdoors whatsoever. The only communication allowed is via service interface calls over the network. Four, it doesn't matter what technology they use, HTTP, COBRA, Pub/Sub, custom protocols, doesn't matter. Bezos doesn't care. Five, all service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world, no exceptions. Six, anyone who doesn't do this will be fired. [laughing] Seven, thank you. Have a nice day." And then he's like: Of course, for everybody who used to work at Amazon, you know he didn't say, "Thank you, have a nice day," 'cause he's so mean.

Ben Gilbert 47:58 And this is crazy at the time. If you think about this sort of edict, I remember building web applications in the late two thousands, and if you told me, and I-- of course, I was writing PHP and querying a MySQL database, and if you told me, "Oh, yeah, you can't query the MySQL database, even though you have access to it, and even though it's owned by your company, you instead have to use this API to go ping this web service, which has permission to directly interact with the database," I'd be like: "What? Are you kidding me? But it'd be so much easier for me to just..." And the answer is, "No, you'll be fired."

David Rosenthal 48:28 It's funny. You know, we thought a lot about in this episode, how do we tell this story for non-technical members of our audience without getting too much in the technical weeds? This is all pretty technical now, but I don't think we can avoid it. This is so important. And the context here is, like, let's zoom back out from service-oriented architecture and APIs and all this. What's really going on here? What's really going on here is this is the beginning of focus on what makes your beer taste better. [chuckles] All of this junk we're talking about, all this technical junk, it's technical junk from the perspective of what actually matters as a business. What matters as a business is the customer experience and new features and customer satisfaction and revenue and profits, and all of this junk was getting in the way. And so this is where-... Jeff has this realization of none of that makes the beer taste better. So let's standardize, get rid of all communication, API-ize all of it, and then everybody here can spend all of their time just focusing on new features to make the beer taste better on amazon.com.

Ben Gilbert 49:38 Yep. And the other thing that it is, is a very Amazonian concept of documentation. So of course, they start all these meetings with the six-pagers and the PR FAQs, where we're not doing PowerPoint slides, we're just sort of working backwards from this document of what the customer will actually experience. APIs are a heavily documentation-oriented way of computing. When I'm hitting your API endpoint, there is a strictly documented set of requirements of things I can send you and ways in which you send information back. Whereas if I'm allowed to communicate directly with your database, you and I can have a little conversation. You can tell me, like, "Oh, yeah, that field, we kind of stopped using for this purpose and started using for this other purpose, so just keep that in mind." There's no "keep that in mind" in APIs. There's, "When you hit this thing, you will get that thing back." And so it brings this true precision, hardened belief in the way in which that thing will respond when I hit it that is documented, and you must keep the documentation up to date with the way it actually performs.

David Rosenthal 50:42 Well, while we're talking here about this earth-shattering realization of focus on what makes your beer taste better and turn into API infrastructure that which doesn't, I think we should talk about our second sponsor of this episode and all of season eleven, one of our very favorite longtime companies in the Acquired family-

Ben Gilbert 51:04 Woo!

David Rosenthal 51:05 ... Pilot.com. Pilot sets up and operates your entire financial stack as a startup and a growing company, including finance, accounting, tax, even higher-level CFO services like investor reporting, all of which you would otherwise be mucking around yourself in, either as a founder or hiring somebody on your team to do. Don't do that. It does not make your product better. It does not make your beer taste better. [chuckles]

Ben Gilbert 51:34 There are many of you out there who are opening QuickBooks when you shouldn't be, so don't. You know you feel guilty when you're doing it. You're like: I shouldn't be doing this, but I am doing this. Call Pilot.

David Rosenthal 51:45 I should probably be thinking about my customers, and instead, I'm-

Ben Gilbert 51:48 Spending the Saturday reconciling.

David Rosenthal 51:51 Yes. For the vast majority of companies, and especially startups, doing it yourself as a founder, terrible use of your time. Hiring your own, you know, deep finance team, also probably a terrible use of your limited venture capital or bootstrapped resources. Instead, you should just go on over to Pilot. They take all of that headache off your plate as a founder. And what's cool, you know, we're talking about APIs here, it's not only that Pilot has teams of expert accountants and financial professionals who can do your books and your financial reporting for you, they also are a technology company run on APIs. Because today, you know, fast-forward, the legacy of everything AWS creates here is Stripe, it's Plaid, [chuckles] it's Modern Treasury. So much of your financial stack as a company these days, and your revenue, runs on API-based services. Well, Pilot integrates with them! So good luck having a traditional accounting firm be able to do that. Pilot integrates with Stripe, Brex, Gusto, Shopify, Square, you name it, and they take all of that data right into your financial stack directly.

Ben Gilbert 53:09 And importantly, you can just count on the fact that they're gonna keep integrating with whatever the next leading-edge financial thing is. Whereas I think for a lot of people, if you say, "Oh, they have a Shopify integration," well, sure, but they're probably not a company full of engineers that is looking for the next Shopify to make sure that they integrate with at the deepest level.

David Rosenthal 53:29 Pilot co-founders and good friends Waseem, Jessica, and Jeff are all MIT engineers. This is their third startup. They sold their last startup to Dropbox. They very much know what they are doing on a technical front, and this is frankly just a brilliant idea and piece of infrastructure that I'm so glad exists. And for everything, as we always say, relevant to this episode, Jeff Bezos himself- [chuckles]

Ben Gilbert 53:54 ... is an investor in the company, alongside Sequoia, Index, and many, many other great VCs. So thanks to Waseem and crew. Everybody in the Acquired community, if you use Pilot, go on over to pilot.com/acquired, sign up there, and if you use that link, you will get twenty percent off your first six months of service.

David Rosenthal 54:18 Thanks, Pilot.

Ben Gilbert 54:20 Thanks, Pilot. You guys are the best. All right, so we're in story number three at this point. One is the apocryphal, "Got some extra hardware lying around." Two is this idea that Tim O'Reilly brings up Web 2.0 and APIs, and so they start working on the Amazon Associates API. Three is really this idea of, "Okay, the organization is moving too slow, and a way to speed it up internally, just for our own step one internal use case, is make it so that the teams communicate with each other via API." But once they start doing that, and obviously before Steve Yegge writes his rant and publishes on the internet, they start realizing, "Okay, there are parts of this where it may make sense to start being external-facing, because once we get this stuff right, and we've toiled around in the darkness so much trying to get this stuff right, and I don't think it's helping our customers at all, maybe there are other people out there who are experiencing this same kind of, uh, blunt force trauma, just trying to keep their infrastructure up and modern."

David Rosenthal 55:25 ... There's one more, small compared to the big ideas, but kind of inevitable as things were going, but one more leap that we should talk about that happens here. Everything we just described so far in AWS origin story number three is related to software engineering and the amazon.com-

Ben Gilbert 55:43 Mm

David Rosenthal 55:43 ... code base. But what AWS is, is abstracted hardware, IT infrastructure, and software, too. But the core, like S3, EC2, that's IT infrastructure. How do you get from transforming your software architecture to, "Oh, now I need cloud IT infrastructure?" Well, it's kind of the same problem. It's an inevitable outcome. When you transition your software architecture to this service-oriented architecture and no longer a monolithic code base, you know, IT used to centrally plan, like we were talking about. We can ship these features at these times, and we need a code freeze at that time, and we need X capacity, and we can forecast that, and we can look out into the future. Now, with this, you've got all these distributed teams doing God knows what without talking to anybody. IT can't centrally plan anymore. So what Amazon realizes is they need to do the same thing with IT that they did with software engineering, which is transform it also into an API-accessible pool of computing resources, versus, "I'm giving you this server, and that's what you got."

Ben Gilbert 57:00 And you're talking about just internally. If all these teams are hitting each other's APIs internally, then, yeah, there has to be some dynamic way that if a, a whole bunch more load starts coming in and you weren't told about it, you do have to be able to spin up the hardware to handle that.

David Rosenthal 57:17 And it's brilliant of, like, "Well, let's just make that an API, too." We place an API call into IT, they have a pool of computing resources.

Ben Gilbert 57:25 [chuckles] But much harder than it sounds.

David Rosenthal 57:27 Yes.

Ben Gilbert 57:27 "Oh, yeah, IT can just become an API." [laughing]

David Rosenthal 57:30 [laughing] No, no, no, no. This is a multi-year journey for IT at Amazon, too. Of course, it wasn't like Bezos just sent the email that Steve Yegge described, and everything happened overnight.

Ben Gilbert 57:43 Yeah. Okay, so what you're telling me then is Bezos gets excited about this, Jassy starts working with him on it. They're basically translating this idea of the first little nugget that you planted is, we should make sure that all of the APIs that we're making available internally, we should sort of, like, design them in mind as if they could be externally consumed at some point. But you haven't yet told me, how does some commercial offering eventually become available, and what is the commercial offering to third-party customers?

David Rosenthal 58:16 All right. So we're now in mid-two thousand and three. This has been this huge transformative project within Amazon over the last eighteen months. Jassy's been working a lot on it as Jeff's TA, and Jeff's like, "Okay, Andy, it's time for you to go back out into the company. You're done being my TA. You gotta go become a leader of something within the company." It's almost like an echo of Jeff and David Shaw back at D. E. Shaw.

Ben Gilbert 58:46 Yeah.

David Rosenthal 58:46 Like, they start thinking together, like, "Okay, Andy, what are you gonna do? What's a new thing you're gonna go lead within Amazon?" [chuckles]

Ben Gilbert 58:54 Yep.

David Rosenthal 58:55 Andy's probably happy he didn't leave Amazon, I think. [chuckles]

Ben Gilbert 58:59 [chuckles]

David Rosenthal 58:59 And they come together to this idea of, well, maybe there's an opportunity to take the API-based IT infrastructure that we're developing here and offer it to third parties. So the legend goes, Andy puts together a six-pager.

Ben Gilbert 59:19 And this is the official Amazon legend. You can read about stuff on aboutamazon.com.

David Rosenthal 59:24 Yep, it's in official Amazon documents. You know, everything in Amazon happens in written narratives, in six-pagers. He writes the six-pager. Famously, he has to tinker with the margins and adjust them to fit everything onto six pages. He can't fit financial projections on there, so there's no financial projections in this document, and then he whiteboards them out on the spot in the meeting with the S team and the board, where he's proposing this big, grand vision to take over Amazon Web Services, relaunch it with this new vision of being cloud IT infrastructure. In the document, there is an ask, a proposal to hire fifty-seven new people to go pursue this initiative. Andy talks about he's so nervous going into the meeting. This is such a huge career moment. He's asking for fifty-seven people. Nobody asks-

Ben Gilbert 1:00:15 [chuckles]

David Rosenthal 1:00:15 ... for fifty-seven people. It's a ballsy move. He's risking everything, and Jeff loves it, the board loves it, the S team loves it. It gets approved, and I think all of that actually happened or happened in some way, shape, or form. Andy, literally, we mentioned Colin Bryar, who was running AWS until this point, Andy and Colin swap places. So Andy goes in, takes over AWS. Colin becomes Jeff's next shadow.

Ben Gilbert 1:00:48 Oh, I didn't realize that. Andy right away took over the publishing of images via the Amazon Associates API, that sort of fledgling AWS?

David Rosenthal 1:00:58 Either that happened, or this is part of the Amazon corporate history, hand-waving, you know, "Oh, all of it just went smoothly." Colin becomes Jeff's shadow. He then goes on to run IMDb when Amazon acquires IMDb, and then later, he would leave Amazon, team up with Bill Carr, who ran Prime Video, and then they write Working Backwards. I didn't realize this. This is brilliant. They now have a consulting firm together as part of Working Backwards to help companies implement the Amazon culture. [chuckles]

Ben Gilbert 1:01:30 It's great.... perfect.

David Rosenthal 1:01:31 Freaking brilliant. So back to Andy. He gets approval, he's gonna hire fifty-seven people. He recruits Adam Selipsky to come in, join the company. Adam, of course, would later leave AWS to become CEO of Tableau, and is now back at AWS, where he is now CEO of AWS.

Ben Gilbert 1:01:50 So I watched every single re:Invent keynote to prepare for this, which I will tell you, that is a lot of IT conference keynote watching, and the most recent one is Adam Selipsky. And it's like ten, eleven years of Jassy up there on stage, and you finally get a different voice, and it's a little bit jarring, especially when you're mainlining them all back-to-back when it's suddenly not Andy Jassy. But yeah, Adam is the guy now.

David Rosenthal 1:02:11 Yeah. Do you know who else was in that first wave of external recruits who come in to join AWS?

Ben Gilbert 1:02:19 I do not.

David Rosenthal 1:02:20 Jeff Lawson.

Ben Gilbert 1:02:22 Oh, no way! The CEO of Twilio.

David Rosenthal 1:02:24 Yes.

Ben Gilbert 1:02:25 Wow.

David Rosenthal 1:02:26 Which totally makes sense that Twilio would come out of AWS.

Ben Gilbert 1:02:29 Yes, of course.

David Rosenthal 1:02:30 So yeah, I think all of this really happens. Andy does write this doc. He does take over AWS. He absolutely builds and leads AWS from what it was, which was very different, into what it is today. But I think there's a little more to the story, too.

Ben Gilbert 1:02:48 It's a convenient narrative, and it's also a little bit odd that this sort of idea could come from someone who wasn't in the muck.

David Rosenthal 1:02:59 Yeah. It's actually a really good interview that Andy does with the Harvard i-Lab in 2013, that's on YouTube. They, they're talking about the origin of AWS. I think the topic is intrapreneurship at companies, which, ugh, my God, the most disgusting word of all time. [laughing]

Ben Gilbert 1:03:16 [laughing]

David Rosenthal 1:03:17 But Andy, in the talk, he's like: "Well, you know, we had to decide, you know, as part of this vision document and the discussion around it, how do we launch this? Do we pick just one service, one kind of IT primitive, and launch with that? Or do we put together a whole bunch of things and launch them all together?" And he says what they ended up doing was they got a tiger team together of the ten best technical minds inside the company, and they deconstructed all the major web services, web applications of the day, amazon.com itself, Google, eBay, all the... He doesn't mention them by name, but I assume the other big web services of the time, big web applications, and then figured out what you would need to re-architect those services based on this new cloud IT primitive infrastructure. And so they come up with a list. They decide you need storage, you need compute, you need databases, and you need a content distribution network, like what Akamai was, to be able to recreate any internet service of scale.

Ben Gilbert 1:04:22 I love that you say, "was," like what Akamai was. [chuckles]

David Rosenthal 1:04:25 Yeah. [chuckles] Story for another day, perhaps. So they decide, "You know what? We can't fulfill our promise to developers of 'you can build web applications of scale with us,' unless we launch with all of those services. So we're gonna build them all, and that's why we need fifty-seven people." Andy would later say... This is a great quote, and this is absolutely true. He says: "If you believe developers will build applications from scratch using web services as primitive building blocks, then the operating system becomes the internet." And that's so true. That's what AWS is today. So they're gonna launch with everything they need to build a whole operating system. [chuckles] This is where the official narrative just completely falls apart because that is totally not what happened, not even a little bit.

Ben Gilbert 1:05:11 Nope, and in fact, I can recall personally using Amazon S3 for something I was working on, and there was no EC2.

David Rosenthal 1:05:20 Yes. So unlike myth number one about AWS origins, you couldn't just take excess amazon.com IT capacity and externalize it. They had to go build all this from scratch as external services. It takes a couple years to do that for everything, and in fairness, you know, maybe in defense of the official narrative, they do start working on all of these suite of services all at once, and it just takes a while to get them all built. That probably is true, but yeah, S3 [chuckles] is the first service to launch by itself in March 2006.

Ben Gilbert 1:05:56 And let's talk about it. It was an independently useful thing. So S3, Simple Storage Service, it's a place that is available on the internet. You don't have to think about where it is. It's in the cloud, and you can dump images there if you're an application developer, and then elsewhere from your application or other applications, or no applications. If you just want to access the image directly by URL, you can access, and it's not just images, it's anything that you want to store up there, and it's this wonderful, magical, amazing thing where I don't have to buy a server, I don't have to configure a server, I don't have to rack a server, I don't have to think about maintaining a server, and I only pay as I go, and it is insanely cheap.

David Rosenthal 1:06:35 Yeah, S3 launches in March 2006. EC2 launches a few months later in August 2006, I think in beta in August 2006.

Ben Gilbert 1:06:45 And what is EC2?

David Rosenthal 1:06:46 EC2 is Elastic Compute Cloud, which is the compute counterpart to the storage part of AWS in S3.

Ben Gilbert 1:06:56 And a simple way to think about EC2 is, if you were a web application developer at the time, like I was, and you were writing stuff, and you were sort of running it on localhost on your computer, and you had previously been deploying it to some server at a data center that you could telnet to and ping and see it had an IP address, well, you could basically spin up an EC2 instance and treat it kind of like that, except it didn't have persistent storage associated with it. You could think about it like a computer without a hard drive that happens to live in the cloud and is yours until you stop using it.

David Rosenthal 1:07:24 It's your processor in the cloud. CloudFront, which is the content delivery network, the CDN, the Akamai part of the puzzle piece, that launches in 2008.... and the first major database offering, RDS, the Relational Database Service, doesn't actually launch until two thousand and nine.

Ben Gilbert 1:07:45 And importantly, RDS, it wasn't like you just start using RDS, and now you don't have to use any of the stuff you've been using before. RDS would run the database that you were already using. So I can't remember if it actually launched with Postgres, but assume you're normally self-hosting Postgres on your server, or you have a separate database server that you're used to running that runs Postgres. Well, now you use RDS, and it runs Postgres, and all your queries work, and you can treat it like it's your own database server.

David Rosenthal 1:08:12 So that's sort of the most obvious crack in the official narrative of the AWS origin, which brings us to the fourth origin story of AWS, the, uh, dissenting narrative, [chuckles] if you will.

Ben Gilbert 1:08:27 At this point, the compass in story number one was, like, a hundred and eighty degrees off, and then in story number two, it got ninety degrees off. We're fine-tuning now. Story three is basically right, but probably doesn't just include the full set of people that could have been written into the narrative.

David Rosenthal 1:08:43 And I think story number four is basically right, too, but three and four are kind of the same.

Ben Gilbert 1:08:48 Success has many fathers.

David Rosenthal 1:08:49 Yes. Concurrently and separately to everything we just said in story number three, Andy Jassy working on Jeff's TA on this big problem, writing the vision doc, the business plan, all that, hiring fifty-seven people. In two thousand and three, a network engineer at Amazon named Benjamin Black is working on the IT architecture transition that we talked about, and he's working with Chris Pinkham, who is his boss, who, in fact, oversees all of network engineering within IT at Amazon, and Chris reports to Rick Dalzell, the CIO of Amazon. So the two of them, Benjamin and Chris, they write a six-pager about how they actually are going to restructure the network engineering part of the IT architecture to the new model that the company is moving to. And at the end of this document, supposedly, they mention that with the architecture that they have in mind, Amazon might actually be able to use that same architecture to sell virtual compute servers as a service to third-party developers. And indeed, Amazon could do that.

Ben Gilbert 1:10:10 Now, here's where things get murky because that document definitely does exist, this idea that most of it is focused on, "Here's how we're gonna execute our plan, and also, we could sell that infrastructure as a service." Here's where Ben Black and his blog post on the subject, and then in future interviews he gives with Network World and others, are very insistent that they then showed this to Jeff Bezos. The proposal made its way to Jeff Bezos.

David Rosenthal 1:10:36 Yep, I think first to Rick, and then to Jeff.

Ben Gilbert 1:10:39 And he green-lit their project.

David Rosenthal 1:10:41 Yes, separately from the rest of AWS.

Ben Gilbert 1:10:45 And what I can't tell is, did this, before it got in front of Jeff, get merged into Andy's proposal, and it was sort of green-lit as one big thing, or were there actually two different concurrent efforts?

David Rosenthal 1:10:59 We're gonna tell the story, and then I have some thoughts on all this. So Chris is actually from South Africa, and right around this same time, he and his family want to move back to South Africa, leave Seattle, move back to Cape Town in South Africa. So he goes to Rick, his boss, and says, "Hey, I'm actually gonna leave and move back, move the family back." And Rick is like: "Oh, no, no, no, no. We're in the middle of this huge architecture transition. This is a key moment in the company. You are a super valuable person at the company. What if we do the same thing we're doing in Palo Alto with A9 and lab one twenty-six? We'll set up a new Amazon subsidiary in Cape Town, South Africa, that you can lead, and then we can retain your talents, and we can figure out what that new subsidiary will do." So Chris is like: "Oh, okay, that sounds good." Chris and Rick start thinking about this, and they decide, "Well, we just had this idea, Benjamin and I, in that paper we wrote about selling virtualized servers to third parties. What if we work on that at the new subsidiary?" [chuckles] So they do. Benjamin doesn't come along, but Chris and a really, really great engineer named Chris Brown-

Ben Gilbert 1:12:13 And from what I can tell, this is where Ben Black's involvement ends, where he was part of pitching the idea but is not actually a part of building the thing that they're gonna build in South Africa.

David Rosenthal 1:12:23 Yep. So Chris and Chris go off to South Africa. They start working independently on this compute server idea, and they do. That becomes EC2. It's that team in South Africa that builds EC2. Brad Stone writes in The Everything Store, quote, "EC2 was born in isolation, with Pinkham talking to his colleagues in Seattle only sporadically, at least for the first year. Pinkham later said that the solitude was beneficial, as it offered a comfortable distance from Amazon's intrusive CEO." Quote from Pinkham: "I spent most of my time trying to hide from Bezos," Pinkham says. "He was a fun guy to talk to, but you did not want to be his pet project. He would love it to distraction." [chuckles] Hilarious.

Ben Gilbert 1:13:10 You can start to see, even in these very public, reasonably nice quotes, that there's enough tension between Chris Pinkham and the Bezos/Jassy leadership, that even in the official Amazon things that they put out about the development in South Africa, like, Chris Pinkham's name is sort of nowhere to be found, even in this South Africa-specific blog post about the history of EC2. There's clearly chafing between Chris and the leadership.

David Rosenthal 1:13:38 ... Yep. In Andy Jassy's infamous one-star review [laughing] of The Everything Store on amazon.com, in one of the several passages where he talks about how Brad had it all wrong, here's a quote from Andy: "The vision document proposing the AWS business and outlining the initial set of services for AWS, including our compute service, EC2, was finished and presented to the executive team in September two thousand and three. I wrote the document and was lucky to have the help of several people in putting it together. This was about a year before Chris Pinkham moved to South Africa [chuckles] to build the initial version of EC2. Chris played an integral role in the definition, team building, and product building of EC2, despite leaving before EC2 was launched." So clearly, there's some bad blood here, but, uh, my thoughts. I want your thoughts, too. I just find this whole thing ridiculous because, A, of course, it doesn't matter.

Ben Gilbert 1:14:36 Right. Who cares?

David Rosenthal 1:14:37 But the most ridiculous thing is that what I think actually happened here, which is there were multiple teams working on multiple related things within the company, that's how Amazon prides itself on running: decentralized innovation. That was the whole point of this whole freaking exercise, was decentralized, let teams innovate. What's Jeff's, uh, invent and wander, you know, is the kinda mantra of him and the company. I think that's what actually happened. The official version now of the AWS history of it was all centrally planned, it was all in that two thousand and three document. That just seems sort of silly to me and counterproductive.

Ben Gilbert 1:15:16 Yeah, I agree. The other thing that becomes clear is it's really not about the idea, it's about the execution, and I know this is a trope, so to make it a little bit more specific, it can be about the idea if you define the idea as the hundreds of micro ideas that comprise the main idea. But if you're saying the idea is something articulatable in a sentence, well, that's pretty much worthless. And maybe even in a vision doc, it's about the thousands of micro decisions you make while executing it and actually doing the work to execute it, that sort of ends up mattering. But, you know, history is written by the victors, so we're seeing some of that play out here. The other thing that's very clear is Andy Jassy is just a brilliant strategist and fantastic leader, and so of course, someone like him in the organization would end up actually running it. So I don't even know why there's dispute over, "Well, it was my idea." It's like, well, who cares? Who's gonna end up turning this thing into a world-changing business?

David Rosenthal 1:16:19 You know, you had that great playbook theme and takeaway from the amazon.com episode that I think you posted as a clip on Twitter and LinkedIn that went so viral, and people who were original Amazon employees loved it, which was your idea that Amazon was a pathfinding algorithm.

Ben Gilbert 1:16:35 Yeah, it was brute-forcing its way through a maze to eventually find the correct way by just gathering data. Launch stuff, gather data, tear it down, start again.

David Rosenthal 1:16:45 Yep. Go through the maze, hit a dead end, backtrack a step or two, go take another path, and I think that actually is also how AWS launched.

Ben Gilbert 1:16:54 Early on, but I wanna get to that in my playbook 'cause I think it actually contrasts that in some ways.

David Rosenthal 1:16:59 Ooh, okay, fun. Fun, fun, fun.

Ben Gilbert 1:17:01 All right, so it launches. Last thing to highlight here is the importance of the primitives. I don't know how intentional it was in the moment, but it became something that later on would become hugely important to them, which is that they truly were unopinionated about this as a platform. They said, "We're going to launch with primitives. It's the most basic story. That's the most basic compute. It's the most basic way to host your databases. It's the most basic CDN, and we can't wait to see what developers build in an innovative way with our absolute bare bones architecture that would go on to be called infrastructure as a service, as sort of a category." And they-- Again, I do not know if it was an intentional thing or not when they were first launching it, but they did not say, "Let's try and build a new OS, a new programming paradigm." No, no, no, no, no. We're just gonna give you super basic building blocks, and you run with it.

David Rosenthal 1:17:58 So all that's on the technical side. We've been spending a lot of time there. We've alluded to this, but let's talk about what a radical innovation this was on the business and market side. I've got a great quote here. So when S3 launched, probably at the same time that you were playing around with it, a truly world-class, fantastic engineer at Microsoft at the time by the name of James Hamilton, who's now an S-team member and SVP distinguished engineer at Amazon, because of what he saw with AWS, he wrote on his personal blog about trying out S3 when it launched with a personal project. So here's a quote from him: "What was even more disruptive was a credit card was all that was needed to provision storage. There was no required proposal for financial approval, there was no RFP, no vendor selection process, no vendor negotiation, and no data center space needed to be found. I could just sign up and start working. From deciding to write the app to it being up and running on the internet was measured in days, and after debugging and testing extensively, the end of the month rolled around, and I got my Visa bill. Of course, I knew abstractly that S3 was disruptively priced, but when I saw that my bill for the entire development and test of this application was three dollars and eight cents, [chuckles] it just seemed wrong. Once development was complete, I was still storing all the test data in S3. So the following month, I got a bill-... for zero dollars and seven cents.

Ben Gilbert 1:19:41 So no joke, David, every month I get a bill from AWS for, like, seventy-one cents, and I have no idea what old project it was for. But it's one of these things where it's like, it's priced so dynamically. If it was a big, successful project holding a lot of data, then, you know, it would be expensive. They actually have pretty good margins on S3 and on bandwidth and some of these things. But because it was an abandoned project for which I do not know what the email address to log into AWS is from whatever team I was working on, I kind of just don't care.

David Rosenthal 1:20:12 Could you imagine back in 2006, let alone even probably today, Oracle or Microsoft-

Ben Gilbert 1:20:20 [chuckles]

David Rosenthal 1:20:20 -or IBM or HP or you name it...

Ben Gilbert 1:20:24 They all have six, seven, and eight-figure contracts. There's no way that they're gonna invest in, "Hey, let's let people pay with a credit card and service this tiny little market."

David Rosenthal 1:20:31 "And we'll charge you three dollars and eight cents." This was unbelievably world-changing, truly world-changing. This is how Dropbox, Instagram, Airbnb, Uber, Zynga, all of these companies get started.

Ben Gilbert 1:20:48 I remember being at all these startup weekends and all these hackathons where the audience, the family members who came, the, like, venture capitalists who came to be the judges, it was blowing the audience's mind how fast people could stand something up in forty-eight hours because suddenly you didn't have to spend five million dollars and three months figuring out what data center you were gonna put something in. You actually could just have an idea and get it out there within two days. This birthed that movement.

David Rosenthal 1:21:17 We all lived it. Rover.com, that, you know, we were all in various ways, part of adjacent to, next to our great friend and mentor, Greg Gottesman. He was a VC. He wasn't technical, you know. It got built in a weekend.

Ben Gilbert 1:21:29 Yeah, Phil Kimmel.

David Rosenthal 1:21:29 Phil, our buddy, built it.

Ben Gilbert 1:21:31 Yep.

David Rosenthal 1:21:31 Amazon, of course, embraces this. In fall of 2007, they start the AWS Startup Challenge, and they host it first in September 2007. They didn't win, but do you know who was part a contestant in that very first AWS Startup Challenge?

Ben Gilbert 1:21:50 Is it like TeachStreet? Like, is it gonna be some Amazon inside baseball?

David Rosenthal 1:21:54 Oh, even better. Justin.tv.

Ben Gilbert 1:21:57 No way!

David Rosenthal 1:21:58 Which, of course, would pivot into Twitch.

Ben Gilbert 1:22:02 Which Amazon would then buy.

David Rosenthal 1:22:03 Of course, Amazon would then buy.

Ben Gilbert 1:22:05 Wow, for, like, the better part of a billion dollars, right?

David Rosenthal 1:22:08 Yep. I don't have a good sense of how Twitch is doing now. I assume Amazon got a good deal on that almost no matter what, but we got to find the right way to revisit that.

Ben Gilbert 1:22:16 For sure. But that is a great use case. Like, Justin.tv early, I mean, they were using a lot of bandwidth to stream video. They were using a lot of S3 to store. Like, it was a great use case. And man, did Amazon embrace this sort of thing. This is probably one of the biggest keys to success or sort of playbook themes for why AWS became successful. They realized how perfect this was for startups. They realized how hard it would be for large enterprises to just wholesale move over. They realized that was not gonna be the first beachhead market. But for startups who were building something from scratch, who could go on to become fifty-plus billion dollar companies, my God, let's get them on AWS. And the blitz was so impressive. I mean, I remember the first time I met Dave Chappell, who was doing developer evangelism for AWS Early with Jeff Barr and so many other folks there. It was just a breath of fresh air where every happy hour you went to, there were AWS people who were giving you tons of free credits, who were helping introduce you to other people for your startup. They all thought about themselves as active participants in the startup community. So it just became this obvious default that you would build on AWS because it felt so ingrained with how you make startups, is you start an AWS account for the thing that you're gonna build. There's a famous Andy Jassy refrain that you hear at basically every re:Invent, where he talks about, first,

Ben Gilbert 1:23:47 there were the enterprise cloud doubters who said: "Oh, maybe this is good for startups, but it's no good for line of business applications. It's no good for mission-critical applications," and, "Oh, maybe it'll be good for my test environment or my dev environment, but I won't be able to run enterprise-grade stuff there."

David Rosenthal 1:24:05 I think his line is, at first it was that nobody thought you could run a real application. It was only, like, what James was building, like a personal-

Ben Gilbert 1:24:12 Ah.

David Rosenthal 1:24:12 -test project. And then it was like: "Oh, well, you know, startups can run in AWS, but, like, real enterprises wouldn't do that."

Ben Gilbert 1:24:20 [chuckles]

David Rosenthal 1:24:20 And then it was like: "Well, as a real enterprise, we can run non-differentiated, you know, non-mission-critical stuff in AWS, but we're not gonna put our mission-critical stuff in AWS. That's gonna be on-premise." And then it was like: "Oh, my God, take my money!"

Ben Gilbert 1:24:34 Right. So I think there's this interesting, obvious first beachhead of customers that are startups. But when you think about the enterprise adoption and how eventually now, you know, your bank's application is on AWS, and everything is moving to the cloud, or a hundred and twenty billion dollars a year of revenue has already moved to the cloud of at least Microsoft, Amazon or Google. So there's these sort of three prepositions of the cloud. There's people building on the cloud, which to me, that's lift and shift. And that's really, like, a phrase that the cloud industry uses for, hey, you were running, you know, some local databases, you had some local storage. You basically had your data center, and you just want to lift that up and shift it over and drop it in Amazon's data center, and you're not gonna take advantage of any cool stuff. You're just gonna now run your stuff in Amazon. So the benefit that you get of that is you only pay for what you use, you don't have to pay the big upfront costs, and you don't have to maintain it yourself, but otherwise, exactly the same thing.

David Rosenthal 1:25:34 Jassy, actually, at the first re:Invent in 2012, as part of his presentation, he has a great-... slide on this, where he talks about the six reasons AWS wins versus traditional infrastructure for enterprises, and it's exactly what you said. It's one, you're trading CapEx for OpEx, which is great. You know, you can take all that expense in every income statement every year, as opposed to capitalizing it. Two, you're getting lower OpEx than you could on your own, thanks to AWS's economies of scale.

Ben Gilbert 1:26:06 They're getting better deals on their servers, so they're passing those along to you.

David Rosenthal 1:26:09 Yep. Three, you don't have to guess on infrastructure capacity ahead of time. AWS is elastic. As you need more, it scales up. As you need less, it scales down, and that's actually four, it can scale down. [chuckles] When projects don't work, you're not stuck with legacy leftover infrastructure from things that don't work. Five, engineers can focus on writing code, not installing infrastructure. Focus on what makes your beer taste better. And then six was, you're instantly global on AWS, versus when you run your own on-prem data centers, you're, like, wherever your data centers are.

Ben Gilbert 1:26:45 Which sounds nice. It's not quite true. It's not one global availability zone. Actually, interesting point, that was the original premise. They thought they were gonna abstract that away, and you were gonna imagine sort of a global S3 data center, and when you deployed it, it just went to all of the data centers. And then they quickly realized, "We're gonna have so much traffic from so many customers that we're gonna consume WAN. We're gonna consume the Internet's bandwidth replicating unnecessarily." And so there is ... You do not run globally by default in every single... Anyway, yes. And so then there's this step two, which is building in the cloud, and that's taking advantage of using things like the relational database service, that RDS, that very early thing that they launched, which is, "Hey, this isn't just your exact same code and your exact same infrastructure, but in our data center, and build differently." You're actually taking advantage of a cloud-native service. And then there's building for the cloud, and that's the future, and that's things like Lambda and DynamoDB. And if you think about Lambda, for folks who have not done this or heard of the serverless movement, it's this idea that you don't even need to, like, reserve an EC2 instance or deploy code to it. You just write your code, and then when you wanna call it, a thing just spins up for a few milliseconds, runs your code, and spins down, and you were never aware of its IP address or where in the world it was. You just know that your code executed, and so that's really like building for the cloud. You're completely architecting your application differently to take advantage of this very different world of computing the cloud offers.

David Rosenthal 1:28:18 If we rewind to origin stories number two and three of the big monolith software problem, and, like, that all the engineers and product teams in Amazon and every other internet company were spending all their time focused on not making their beer taste better, undifferentiated heavy IT lifting. In the beginning, really, what happened is probably development teams in those days were spending, like, seventy percent of their time on infrastructure and setup and thirty percent of their time on software development. And then AWS shifted it to, "Okay, spend seventy percent of your time on software development and thirty percent of your time on worrying about our APIs and your infrastructure." This for the cloud, you know, Lambda, everything is like, that's taking it down to zero. [chuckles]

Ben Gilbert 1:29:06 Right. That's the goal, at least. I think all this stuff sounds better in principle than it actually ends up in practice. But yeah, that's the idea. Now, AWS, in its earliest days, let's call it the first couple of years, was really startup-focused, new applications from whole cloth that wanna use our infrastructure as a service, primitive building blocks. And they very quickly realized, "Well, if we're doing infrastructure as a service, it also does enable this lift and shift thing. So as long as we work like hell to satisfy the compliance requirements, and availability requirements, and uptime, and all this stuff, replication requirements of enterprises-

David Rosenthal 1:29:41 You get SOC 2 audited with Fanta.

Ben Gilbert 1:29:43 There you go. Perfect. So very quickly, AWS could serve these two markets of startups and the lift and shift enterprise. Now, another way you could have designed this is, instead of doing this infrastructure as a service and these primitives, you could say, "Let's think about the far future, the Lambdas of the world," and we're imagining now in 2006. "Why don't we just build that sort of stuff to start? Let's change the development paradigm. Let's build the platform of the future. That platform will live in the cloud. That platform is not Windows of the past or the App Store of the current day," where it was just sort of coming. "That platform of the cloud, why don't we start writing the brand-new paradigm today?" And there are a couple other big tech companies that took that approach at first that were completely wrong, and the unfortunate thing for Microsoft and for Google, who really started at this platform as a service layer, was you basically didn't get the startups because you didn't have a mature platform yet that people were excited to build on and understood how to build for. But you also didn't get the enterprises 'cause there was no ability to lift and shift. And so if you were creating a platform as a service in the late 2000s, you're really a decade early, and you're building for a market that doesn't yet exist.

David Rosenthal 1:31:06 Okay, so let's talk about what happens, 'cause this is just... Man, Amazon ran the table on maybe the most important market of all time.

Ben Gilbert 1:31:15 For, like, the first five years, with nobody competing with them.

David Rosenthal 1:31:19 It's incredible. So 2006 is when the first services launch. 2007, 2008, that's when these startups are getting started: Airbnb, Uber, you know, Instagram, and the like. You know, and they're becoming big, but they're not yet at the scale that they are today. 2009, Netflix becomes a customer.

Ben Gilbert 1:31:37 And how crazy is this? They had already built their own-- In the last, like, three years,... basically cloud internally in order to stream video, which was originally, I think, streamed through Silverlight. They had this big partnership with Microsoft.

David Rosenthal 1:31:51 That's right! Oh, my God, that was so terrible.

Ben Gilbert 1:31:53 [chuckles] Yes. Yeah, I think you had to use IE to view it. It was bad. But they had just invested a bunch and then did an about-face and said, "Oh, we were wrong. Actually, we're gonna use AWS instead."

David Rosenthal 1:32:05 We're moving all of it to AWS, and I believe Netflix is still, to this day, I think, one hundred percent on AWS.

Ben Gilbert 1:32:12 I don't know about one hundred percent, but yes, they're still an enormous customer. Reed Hastings was actually the very first guest interviewed on stage at the first re:Invent in twenty twelve.

David Rosenthal 1:32:21 I think in that interview, if it's wasn't that one, it's another one around that time, he talks about... People say, "Reed, you compete with Amazon.com. Aren't you worried about being on AWS?" And he's like, "No, [chuckles] I'm not worried at all about being on AWS. It is legitimately the smart infrastructure decision for us to make."

Ben Gilbert 1:32:40 Which that was such a feather in Amazon's cap. They've had two big feathers in their cap. There's that one and the CIA one. Like, "It's secure enough for the CIA to use, so it should be secure enough for you," and that was a few years later. But the Netflix one, I mean, a lot of people were afraid to use AWS early on because they felt like they didn't wanna do business with Amazon if they were a retailer, or they didn't wanna do business with Amazon if they were in video or in any of these things that Amazon was competing on. And Reed getting up on stage and saying this matter-of-factly and so forcefully was him saying, "You can trust that AWS is different than Amazon."

David Rosenthal 1:33:13 Okay, so why is Reed and Netflix making this decision? Why then do a bunch of other customers do this? And Microsoft... Let's put Google to the side for a minute, but IBM, you know, Oracle, all these legacy technology companies, why are they asleep at the wheel here? It's a disruptive pricing model.

Ben Gilbert 1:33:33 And let's not lump them together, 'cause I actually think it's worth analyzing. Each company failed to claim this opportunity for unique reasons.

David Rosenthal 1:33:43 Hmm. Okay.

Ben Gilbert 1:33:44 So the first couple, it's worth analyzing. I think what you're pointing out is these old server companies, so the IBMs and Oracle on the database side, that made these ridiculous gross margins, and they sold you this complete proprietary solution.

David Rosenthal 1:34:00 Yeah, eighty percent gross margins.

Ben Gilbert 1:34:02 Totally, and they would sell that to you, and they would install it in your data center, and eventually, they would hand wave and call something cloud.

David Rosenthal 1:34:10 Private cloud. Private cloud!

Ben Gilbert 1:34:11 They might do it in their data center, they might do it in yours, but it's effectively the same thing, and it's sold on a license basis that comes with auditing. Amazon has this ability to literally meter your usage and then charge you exactly what you need to be charged, whereas this old model of buying a bunch of Oracle licenses and deploying them on the servers in your data center, you just get these audits every once in a while that were like: "Okay, cool. Well, we sold you a license, and you bought this many licenses. We'll show up and make sure that you aren't misusing this thing." So they weren't gonna change that business model. I mean, it was a license to print money.

David Rosenthal 1:34:49 Amazon targeted gross margins and operating margins for AWS in the twenty to forty percent range.

Ben Gilbert 1:34:57 Which felt like a ten X and a twenty X for them, but was unattractive to the traditional-

David Rosenthal 1:35:02 Right! This is the perspective. Amazon.com is operating on, like, a two percent operating margin basis. For Amazon, they're like: "Oh, shoot, we get ten to twenty X our margin basis with this new business? Awesome," but that's still less than half of the margin that the old school guys are getting.

Ben Gilbert 1:35:21 And the old school guys are certainly fat and happy on their operations, whereas Amazon knows how to run everything they've ever run as this unbelievable lean machine, 'cause they're so COGS sensitive on everything.

David Rosenthal 1:35:33 So here's another thing, though. You mentioned, call it the Oracles or the IBMs, whoever, they'd come install this software on computers for you or in their data centers, call it private cloud, whatever. They'd install Oracle Database version nineteen, and then two years later, you're paying your maintenance costs. You're gonna pay an upgrade cost to go to Oracle Database version twenty, and then you're gonna go a couple years later to version twenty-one, and you're gonna pay a bunch of money every time you migrate.

Ben Gilbert 1:36:02 Right. Why would you give up this annuity that you have?

David Rosenthal 1:36:04 Right. Well, cloud infrastructure, it's always up to date. There is no version. Whatever you're using, you're using the latest stuff because it's always... And then even more than that, Amazon gets to constantly iterate versus doing these Windows XP, every four years, we're gonna ship a big update. No, no, it's just constantly changing.

Ben Gilbert 1:36:26 Yep. Okay, so that's super old guard, the IBMs and Oracles, which is very funny when you watch all these keynotes. I wonder if anyone's ever watched them all mainlined like I did, 'cause I have this unique perspective, seeing them all so close to each other. They used to, on stage, refer to IBM and Oracle in a tongue-in-cheek way. They would refer to, like, a New York company, and it would be, like, IBM's logo, but it would say, like, New York company. And, like, Oracle is, you know... They would go as far as to say, like, San Francisco company, and then they might make a reference to, like, a super yacht or, like, sailing or something to, like, really drive the point home. Around twenty sixteen, seventeen, they totally did an about-face, and they just start directly attacking them, and they start directly attacking Microsoft, too, because I think Microsoft went from, in the early days, someone where Amazon looked at them more as a partner, like, "We're happy to run Microsoft stuff on your AWS instances," and now that Azure's actually been a extremely viable competitor and made a big, big comeback-

David Rosenthal 1:37:22 They're the best competitor to AWS, by far.

Ben Gilbert 1:37:25 Amazon now loves attacking SQL Server licenses and stuff like that, that Microsoft, of course, comes in and audits, just like the old guard four. So let's look at Microsoft, though. Let's think back to the mid-2000s, 'cause this really should have been their business to take. They should have figured this out, but there were essentially two problems going on at Microsoft. One is that the Windows group just had too much power.... and between them and the Windows Server people and the SQL Server people, the goal of those groups was to get customers to do more with this idea that people thought was gonna be big for a while, of PCs taking over the data center and PC operating systems becoming the data center operating system. And really, the goal was sell more Windows Server licenses, and that was a great business. So anything that looked too much like that within Microsoft got gobbled up in an internal power struggle, 'cause it could look like it would cannibalize that thing.

David Rosenthal 1:38:18 This was probably happening when you were there, right?

Ben Gilbert 1:38:21 Yes. Uh, it was sort of over by the time I was there. 2012 is when I arrived. But they did eventually realize that they had to make a big bet on Azure, and totally separate from Windows Server. And so this, we should give Ballmer credit, 'cause he did see this. So they replaced the leader of that organization at the time, of Windows Server and tools business, with Satya, who would eventually, of course, become CEO and then really double down on the cloud strategy. But they realized, okay, Azure needs to be a thing that's kept separate and has CEO sponsorship, and can sort of escape the Windows Server thing. But their second problem is what we were talking about earlier. They launched this thing called Azure Cloud Services, which they've now basically deprecated, which was a platform as a service approach. Microsoft had the golden goose. They had all the IT relationships. What they should have done is gone to everyone that was using Windows Server and say, "Great news. We have primitives in a data center that you can lift and shift to, much like how Azure works today. You can trust us. You already pay us. We'll make this a part of your enterprise agreement." But Microsoft got clever, and they thought, "You know what? The Win32 runtime, the .NET platform, we're a great platform company. Developers wanna build for the things that we make, so let's make the next generation set of APIs and platforms for building great cloud applications." And they just totally did not recognize the magical thing they had in front of them, which was all the customers and all the distribution, who, over the next five years, would slowly dribble out and start their new stuff on AWS while Microsoft was still figuring out its strategy. They got caught in that middle of people building brand-new apps, didn't know how to build for their platforms, and they didn't want the lock-in. That's still a big thing in cloud: "Oh, don't get locked in. You wanna be multi-cloud." And they didn't make it easy for their existing customers to lift and shift. So Microsoft, while they're in a great place now and have figured out an interesting strategy, and we can talk about kind of the bear and bull later, they just had five years of watching pitches go by.

David Rosenthal 1:40:27 Yeah. Oh, it was such a whiff. Okay, we talked about Oracle, and I wanna come back to Oracle in a minute. We talked about Microsoft. What about Google?

Ben Gilbert 1:40:37 So Google's the third place. Amazon's got thirty-five, maybe forty percent. Microsoft's got twenty to twenty-two percent. Google, somewhere around ten percent.

David Rosenthal 1:40:46 Which that Microsoft having twenty-two percent-

Ben Gilbert 1:40:48 Very impressive.

David Rosenthal 1:40:48 That's an enormous win.

Ben Gilbert 1:40:50 Totally. Here's my sorta take on Google. They accidentally became a business. They launched as a project, and then they figured out this business that became unbelievably cash generative immediately. The nature of their business being search and feeding all the data directly in to make the results better, is that they instantly became a consumer-sponsored monopoly. Totally legally done. Competition's just a click away, but they're the best experience, so they just have these unbelievable reinforcing effects of becoming a monopoly. So they're a super high gross margin monopoly in the biggest market in the world, which is people wanting to use the internet, and they're the front door to the internet. So their entire existence, it's not that it's been easy, 'cause it's been a computer science challenge.

David Rosenthal 1:41:40 It's been very academic.

Ben Gilbert 1:41:42 And it's... They've never had to go into a hard business. I don't know what Google's advertising margins are, but that business probably runs at, I guess it depends if you put sales above the line or below the line, but eighty percent gross margins. A thirty percent gross margin business is not particularly attractive to them, nor are they good at sales. I know they're getting better, but the narrative at the time was they made this G Suite thing, which at the time was called Google Apps, but no one would buy it, so they ended up giving basically all of it away for free to consumers forever, Google Docs and Gmail and everything. It was the best thing to use, and they couldn't figure out any way to sell it to enterprises. So they didn't have the competency of enterprise sales the way that Microsoft did. They didn't have the ability like Amazon to operate in these really hard businesses, eking out every last dollar, and so it just kinda looked unattractive. Meanwhile, they actually had the best technology for it. They actually operated these big data centers and this really novel way of networking all the computers together in order to pull off search, and they were sort of inventing machine learning before machine learning. So a huge value prop of the cloud now is all your data's in the cloud, and that way you can use a bunch of stuff that Google invented, TensorFlow, [chuckles] Kubernetes, to run your stuff in the cloud. This also was kind of theirs to win, but they didn't have the sales and marketing muscle, and they didn't, I don't think, have the iron gut that Amazon had to go do something kinda grinded out and hard.

David Rosenthal 1:43:12 Well, I think they also made the mistake that you were originally talking about. I thought you were talking about Google, and then you said it was Microsoft, too, of, like, building too far in the future. I think Google made that mistake, too.

Ben Gilbert 1:43:23 Yep, that's totally true. I mean, the first foray was Google App Engine, which was in no way infrastructure as a service. It was not primitives. It was, I think you can write in Python or Java, and it was a specific API surface for GAE, and you can make App Engine apps, and it was all abstracted away from you. It was kind of the same Microsoft thing, if we're gonna get really clever and build you a platform of the future. But Google, per the Steve Yegge rant, is not at all a platform company, and so they didn't really know how to build it, they didn't know how to sell it, they didn't know how to identify a market for it, they didn't know how to support developers in it at the time, and so that sort of fell on its face. And what is GCP? Google Cloud Platform is now a very viable player in this race, but that's not where they started.

David Rosenthal 1:44:09 ... Yep. So I wanna rewind back to Oracle and talk about something, but one thing that really came up in the research and from talking to people and friends at AWS and Amazon, Amazon and AWS deserve so much credit for overcoming one of the hurdles that you just said Google had, which was Google didn't know how to do sales. Amazon didn't know how to do enterprise sales either.

Ben Gilbert 1:44:33 That's a great point.

David Rosenthal 1:44:35 And when AWS started, like we talked about, the obvious core product market fit and first set of customers was startups. Well, they don't want enterprise sales. They just wanna pay with a credit card online, and so Amazon didn't have to figure it out. But they then did also figure it out and serve enterprises, and governments, and government agencies, and big institutions, and did the lift and shift thing, and then brought those big enterprises along.

Ben Gilbert 1:45:01 And I think it started with academia. Their first big contracts were with universities doing research and running effectively, like, their supercomputer loads on AWS.

David Rosenthal 1:45:12 Yep, NASA was famously a customer starting in 2009.

Ben Gilbert 1:45:15 Yes, that's right. They did the data streaming and then the video distribution of the Mars landing, right?

David Rosenthal 1:45:22 Yep, that's right. That's right.

Ben Gilbert 1:45:23 That was the first big thing, but working with NASA and the academic community on, like, how do we fit in with institutions, I think taught them some of that enterprise muscle.

David Rosenthal 1:45:33 You know, those folks don't wanna pay with a credit card. [chuckles]

Ben Gilbert 1:45:35 Right.

David Rosenthal 1:45:36 So you gotta do contracts, you gotta do billing, you gotta do discounts, you need a sales force, you need all this stuff. You need to do a big conference like re:Invent.

Ben Gilbert 1:45:44 They had to have poached a bunch of Oracle salespeople 'cause the Amazon sales machine is a lot like the Oracle sales machine of old.

David Rosenthal 1:45:51 Yep. Okay, let's talk about Oracle. One of the things that I think to most people, was to me before doing the research here, is vastly underappreciated about AWS is, you know, people think about EC2 and S3, and it's like infrastructure as a service, and compute, storage, and, you know, networking, and all that. True, Amazon doesn't report this, but if you google estimates of what the most popular AWS services are, the most used ones, EC2, S3, they're juggernauts, but numbers three, four, and five are all databases. AWS is a huge database business. They have taken so much share from Oracle, [chuckles] and while it's all related, it's infrastructure, it's also a different kinda business from infrastructure. Famously, AWS Redshift, like, why is it called Redshift?

Ben Gilbert 1:46:49 Ooh, yes. So for people who don't know this, there's an official Amazon talk track, and then there is a real talk track. So the official Amazon talk track, do you know this one, David?

David Rosenthal 1:47:00 Oh, that it's like a Doppler effect or something like that?

Ben Gilbert 1:47:03 Yeah, it's physics-related. I think Amazon actually used Doppler as a code name for Alexa. And of course, one of their buildings in Seattle is that, you know, when the sound waves like get bunched up or spread out, like when a siren goes by, it's the Doppler effect, and redshift is the light equivalent. It's like a star moving away from you.

David Rosenthal 1:47:21 But there's another part of the story here. [chuckles]

Ben Gilbert 1:47:23 Shift away from big red.

David Rosenthal 1:47:26 Yeah, which is Oracle. [chuckles] So yeah, the database market is freaking huge. There's two properties of the database market that people just don't think about but are incredible. One, the global market size for database software is one hundred billion dollars, and it is growing at ten percent per year. Because everything you do with computing, you need to store it in a database. You need databases, and you can't get away from them. It's big, and it's growing fast. Two, database software may be the stickiest software of all time.

Ben Gilbert 1:48:02 Especially at the scale that people are producing data now. It's actually worth contextualizing this a little bit. So there's all these stats all the time, which are something like last year, more data was produced and stored than in the entire decade before and in the entire century before that, and that's not the exact stat, but there's eleven different variants of it, which we all sort of intuitively know because we're storing data on our phones. But when you have two things exponentially growing, it's hard to intuit the difference between those two things. And so we sort of know this about data. We also know this about the internet. Like, when you talk about dial-up back in the day, and then when, uh, people got their first cable or T-One line, and meanwhile, I'm here podcasting, and, David, I am seeing you in gigabit down directly into my computer, and it's unbelievable. So you think, wow, these two things have the same phenomena, except that they're actually moving at very different rates. The internet has not gotten faster at the rate that data storage has increased. So this is most illustrated in some of the AWS re:Invent talks. They're like, "Hey, a lot of you wanna shift to the cloud, but you have a petabyte of data, or some of you have an exabyte of data in your data center. So what do we do about that?" And they first released this thing that was a hundred-terabyte super secure thing they would ship to your office, called the Snowball, and you'd plug it in, it would automatically get all your data. It had a Kindle on it, so it would actually display a custom shipping thing, and you could track it all the way back, and it would arrive in the Amazon data center, and they would auto... It, it was like tamper-proof, bulletproof. It was an amazing thing. And they've released a few other generations of them now. There's even some with compute on them for field applications. And then the curves kept going. The internet kept getting a little bit faster, but our data storage kept getting a lot more significant. And there's some stat that Andy gives on stage in a keynote in twenty sixteen, seventeen, somewhere in there, where they announce Amazon Snowmobile, and he's like: Hey... 'Cause all of us are sitting here on computers that have a terabyte or two terabytes or four-terabyte hard drive, you're like, a hundred terabytes is not that meaningful.... And so then they're like, "We will send a snowmobile to your data center," which is a semi-truck full of snowballs, effectively, so that you can get the data to us. And even with this solution, this never underestimate the bandwidth of a semi-truck moving down the highway, this type of solution, it can still take six months to migrate all of your data into the cloud, whereas it would've taken you years and years and years and years, I don't know, the better part of a century, to actually upload it over the wide area network, over the internet. And so that, I think, illustrates pretty heavily your point about once you decide to put all of your enterprise data into a database hosted in some specific vendor's cloud, there's pretty meaningful lock-in there. There are very practical concerns with moving.

David Rosenthal 1:51:00 Oh, I can do you one better on an example. Amazon.com used Oracle databases-

Ben Gilbert 1:51:07 Yep

David Rosenthal 1:51:07 ... when it was started. Amazon.com did not finish their [chuckles] migration off of Oracle databases and onto AWS products until 2019. [laughing]

Ben Gilbert 1:51:20 Oh, my God!

David Rosenthal 1:51:21 Thirteen years after AWS launched.

Ben Gilbert 1:51:24 That is insane.

David Rosenthal 1:51:25 It took that long for Amazon itself to migrate off of Oracle.

Ben Gilbert 1:51:30 Meanwhile, by that point, Amazon had eight different database solutions for other companies to use and had invented three of them. There's open source ones they host for you, but they also created DynamoDB, and they invented new database technologies that are compatible with other relational databases, but way faster, way more performant, and it's still hard to migrate within the company.

David Rosenthal 1:51:54 Amazing. You know, you just play that forward and you're like, wow, okay, A, there's still so much revenue that's gonna shift to AWS, and B, it's gonna be so sticky. So sticky! One of the most amazing stats that, again, one of our friends pointed out to us that, I, I tweeted about this, and I posted it on LinkedIn, it's just crazy. AWS today is on an eighty billion dollar revenue run rate, eight zero. That is not the most crazy, impressive, defensible thing about AWS. If you go look in the financials, in the 10-Q, the latest 10-Q from Amazon, they have to report the AWS revenue backlog.

Ben Gilbert 1:52:38 Basically, revenue that's contracted but not recognized yet.

David Rosenthal 1:52:41 These are contracts, you know, mostly with big enterprises, of revenue they've signed deals for, but that is not yet recognized. It's gonna be recognized in future quarters. [chuckles] That backlog of committed contractual [chuckles] signed revenue is over one hundred billion dollars. I don't even know what to say about that.

Ben Gilbert 1:53:03 There's a lot more storage and compute not on the cloud than currently in the cloud.

David Rosenthal 1:53:07 So Amazon could shut down all sales efforts, stop growing, literally turn off the lights in terms of new business today, and they still have a hundred billion dollars more business that is contractually coming their way. [chuckles]

Ben Gilbert 1:53:24 It's insane.

David Rosenthal 1:53:25 Crazy. Just crazy.

Ben Gilbert 1:53:27 So David, you mentioned they're on a, what is it, seventy, eighty billion dollar run rate right now?

David Rosenthal 1:53:31 Eighty. Eight zero.

Ben Gilbert 1:53:33 Well, in 2014, Jeff Bezos wrote a memo, the annual memo that comes out, a letter to shareholders, and said that, quote, "I believe that AWS is market size unconstrained." [laughing]

David Rosenthal 1:53:47 [laughing]

Ben Gilbert 1:53:47 That was the point at which it was a year before they broke out AWS's financials, and I think it was a six billion dollar run rate business.

David Rosenthal 1:53:59 When the, quote-unquote, "AWS IPO," which I think Ben Thompson coined that term-

Ben Gilbert 1:54:04 Yeah

David Rosenthal 1:54:05 ... happened in 2015, that was when they reported Q1 2015 earnings. At that point in time, AWS was a six billion dollar revenue run rate.

Ben Gilbert 1:54:14 So it was probably, like, a four billion dollar business when Bezos is like, "Wow, this thing, I think it's unconstrained." It's nuts. I mean, the real story here is Amazon discovered a new unregulated public utility that they could generate enormous margins on.

David Rosenthal 1:54:31 Well, enormous for Amazon margins.

Ben Gilbert 1:54:34 Okay, but an enormous raw dollar margins, absolute dollar margins. This is a business that they can generate billions and billions of dollars in profits by operating and is effectively a public utility. The market size is, I think I said a hundred and twenty billion earlier, but I think that's being conservative, and growing at thirty percent per year with no end in sight of this thing continuing to compound at that rate.

David Rosenthal 1:54:58 You know, I always used to think about and talk about the mega trend of our lifetimes is the internet. Believe in the internet. That's the bedrock of modern life, and AWS is what powers the internet, that's true. What I've realized here, it's more than the internet. It is anything that a computer could touch, AWS takes a tax on that, essentially. Now, to bring it full circle, anything a computer could touch is the internet. You know, like, it's one and the same these days. Jeff is... It's a crazy statement, but I think he's right. It's market size unconstrained.

Ben Gilbert 1:55:29 It certainly was [chuckles] in 2014, and I wonder if he could even make it now.

David Rosenthal 1:55:33 Yeah. So okay, the AWS IPO happens in 2015. "IPO," quote-unquote, six billion dollar revenue run rate for AWS, seventy percent [chuckles] annual growth rate.

Ben Gilbert 1:55:46 That's right, it was still growing like crazy then. I think now it's growing, like, thirty to thirty-five percent, but then it was nuts.

David Rosenthal 1:55:52 Thirty to thirty-five percent growth on eighty billion dollars is nuts. [laughing] Yeah, 19.2% operating margin. When that happens, Amazon stock jumps fifteen percent when that earnings release comes out. It should have jumped, like, five hundred percent, and does [chuckles] over the next year or two.

Ben Gilbert 1:56:09 What an idiot I was for not buying the day that it jumped that percent. Isn't that the funniest thing about all this, is you look at it and you're like, "Well, now the stock's expensive"? No, the stock was still very cheap!

David Rosenthal 1:56:19 ... Very deep, very deep. 2016, this is interesting. Andy Jassy was not technically the CEO of Amazon Web Services.

Ben Gilbert 1:56:29 Senior Vice President of AWS.

David Rosenthal 1:56:31 Yep, until twenty sixteen. Twenty sixteen, they restructure corporately. Jeff Bezos becomes CEO of the whole company, Jassy becomes CEO of AWS, and Jeff Wilke becomes CEO of everything else, Amazon Retail. That year, AWS does twelve billion dollars in revenue, over fifty percent of the company's operating profits, which, as we said, they do every year. Seventeen billion in revenue the next year, then twenty-five, forty-five in twenty twenty, sixty-two last year, but eighty billion dollar run rate. And [chuckles] there's today sitting on a hundred billion dollar backlog that's coming, rain or shine. Just freaking unbelievable.

Ben Gilbert 1:57:18 Yep.

David Rosenthal 1:57:19 July 5th, twenty twenty-one, Jeff Bezos retires.

Ben Gilbert 1:57:25 Isn't that crazy? That was only a year ago. It feels like longer.

David Rosenthal 1:57:27 I know. Yeah, crazy. They announced it before then, but that's when it actually-

Ben Gilbert 1:57:32 Yeah

David Rosenthal 1:57:32 ... happened. Andy Jassy becomes CEO of all of Amazon. Adam Selipsky becomes CEO of Amazon Web Services. I think this was part of the most recent earnings release, this most recent quarter. They did a snowmobile operation on the International Space Station.

Ben Gilbert 1:57:52 [chuckles] Oh, I didn't know that. Really?

David Rosenthal 1:57:54 Yeah. I don't know if they worked with SpaceX or somebody, or maybe Blue Origin, and they sent some snowballs up to the space station-

Ben Gilbert 1:57:59 Wow!

David Rosenthal 1:57:59 ... and they lifted and shifted [chuckles] out of the space station. We've said it before, but AWS has about a thirty-nine percent market share of the cloud, Azure, twenty-one percent, Alibaba, ten percent. They're the dominant player in China, which that's an interesting story in and of itself, that similar to Amazon, like, it was Alibaba-

Ben Gilbert 1:58:18 Right

David Rosenthal 1:58:19 ... that became the dominant cloud player in China. Be fun to dig into how that happened, and Google, about seven percent.

Ben Gilbert 1:58:26 Yep. It's pretty interesting to look at all the ways they're pressing their advantages, too. Twenty fifteen, that year, they broke out finances. They also bought Annapurna Labs, this Israeli company, and they started custom-designing chips, which we've seen in both their training chips. They've done custom... I think they're called Trainium, and then they have inference chips, which are also some crazy name, like Inferon or Inf-- I can't remember exactly, but they have custom machine learning chips.

David Rosenthal 1:58:52 Do you know who makes those chips?

Ben Gilbert 1:58:54 TSMC.

David Rosenthal 1:58:55 Of course. Big TSMC customer.

Ben Gilbert 1:58:58 Huh. Yeah, the other thing is that in many ways, it's the embrace, extend strategy that Microsoft ran, where first they have RDS, and they're like: "You can run anything in RDS," and then they start doing things like launching Amazon Aurora, which is a direct attack at Oracle and a proprietary database software that they own and control. And they're like: "But it's so fast, and it's so performant. It's compatible. Oh, and by the way, we generate much better margins on it." It's all these things that they used to attack Oracle for, and they're like: "Well, look, now that we have all the customers, why don't we do some proprietary databases, too? And we can generate more margins on those." And there are ways that they generate huge margins, like bandwidth. AWS makes ninety-plus percent gross margins on their bandwidth charges. There are many ways where, yes, cloud is still objectively better than the old way that the licenses were structured, the old way of storing on-prem, the old way of hiring all your own IT people. But also, Amazon is starting to feel themselves on the lead that they've generated and run some of the same playbook. The other thing, so then the question becomes like: Okay, well, why machine learning? 'Cause it's so clear that compute is this massive pillar of the business. Databases has sort of been stood up as not quite as important, but definitely more important from a stickiness perspective. Every year, they announce some new database thing when they're on stage. Machine learning, they've announced SageMaker. They've broken out the keynotes, so now there's a custom ML keynote. They have a whole bunch of cloud-hosted ML offerings. They run TensorFlow, which is funny, 'cause that's a thing that Google created. They have their own container service. They also have their own elastic Kubernetes service, so they sort of have to serve customers, 'cause customers want Kubernetes, but they're trying to get you to use their own custom ECS Amazon container service. And what's becoming clearer to me is the machine l- learning capabilities that Amazon has need to be good, but they actually don't need to be as good as Google's, because here's sort of the strategy with machine learning: You're gonna use whatever ML is available with where your data is, 'cause running machine learning near your data is the most important thing. So once you've picked Amazon to be your storage vendor, and you've sent semi trucks full of your data into [chuckles] their data centers, you're not shopping around for, "Oh, where should I run my ML?" You're gonna run your ML on AWS, and so they can't fall crazy behind here. But I think this is one way that even though Google should be best positioned to have better ML offerings than anyone else, it kind of doesn't matter if they're not the place where customers are storing their data.

David Rosenthal 2:01:38 Okay, well, one last element of the story before we transition to analysis. I don't think we can call this a coda, 'cause they failed. [chuckles] It's not a coda, 'cause they didn't do it.

Ben Gilbert 2:01:51 It's a work in progress.

David Rosenthal 2:01:52 A work in progress, I think justifiably so. This has been an AWS love fest. We've heaped so much praise on them. It's like they've done everything right. It's amazing. There's one thing they missed. Ben, do you wanna tell us about it?

Ben Gilbert 2:02:08 Data warehouses. How is Snowflake its own fifty billion dollar company?

David Rosenthal 2:02:14 Unbelievable.

Ben Gilbert 2:02:15 It stores data in AWS and other public clouds, and it is its own fifty billion dollar company.... And what Amazon would tell you is, "We have Redshift, and it's one of the fastest-growing Amazon services ever, and it's doing really well." But you know the databases team at Amazon, that whole org has to be very, very unhappy that Snowflake managed to, I mean, run the gauntlet on the data warehouse market.

David Rosenthal 2:02:45 It's crazy that AWS did not do this [chuckles] .

Ben Gilbert 2:02:47 It's probably AWS's biggest failure, and the question is, why? And I think there's a few areas. One is just big company stuff. I think before launching something, when you're at Amazon's scale, and now that they are the trusted partner of all these IT departments, you've got these security things, operational things, SLA guarantees that they're fully committed to. And I think it hamstrings your ability to really streamline a product, be opinionated, and get something to market that's both fast and intuitive and built for the user. I think Redshift requires a lot of customization, whereas Snowflake is awesome for developers out of the box. And it's funny that the playbook that Snowflake ran is pretty similar to the playbook that AWS ran when they were just S3 and EC2 serving individual developers. So there's a little bit of like they're a victim of their own success on this front. The other one is, Ben Thompson pointed this out in a piece that we'll link to in the show notes, it's right there in the name. They're fighting Oracle. They're fighting the last battle with Redshift. It's, "Hey, take your Oracle-style data warehouse and basically do that in the cloud," rather than lots and lots of Snowflake customers never would have become Oracle customers. It was a different customer segment with a different set of needs. I mean, it's just a fantastic product, and that's not really who Amazon was serving. And there's new leadership there now, and they're getting the house in order, and I think they recognize this, but this was a whiff.

David Rosenthal 2:04:22 Probably not a whiff on the order of-

Ben Gilbert 2:04:24 Microsoft and Google whiffing on cloud. Yeah. It's an order of magnitude or two smaller.

David Rosenthal 2:04:30 Yes. So AWS, we're gonna do analysis now, do grading. There's no way this isn't gonna be a very high grade, but, like, if there's a black mark, this is it.

Ben Gilbert 2:04:41 The other thing where they're sort of a victim of their own success is the Amazon two pizza team thing led them to launch all these different services. Rather than having a cohesive product strategy, AWS has kind of been alphabet soup. And I haven't logged into the AWS dashboard in a while, but it used to just be so overwhelming, so many amorphous logos that all kind of feel like the same thing, where it's hard to disambiguate between two things. And I think Amazon realizes this because their keynotes now seem to be much more about pitching these vertical solutions, like, "Here's this thing for this industry, here's a vertical solution, here's case studies of other people in your industry," rather than first presenting you with, "We have four hundred and seventy-six services!" And I think that in the keynotes, they've also really dialed back on what used to be the drumbeat of the keynote, which is, "We launched what we consider to be seventy-four significant features this year, and we're excited to tell you all about them." I think that won for a long time, and now it's created so much confusion for customers that that's actually, like, the bull case for a Google, who is sort of a newer entrant, who's coming in with a more cohesive product strategy and can help customers really understand what they should be doing, rather than being like, "Hey, there's no guardrails. Good luck." And AWS keeps launching even more new services now to provide those guardrails and say, "Well, if you use whatever, whatever manager, then you can't get yourself into too much trouble." And it's like, "Oh, cool, a thirteenth standards body." [chuckles] They definitely have a little bit of that cleanup effort going on now, but, hey, they got market leadership, and they make far more revenue and far more operating income than anyone else, so it's hard to argue with. All right, listeners, well, this is a great time to share our next sponsor with you, something extremely unusual. This segment is brought to you by our great friends at NZS Capital.

David Rosenthal 2:06:33 They're just the best.

Ben Gilbert 2:06:34 They are. We first chatted with Britton and Brad and Joe and John with the idea about doing a paid sponsorship. They jumped on it, but they gave us one very particular caveat because they're such learners. And they said that the only thing we could ask listeners to do as a call to action is to read one of their white papers, think about it, and offer feedback and further refine the thesis. Well, this time, in contrast to our last two episodes, we are going to talk about a different white paper, and for those of you who joined us for the talkback, that was awesome to get to talk to all of you with the NZS guys on the call.

David Rosenthal 2:07:08 And that was so great about complexity and complexity investing, sort of the founding thesis of the firm. Today, though, we are talking about their white paper, Redefining the Margin of Safety, and we'll have a link in the show notes for folks to read it. But it's a super cool concept. So margin of safety, for folks who listened to our crazy ten-hour, three-part Berkshire Hathaway series last year, you'll remember that as an original Ben Graham concept, and then, of course, Warren and Charlie popularized it at Berkshire. And the idea is actually similar to NZS's core thesis, which is that you can't really predict the future [chuckles] as an investor or anybody else, and thus, the idea of having margin of safety in your investments, in the Graham concept of it, is around valuation. That gives you a wide leeway to be wrong.

Ben Gilbert 2:08:05 Yes. In a very wide possible of scenarios, rather than a very narrow set of scenarios, you're gonna be okay and still may make a profitable investment. And of course, Graham's a little simplistic viewpoint on this is, if it's a high valuation relative to the business's fundamentals, it's a low margin of safety, and a low valuation gives you a high margin of safety.... Now, NZS is different. They believe valuation alone is insufficient to actually think through what the true margin of safety is.

David Rosenthal 2:08:36 So they think about margin of safety really as focusing in today's fast-changing world on the adaptability of the management team of a company. A management team that's highly adaptable is going to give you, as an investor in the company, a much higher degree of margin of safety if you believe that the pace of change out there is accelerating and things are gonna be changing. Valuation doesn't tell you much, but a management team's ability to adapt to changing conditions does. So that's sort of part one of their thesis here. Part two, which is really cool, is that there's also a time element here. So not just management's capability to adapt, but what is the business cycle of the company that they're running? If it's a super, super fast business cycle, well, you could have the best management team in the world at adaptability, they're just not gonna have time to react, and then the likelihood that within a narrow window of time they'll make the right choices is low. So an example here is Groupon or Zynga. You know, it wasn't maybe necessarily that the management teams didn't know how to adapt to changing conditions, it's just that the business cycle for those companies was so fast they didn't have time to.

Ben Gilbert 2:09:51 They actually use this analogy in the paper where they're saying, "Well, imagine that you're driving only two feet away from another car and you're going quite fast. If they tap the brakes, you're screwed no matter what, how good of a driver you are." But of course, if you're at a safe distance and you give yourself time to react, then there could be a lot more margin of safety, no matter what the price of the investment. So a little bit about NZS before we close here. They've got over a billion dollars under management. They're a global equity fund. They're long only. They manage money for institutional and accredited investors. They're just some of our very favorite thinkers. They started the firm in twenty nineteen and worked together for many, many years before that. If you find this stuff interesting, you should go read the whole white paper by clicking the link in the show notes. It is well worth a read, and we say that just as fans of their ideas. We are not clients of the firm. And finally, they do really, really, really want your feedback on this. So if you've got a bone to pick, if you want to understand it further and read the whole white paper, if you totally agree, click the link in the show notes, go check out the white paper. You can email any of them. Their emails are on the white paper itself. Or even better, we're gonna do another Zoom call with them in October to talk about these ideas together. So there is a second link in the show notes to add that to your calendar, and we would love to see you there. Our thanks to NZS Capital.

David Rosenthal 2:11:11 Well, should we transition to analysis?

Ben Gilbert 2:11:15 Yeah, let's start with power, 'cause I think AWS is actually one of the best case studies in power of all time. So longtime listeners of the show know power is what enables a business to achieve persistent differential returns, or put another way, to become more profitable than their closest competitor, and do so sustainably, so they can sort of build enterprise value and be sustainably more profitable than their nearest competitor. David, when AWS broke out their financials, they were at, did you say nineteen percent, eighteen, nineteen percent operating margins?

David Rosenthal 2:11:48 Nineteen percent.

Ben Gilbert 2:11:50 Now they're at thirty percent. They've gotten more profitable when the landscape got more competitive.

David Rosenthal 2:11:56 Yeah, how did that happen?

Ben Gilbert 2:11:58 So there's something going on [chuckles] there. So there's a couple things. Moore's law is in their favor of all their cogs getting materially cheaper over time, and if I had to guess, I think they're not discounting for customers as fast as they're realizing both economies of scale and legitimately just costs coming down from Moore's law. But I think actually what's going on here is it comes all the way full circle that Amazon is offering platform-as-a-service offerings at this point and telling customers: "Hey, you could just keep using our primitive building blocks, but actually, what you should be doing to take advantage of the full power of the cloud to run these Lambda functions or to take advantage of these proprietary databases that are way faster, is to pay us a little bit more margin and take advantage of cloud-native things." And it's like, ah, the old tricks are the new tricks. Now you're the incumbent, and you're finding a way to do margin expansion, and the mindset a decade ago, or almost two decades ago at this point, of, "Oh, we need to create the platform of the future," was right, but you needed to do infrastructure as a service, as a stepping stone to get there. And it turns out that Amazon did that and generated their eighteen percent operating margins, and now here they are in a more of a platform-as-a-service world with customer lock-in, generating thirty percent margins.

David Rosenthal 2:13:26 It's funny, I'm looking at the list of seven powers here, which are, for folks who are new, counterpositioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And I'm like, check, check, check-

Ben Gilbert 2:13:39 Right!

David Rosenthal 2:13:39 ... check, check, check. [chuckles]

Ben Gilbert 2:13:41 So early on in the takeoff phase, counterpositioning all over the place.

David Rosenthal 2:13:45 All over the place.

Ben Gilbert 2:13:46 It was just straight up a business that the incumbents would never have done because it would have cannibalized themselves. Scale economies, this is probably the single greatest scale economies business of all time. I was trying to explore this idea of why now? Why did cloud happen in the late two thousands? And one answer is mobile, because as the computing devices get smaller, it requires more of the computing to be done in the cloud, so that sort of definitely accelerated this trend. But the other one is Amazon was kind of the first company to ever try and build data centers at this scale, 'cause they needed them to run the largest-... web application, amazon.com, and cloud is not profitable unless you run it at absolute massive scale. And so I think other people maybe evaluated this business model in theory, but Amazon was the one that was practically in a position to do it and actually realize the scale economies, or I should say, economies of scale, that would lead to the scale economy's power.

David Rosenthal 2:14:49 Yep. Well, and it continues to feed itself now of because Amazon's the biggest, they have the most surface area over which to spread out their CapEx and infrastructure costs, and so thus, they can charge the lowest prices at similar or higher profit margins than their competitors.

Ben Gilbert 2:15:08 It's amazing. Then you layer on the switching costs. Once people are semi-trucking their data into your data centers, there is very real switching costs.

David Rosenthal 2:15:17 I mean, amazon.com took 13 years to offload off of Oracle onto [chuckles] AWS.

Ben Gilbert 2:15:24 Yep.

David Rosenthal 2:15:25 If that's not switching costs in this industry, I don't know what is.

Ben Gilbert 2:15:28 Branding is very clear. I mean, by being the leader at this point, they're just winning. I mean, even if people wanna do the multi-cloud thing, they're basically like, "Cool, do Amazon and one of the others." Their market leadership position, and when they say things like, "This is the fastest growing Amazon service ever," they're reinforcing this idea of everyone else is eh, and everything we launch, customers love. And I do think people are totally willing to pay up at this point because they just view it as, This will cost us less in the long term than if we make the wrong technology choice and then need to move again.

David Rosenthal 2:16:00 Well, there's also the competitors. You know, at this point, probably with Microsoft and Google, you can feel more safe, but for the longest time, their strategies were all over the place. So as a customer, I don't have any trust that I can build on your cloud strategy, and it's not gonna completely change in the next several years.

Ben Gilbert 2:16:19 Totally, totally agree.

David Rosenthal 2:16:20 Whereas Amazon has just been, like, consistent.

Ben Gilbert 2:16:22 Yep. I will say, I think a tailwind for Microsoft has been multi-cloud. This idea that, hey, you don't want vendor lock-in, so you really should have some redundancy or spread out your infrastructure across multiple cloud providers. And I think enterprises over the last five, eight years really bought that narrative, hook, line, and sinker. It's a reasonable narrative. And so what has sort of happened is... And I remember there's a parallel to mobile development here. When I was an iPhone developer, people were telling me, "Use PhoneGap," and I'm like: Why? Then I won't get to use any of the, like, cool stuff that iOS lets you do, like the latest APIs and, you know, the lowest level hardware features. And they're like, "Yeah, but then you don't need to write an Android app, too, so your development costs are lower." And I'd be like, "Well, but I'll make an app no one wants to use. So sure, my costs will be lower, but I won't get to make an actually interesting application." And I think there's some argument here in multi-cloud, where it's like, okay, cool, you're gonna use everyone's infrastructure as a service, but we're far enough in the development of cloud now, where these vendors are doing actually interesting platform-as-a-service things, so you do wanna take advantage of that. And this is the Amazon argument, which they've argued in the last two keynotes, that they started showing up magically in 2021 in keynotes, where they're realizing, "Oh, crap, multi-cloud is making it so that a bunch of the revenue that could be coming to us is going mostly to Microsoft, but a little bit to Google as people diversify this space. And really, what we wanna do is convince people, actually, you'll save money because you'll have less complexity to manage with multi-cloud, and you'll get the functionality of all the cool things that we're launching, which require all the tight integration." So again, the thing that they were fighting against when they first launched, now that they're the big incumbent-

David Rosenthal 2:18:09 They're writing the playbook.

Ben Gilbert 2:18:11 Yeah. [chuckles]

David Rosenthal 2:18:11 Of course. That's how it works. [chuckles]

Ben Gilbert 2:18:13 The cycle of life.

David Rosenthal 2:18:15 I have a slight sidebar question. We talked about all the other big technology companies that whiffed on cloud. We didn't talk about Apple at all. Did they whiff on this, too, or is this something that's just like, "This is not Apple"?

Ben Gilbert 2:18:28 It's a good question. I mean, it's not Apple the way I think of Apple, and in fact, I even think iCloud's back end is Azure, or at least for a long time was Azure.

David Rosenthal 2:18:38 It was AWS. There was, like, a-

Ben Gilbert 2:18:40 Oh, really?

David Rosenthal 2:18:41 ... 2016, maybe, New York Times article that came out, where they reported that it was AWS, and Apple got very upset about it.

Ben Gilbert 2:18:48 I bet. I mean, Apple basically doesn't serve enterprises, and I know they sell laptops and phones to companies in bulk, and they have a enterprise relationship manager for companies. But this is not Apple's wheelhouse. That said, Tim Cook's Apple is very different than the Apple that I sort of hold in my head, and Tim Cook's Apple is wherever there is durable, high-margin revenue. And so this actually is Tim Cook's wheelhouse. I think if he had the sales force to go after this, I think he would do it.

David Rosenthal 2:19:21 So I totally agree. Apple's a consumer technology company. Yeah, maybe they should be running their own iCloud data centers. I don't know, probably not. But developers are so important to Apple.

Ben Gilbert 2:19:32 Mm.

David Rosenthal 2:19:33 They are so, and should be so close and in touch with developers, and Apple has had its own drawbacks of a high-margin business model recently and a monopoly with their developer [chuckles] relationships. You know, mobile, like you said, was the first beachhead for the cloud. Should Apple have been offering something for developers there, too? I don't know. It didn't happen, so it doesn't matter.

Ben Gilbert 2:19:56 They have spun up something where you can sort of build your applications in the cloud now, but I assume it's all just white-labeled AWS or Microsoft.

David Rosenthal 2:20:03 Yeah. I mean, you never know with Apple, but I think the ship has sailed. [chuckles]

Ben Gilbert 2:20:07 Yeah. I do know Facebook uses AWS.

David Rosenthal 2:20:11 Hmm, interesting.

Ben Gilbert 2:20:12 So Facebook has their own first-party data centers that they operate 'cause they're obviously at, at such massive scale, where that makes sense, but then they also use AWS for some stuff.

David Rosenthal 2:20:23 I'm trying to think about, does AWS have network economy power? I don't think so.

Ben Gilbert 2:20:29 I don't either.

David Rosenthal 2:20:30 I don't think I care if you use AWS.

Ben Gilbert 2:20:33 No.... It's indirect. It shows up in scale economies 'cause my stuff gets cheaper 'cause you use it.

David Rosenthal 2:20:39 I think that's the only, of the sort of like the big five of the seven powers, you know, so not including process, power, and cornered resource, which are kind of esoteric special cases. I think network economies is the only one that AWS doesn't have, but it indexes off the charts on the other four: counter-positioning, scale economies, switching costs, and branding.

Ben Gilbert 2:21:02 Yep.

David Rosenthal 2:21:03 Okay, well, we talked a little bit about what would have happened otherwise with Apple. We talked about it as we went along with the other big technology companies. Should we move on to playbook?

Ben Gilbert 2:21:14 Yeah, let's do it. My first thing to highlight in playbook is a perfect transition from the seven powers, because I do think this is actually the best scale economy business of all time. Because the fixed costs are so enormous, you amortize them across a huge customer base, you're rewarded for that massive scale and for making these ungodly large investments. For the first time, they just invested so much in building out new data centers for AWS, they actually took Amazon cash flow negative. Their free cash flow is massively negative over the last twelve months because of these continued, unbelievably large investments. I think this is a business that would have taken enormous scale to get to profitability at all, but now that they have it, it's one of these sort of self-fulfilling prophecies where now that they're massively the market leader, they just kind of have to keep going. And there could be a self-inflicted wound or, like, uh, soccer people call it an own goal, but once you have this scale economy's power going, I just think it's pretty hard to drop the ball at this point.

David Rosenthal 2:22:25 I mean, look, we've alluded to this for years on Acquired.

Ben Gilbert 2:22:29 Mm.

David Rosenthal 2:22:29 We've talked about it a lot on this episode. AWS is a utility company. Think about what a utility company is. It's exactly what you described. It's the ultimate scale economy business. It is something that requires so much CapEx that society as a whole decides that there should be a centralized provider of this. And [chuckles] most other utility cases, they are regulated by the government about how much profit margin they can take, because otherwise they could take massively exorbitant profits and extort customers. And AWS happens to be an unregulated utility for the internet, which is maybe the biggest market of all time.

Ben Gilbert 2:23:04 Well put. So here's the interesting point I want to make on that. There's that common refrain of like: "Wow, I can't believe Amazon, the e-commerce company, became the cloud company." From this perspective, this is exactly the same thing that the amazon.com retail business was, an ungodly amount of investment in the fulfillment network globally in order to sell stuff to a big group of customers in a massively amortized way. It's just a data center instead of a fulfillment center, so it's like they had the right mindset for this business.

David Rosenthal 2:23:38 It's actually a very similar business at scale.

Ben Gilbert 2:23:41 Yes. Another one that I had is price cuts. This is not something we talked about in history and facts, but I do think it's worth calling out. By 2012, and keep in mind, they had very little competition up until this point, they had already done twenty-three price reductions across the board for all of their services. By 2013, they had done forty, by 2015, they had done fifty-one. So they were proactively, without competitive pressure, reducing prices. And so the question sort of is, why? Well, it reminded me of TSMC. So speaking of Hamilton and Seven Powers, in our conversation with him and Shen Ye, he pointed out that it made sense for TSMC to proactively lower prices for customers in order to win business, and what you're essentially doing there is you're giving up current day profit dollars to gain something in the future. So that's kind of the obvious part. The less obvious part in the TSMC case is that since the cost to build out a new chip fab are so large and so lumpy, like ten billion dollars all at once, it's super advantageous to have that predictability of customer orders, and on top of that, there's a finite number of the machines available to manufacture those high-end chips, the ones that ASML makes. So it sort of pays doubly to be able to know for sure you can be one of the few to get those. Well, AWS sort of has the same thing going on, where it's the ASML machines are much more scarce than the servers that AWS is buying, but it's unbelievably helpful for AWS to win market share so they can do their thing and invest more in building out more data centers to kind of keep that thing going. So the proactive price drops works not quite as well as it does for TSMC, but they get rewarded for it for sure.

David Rosenthal 2:25:27 Yeah. This was such a good point from Hamilton. The strategy is not just to win business, it's to be able to feel confident about building out ahead of the curve on infrastructure-

Ben Gilbert 2:25:42 Yes

David Rosenthal 2:25:42 ... to enable scale economies.

Ben Gilbert 2:25:44 Yes.

David Rosenthal 2:25:45 Or further drive scale economies.

Ben Gilbert 2:25:47 So then here's a sort of thing that is unfortunate about AWS relative to the amazon.com business, speaking of building out infrastructure. We talked about float in the amazon.com business. Customer makes an order, customer pays immediately, Amazon gets net sixty or so to pay a supplier. It's the opposite in cloud.

David Rosenthal 2:26:06 [chuckles] Right. This is why they have a hundred billion dollar revenue backlog. From this dimension, that's a terrible thing.

Ben Gilbert 2:26:14 Amazon doesn't get this money up front. Their whole thing to customers is you don't have to pay up front to install servers. There are reserved instances, but there are sort of ways that they try to get a little bit more, um, upfront cash.... but they have to go build these whole data centers, buying all this real estate, buying all the servers or leasing, however they sort of structure them. And so they've had to get creative with capital leases on the data centers instead of buying them upfront, so that they can make the data centers effectively pay as you go, just like their revenue is pay as you go. So they don't get the incredible business model, the negative cash conversion cycle thing that they have in the retail business in AWS. And I think that's important to understand, that while this business is much higher margin, their effective cost of capital is higher.

David Rosenthal 2:27:00 Well, I guess Amazon's stock price I don't think dropped that much, but people freaked out this past quarter when Amazon reported the hugely negative cash flow. [chuckles]

Ben Gilbert 2:27:11 Right.

David Rosenthal 2:27:11 And this is why.

Ben Gilbert 2:27:12 Right.

David Rosenthal 2:27:13 And that is also why you shouldn't be, like, that worried about it. But compared to their retail business that has a negative cash cycle, this is a less attractive element of the AWS business model.

Ben Gilbert 2:27:24 Yep. All right, another one I had is, I was reading from friends of the show, Tegas. They had this great transcript that I was reading from a former AWS business development person on, uh, kind of the obsession around multi-cloud, and it got me thinking a lot around multi-cloud. And the evolution of what cloud means has completely changed. When cloud first started, it meant use these primitive building blocks in our data center, our being Amazon, and pay as you go. And what it has evolved to mean is, use our cloud services, which exist now at a higher level of abstraction, and some of which are proprietary, and it doesn't actually have to be in our data center. And so the interesting thing about where multi-cloud and hybrid cloud is going, multi-cloud being, you know, Amazon and Microsoft, and hybrid cloud being this sort of in your data center and in our data center, in the most recent AWS keynote, they announced a bunch of services which are AWS cloud services that run in your data center, where Amazon employees come and install servers and maintain servers in your data center.

David Rosenthal 2:28:35 It's the old Oracle business model all-

Ben Gilbert 2:28:37 Right

David Rosenthal 2:28:38 ... over again.

Ben Gilbert 2:28:39 And they're like: Well, it's, it's great 'cause you get access to Lambda right there on-prem, I mean, in the cloud. And you're like: What? Sorry, what? How is it in the cloud if it's... They're like: Yeah, yeah, 'cause it's, uh, you know, AWS Lambda, so it's cloud, 'cause it's Lambda, but, well, it's in your data center, but it's in the cloud. I'm like: What do these words even mean anymore? It was funny, reading this transcript really made me start to contemplate what is cloud even now? Because it also exists in multiple clouds and your data center, and so it really actually ends up being about the set of proprietary services that you're building your application on, rather than where it's running.

David Rosenthal 2:29:16 I guess these days, you know, it means kind of back to the beginning of the episode, it means your IT infrastructure, you are calling via an API.

Ben Gilbert 2:29:25 Right.

David Rosenthal 2:29:25 I think that's what cloud means. [chuckles]

Ben Gilbert 2:29:26 Yep. Someone's gonna finish this episode and be like: Well, I thought I knew what the cloud was, and then Ben and David talked for three hours, and now I don't know what it is anymore.

David Rosenthal 2:29:33 Yeah. [laughing]

Ben Gilbert 2:29:34 [laughing]

David Rosenthal 2:29:36 Oh, you know it when you see it.

Ben Gilbert 2:29:37 Yep. All right, another one: make something people want. This is the YC slogan, but this is exactly what Amazon did. I think Microsoft and Google both wanted to build something that they thought would be an amazing business model and something that was very clever to them as technologists, and what Amazon decided to do is figure out what startups wanted to build on, figure out what IT managers wanted to lift and shift to, and just build that. And it's boring, but it comes through in all these keynotes. I mean, every single thing has a customer use case attached to it, a customer use case that drove them to develop it. And it's funny how they refuse to do things like... For the longest time, people were like: "Why aren't you doing anything in blockchain?" And Andy Jassy's [chuckles] comment on stage is, he's like: "We don't really understand the customer use case yet." And this was in, like, twenty fifteen or sixteen. This is six years before the recent buzz around Web3 use cases, and I just think they're so focused on that as the very first question you have to ask before investing a single dollar of engineering resources. It's just very impressive.

David Rosenthal 2:30:38 Whereas in that same timeframe, didn't Microsoft have those ads with Common? "Blockchain in the cloud on Microsoft."

Ben Gilbert 2:30:46 Ugh.

David Rosenthal 2:30:46 You know, and IBM was doing, like, a corporate blockchain.

Ben Gilbert 2:30:49 Yeah. So they eventually did roll something out that was like, "This isn't a blockchain, but we think it accomplishes the same thing that you people who are asking for blockchain-based enterprise infrastructure are asking for."

David Rosenthal 2:31:03 Interesting.

Ben Gilbert 2:31:04 Okay, my next one is about asymmetric upside, and this is another Bezos letter that I'm gonna quote from twenty fifteen, where he says, "Given a ten percent chance of a hundred times payoff, you should make that bet every time. But you're still gonna be wrong nine times out of ten. We all know that if you swing for the fences, you're gonna strike out a lot, but you're also gonna hit some home runs. The difference between baseball and business, however, is that a baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can ever get is four. In business, every once in a while, when you step up to the plate, you can score a thousand runs. This long-tail distribution of returns is why it's important to be bold. Big winners pay for so many experiments."

David Rosenthal 2:31:51 Market size unconstrained.

Ben Gilbert 2:31:53 Market size unconstrained.

David Rosenthal 2:31:56 I think that's gotta be, like, a catchphrase on Acquired that we should incorporate.

Ben Gilbert 2:31:59 Oh, for sure. Let's print it on some merch. [chuckles]

David Rosenthal 2:32:03 Yeah. [chuckles]

Ben Gilbert 2:32:03 But yeah, th- this is the year after he makes the market size unconstrained comment about AWS. I just think it's such a perfect illustration. A lot of people make fun of certain venture capital investments, and I'm kind of only interested in the ones people are making fun of, 'cause that's the whole point of venture capital, is seeking these crazy, asymmetric, long-tail returns. And I think Jeff Bezos got that better than most VCs do. He's a phenomenal-... high beta capital allocator. And so in running a company, I mean, he was also a very good operational CEO and also, like, an actual genius. So, like, all of these things, there's lots to say about Jeff Bezos. He's absolutely a genius. He's absolutely a brilliant operator. But maybe even more than these things, he just gets capital allocation, and that's why I think Amazon is effectively the highest performing venture returns in history. AWS is a venture bet in their portfolio that they own one hundred percent of.

David Rosenthal 2:33:01 Also, that quote, what did he say, uh, in baseball, you have truncated returns?

Ben Gilbert 2:33:06 A truncated outcome distribution.

David Rosenthal 2:33:08 Truncated outcome distribution. That's the most Jeff Bezos thing ever. [chuckles]

Ben Gilbert 2:33:11 [chuckles] Right.

David Rosenthal 2:33:14 I'm sure that Aaron Judge is thinking that when he goes to the plate. He's like, "Oh, if only I didn't have a truncated outcome distribution." [laughing] Oh, so great. Which also reminds me, sidebar, 'cause we're deep in the episode here. Watching the re:Invent keynote with Reed Hastings-

Ben Gilbert 2:33:31 Yep.

David Rosenthal 2:33:32 It's been so long since we did our two Netflix series.

Ben Gilbert 2:33:35 Yeah, we need a part three.

David Rosenthal 2:33:36 When was it? That was years ago, but I think they're still really good. Be fun to go back and re-listen to them. Reed Hastings is a huge nerd.

Ben Gilbert 2:33:44 Oh, yeah.

David Rosenthal 2:33:44 A huge nerd.

Ben Gilbert 2:33:46 I mean, he started his career doing, like, a data storage company.

David Rosenthal 2:33:50 Yes. I think of him now as like, oh, Reed Hastings, CEO and founder of Netflix. He's a business guy, like-

Ben Gilbert 2:33:56 No

David Rosenthal 2:33:56 ... kinda like Bezos. No, he's like a true geek.

Ben Gilbert 2:33:59 He's an engineer, and his engineering project is his company.

David Rosenthal 2:34:02 Yes.

Ben Gilbert 2:34:03 Yeah.

David Rosenthal 2:34:04 And I mean that in the highest possible compliment.

Ben Gilbert 2:34:07 Those people are the people you could listen to talk forever because they speak with such precision about their strategy, because it's actually thought through to a layer deeper than the platitudinal stuff you normally hear.

David Rosenthal 2:34:19 Yep.

Ben Gilbert 2:34:20 All right, so here's my last one, and you brought it up earlier in the episode, and I wanted to save it to the end of Playbook 'cause I think it contrasts my takeaway from the last episode. So I use this analogy that Amazon would quickly spin something up, learn from it, and if it wasn't the right thing, kill it and take the learnings to do the next thing, and I think I called it brute force maze finding or path finding. Well, AWS is different. They don't really have a Fire Phone or a Z Shops, and the biggest reason for this is when you launch a service for enterprise customers, it is really hard to kill it. You burn customer trust, and actually, if you think about what's the bigger risk, burning the trust and losing that customer and all their future revenue, or having to maintain kind of a crappy service that didn't work, you just maintain the service.

David Rosenthal 2:35:07 Right. Such a good point.

Ben Gilbert 2:35:09 There's stuff that didn't live up to the full potential, like all the productivity applications they've ever tried, WorkMail-

David Rosenthal 2:35:15 Chime

Ben Gilbert 2:35:16 ... Their IoT offering, Greengrass. I think IoT just didn't pan out the way that everyone sort of wanted it to. They launched something in twenty thirteen called AppStream to run mobile apps in the cloud. But the commitment to maintaining these things is just completely different at AWS than in the consumer business, and the biggest illustration is SimpleDB. So DynamoDB comes out, it's way more performant, it has sort of a similar job to be done, and SimpleDB had all kinds of cost issues for Amazon, but there were customers using it, so they kept it up. I think one of those customers was even Netflix, and they just didn't want to deprecate something that customers were using.

David Rosenthal 2:35:54 Yeah, and this is why, you know, you log on to the AWS product page, and there's two hundred services there. [chuckles] Such a good point. You can't... Like, it's not worth it to them to kill anything.

Ben Gilbert 2:36:06 Yep. All right, grading?

David Rosenthal 2:36:09 Do we even really need to discuss this?

Ben Gilbert 2:36:10 I mean, we could be like, "Okay, A plus, we're done." Here's probably the most interesting way to think about... And actually, I'm gonna stretch this out from just AWS and talk about all of Amazon-

David Rosenthal 2:36:20 Ooh, okay, great

Ben Gilbert 2:36:21 ... to sort of evaluate it going forward. What is a market cap? Well, market cap-

David Rosenthal 2:36:26 [chuckles] Market cap, unconstrained. [chuckles]

Ben Gilbert 2:36:29 What is value? What is money? So what is market cap? Market cap is the sum of all future cash flows discounted to the present day at some discount rate. And, you know, the long term, the market is a weighing machine, even if the short term, it's a voting machine. Thank you to Warren Buffett. So Amazon has a one point five trillion dollar market cap, and they had, like, a five-year run where they generated some cash, and then the pandemic hit, and they made a bunch of reinvestments, and now they're certainly not generating cash. And up until twenty fifteen, they broke even. They know how to do one thing really, really, really well, which is reinvest every single dollar into growing, and I'm very curious what this business looks like when they stop doing that. At some point, will they see when they're actually saturating all their total addressable markets and ease back on growth so that they can generate the maybe hundreds of billions of dollars in profits per year they need to justify this market cap? If you're worth one point five trillion dollars, it does suppose that you're spitting off, like, a hundred billion dollars a year or somewhere on that order of cash, which we've never seen them do or come close to doing. So either they need to continue operating the way that they have and continue finding more AWSs, or at some point, they need to realize, "Oh, there's the edge of the TAM. Let's start generating a ton of cash, even though we've never known how to do that before."

David Rosenthal 2:38:13 Hmm. I think on the last episode, I said, if, but of course, when we get to interview Jeff Bezos, the question I really want to ask him is, "Is it still day one? Is it day two? Why did you retire?" All that stuff. But you raise an interesting point. Amazon, as a company, as a whole, is just sort of architected-... And Jeff would say, "I told you guys all along." It's architected to always be a day one company, in that it needs to always keep growing. [chuckles]

Ben Gilbert 2:38:41 Yes. So at some point, that bumps up against the GDP of the world, right? You can't actually do that indefinitely, unless the GDP of the world keeps growing at a faster rate than Amazon's growth, which is definitely not true. Amazon's a much higher growth company than the world's GDP. So maybe this is like a, well, at some point, you know, a billion years from now, we're all dead, and the Earth gets absorbed by the Sun anyway, so don't project out this far. But I am curious, if you held Amazon indefinitely until the company no longer existed, which it will at some point, will you actually realize $1.5 trillion of value?

David Rosenthal 2:39:24 Yeah, it's a good point. Maybe this is part of Jeff stepping back and Andy Jassy becoming CEO of the whole company.

Ben Gilbert 2:39:31 Is to actually figure out how to do that.

David Rosenthal 2:39:34 Yeah. I mean, I can imagine that that's a challenge that I'm totally projecting here into Jeff Bezos's mind. Always a dangerous thing to do, in part because it's so much more expansive than anybody [chuckles] who would try to project into it, but I bet that's not something he's personally very interested in figuring out.

Ben Gilbert 2:39:51 Right. I think that's a great point. And I should say, I mean, I think in the 12 months leading up to June of 2020, they generated 27 billion of free cash flow. They know how to generate cash. I sort of thought they were on the path starting, I think in like 2015, '16, is when they really started actually becoming free cash flow positive and growing that year over year, and that just stopped when the pandemic hit. So maybe we're in some temporary anomaly that they'll go back to the 2019 mode here shortly, or maybe the anomaly was the last five years before COVID.

David Rosenthal 2:40:25 Well, Andy, I think, has said on recent earning calls, "Hey, we're gonna be moving back towards profitability. We know how to do this. Don't freak out."

Ben Gilbert 2:40:35 Yeah, and that's the exact opposite message of what Jeff Bezos said in the 2020 letter, right when COVID hit.

David Rosenthal 2:40:43 Didn't he say, like, "Buckle your seatbelt?"

Ben Gilbert 2:40:45 Yeah, he said, "If you're a shareowner in Amazon, you may wanna take a seat."

David Rosenthal 2:40:49 Oh, great.

Ben Gilbert 2:40:51 Yep.

David Rosenthal 2:40:51 He's such a cowboy, like we talked about. You know, he wears the cowboy boots.

Ben Gilbert 2:40:55 Truly. Anyway, that's sort of a thought experiment exercise, but to actually grade it, I mean, it was an activity of new market creation that just completely worked and invented one of the biggest markets of all time, and then became the leader in that, and managed to have no competition for the first five years, and then stave off everyone coming after them, basically permanently. They own just little enough of this market that it's not of regulatory concern. Like, if they owned 80% of cloud, it probably would be worse for them long term.

David Rosenthal 2:41:29 Oh, here's a question: Was Amazon strategic in letting Microsoft back in the game? [chuckles]

Ben Gilbert 2:41:35 No, I don't think so. I think that's too difficult of a future to see to cannibalize current day.

David Rosenthal 2:41:41 I'm sure they're worried about antitrust and regulation.

Ben Gilbert 2:41:45 Yeah. I mean, it's the same way that Google looks at Bing, I'm sure, which is like, "Woof, thank God that exists."

David Rosenthal 2:41:50 All right, what's your grade?

Ben Gilbert 2:41:52 It's an A plus, but grading's a silly exercise. I almost wanna cut it from these types of episodes. But I do think the interesting question is, that I do wanna continue to ponder for a while is, if you held Amazon ad infinitum, and you owned 100% of the company, would you ever be profitable on your business to buy it for a trillion and a half dollars?

David Rosenthal 2:42:11 Hmm. It's the Warren Buffett, Ben Graham, a stock is a piece of a business.

Ben Gilbert 2:42:16 Yes.

David Rosenthal 2:42:16 If you were able to buy the whole company of amazon.com for $1.5 trillion, is that a good use of capital?

Ben Gilbert 2:42:27 Yeah. Great question.

David Rosenthal 2:42:29 I think it probably is. [chuckles]

Ben Gilbert 2:42:32 [chuckles] That's where I thought you were going.

David Rosenthal 2:42:33 I mean, I'm a little biased here, but come on. Yeah, A plus for me. Like, get out of here. This division of this company has $100 billion- [chuckles]

Ben Gilbert 2:42:41 [chuckles]

David Rosenthal 2:42:42 ... of contracted revenue. A plus, we're done.

Ben Gilbert 2:42:44 David thinks the stock's cheap.

David Rosenthal 2:42:46 Yeah. Uh, carve-outs, what you got?

Ben Gilbert 2:42:49 Yes, carve-outs. Mine is a very enjoyable show that I watched on Disney Plus. It is a Marvel show called Moon Knight, and I would say-

David Rosenthal 2:42:57 Ooh

Ben Gilbert 2:42:57 ... it's not the best show that I've seen on Disney Plus, but it is the best acting that I have seen in any of the Marvel Cinematic Universe shows.

David Rosenthal 2:43:08 Ah, nice!

Ben Gilbert 2:43:09 I still think Loki is probably the best written, and what was the one with the Scarlet Witch?

David Rosenthal 2:43:18 Oh, WandaVision.

Ben Gilbert 2:43:19 WandaVision, also very good.

David Rosenthal 2:43:20 That was good.

Ben Gilbert 2:43:21 Fantastic writing. I would say this is, like, almost to those calibers, but definitely a notch below. But Oscar Isaac playing the lead role is some of the best acting I've seen in any TV or movie ever, and the writing is entertaining enough where you can just sit there and enjoy his performance in a way that feels Broadway-level theatrical. I did not appreciate him as an actor until this.

David Rosenthal 2:43:47 Wait, is he-

Ben Gilbert 2:43:48 Poe Dameron.

David Rosenthal 2:43:49 Yeah, that's what I was gonna say. I was like, he's done other Disney Star Wars stuff.

Ben Gilbert 2:43:52 He's also done some other crazy roles. I think he's in, um, Ex Machina.

David Rosenthal 2:43:57 Ah. Have you watched any of the new Star Wars stuff?

Ben Gilbert 2:44:03 I just finished Obi-Wan Kenobi and was deeply unenthused.

David Rosenthal 2:44:07 Oh, bummer.

Ben Gilbert 2:44:08 I enjoyed it. Like, as a Star Wars fan, just more Star Wars is awesome, and, like, getting to see Obi-Wan at a different age is awesome, but I think they took away from the gravitas of his character. I guess... Okay, spoiler alert, please stop this if you've not seen Obi-Wan Kenobi. It's gonna be spoilery, where I'm not gonna tell you the end of the series, but I'm gonna tell you what the series is about. It's about the period of time between when he arrives on Tatooine at the end of Episode III-... but before A New Hope.

David Rosenthal 2:44:40 Mm.

Ben Gilbert 2:44:40 And in A New Hope, there's all this great gravitas given to this idea that, like, wow, he came here and has been, like, living in a cave, marooned and away from all this stuff forever since we last saw him.

David Rosenthal 2:44:53 Yeah, he's the old hermit Ben, right?

Ben Gilbert 2:44:55 Right. He brings Luke to Tatooine, and then that's his responsibility. And this is, like, a whole galactic adventure that takes place- [chuckles]

David Rosenthal 2:45:03 He's like Han Solo.

Ben Gilbert 2:45:04 Where he leaves Tatooine and comes back, and I won't spoil things too much, with very, very major characters, where Obi-Wan has interactions with them, and big material fights that totally would change the character dynamic and the level of import put on his character on Tatooine-

David Rosenthal 2:45:23 Hmm

Ben Gilbert 2:45:23 ... in a way where it feels like it cheapened the canon to date by this existing.

David Rosenthal 2:45:30 I have not watched any of the new stuff, but, uh, man, I feel like Lucasfilm just needs a new start. Doesn't feel like it's going in a good direction.

Ben Gilbert 2:45:39 The IP also doesn't really lend itself well to serials. I don't know. Maybe that's not true. I did really like The Mandalorian.

David Rosenthal 2:45:48 Yeah.

Ben Gilbert 2:45:49 And then I liked when Boba Fett tried to become The Mandalorian [chuckles] by being like, "Ooh, Boba Fett's not that good. Let's just kinda make it The Mandalorian again."

David Rosenthal 2:45:56 Well, that could be an episode for another day.

Ben Gilbert 2:45:59 Moon Knight, Oscar Isaac, go watch it.

David Rosenthal 2:46:02 Awesome. My carve-out is one that if you are listening to this now, I'm pretty sure you're gonna love this. I have a high degree of confidence in the affinity overlap between people listening right now and the carve-out that I'm about to say, which is Lex Fridman's five-and-a-half-hour-

Ben Gilbert 2:46:24 [laughing]

David Rosenthal 2:46:24 ... interview with John Carmack. It's so good. It's so good.

Ben Gilbert 2:46:31 It's awesome.

David Rosenthal 2:46:32 Carmack's just a legend.

Ben Gilbert 2:46:33 I'm an hour in, and it's great.

David Rosenthal 2:46:35 It's so, so good, especially having... Not knowing that that was coming, having just recently listened to the audiobook of Masters of Doom.

Ben Gilbert 2:46:44 That was made for you. It's perfect.

David Rosenthal 2:46:45 Ah, I'm just in heaven. In heaven. Reading Masters of Doom and now listening to this episode, this interview with Carmack, makes me actually wanna go either talk to or find out more from Romero, John Romero, and hear how he thinks about things and, like, his history of, of id. 'Cause Carmack actually says in the beginning of the interview with Lex, "John Romero is better at talking about the history of id and being kind of the keeper of that-

Ben Gilbert 2:47:13 Hmm

David Rosenthal 2:47:14 ... than I am." They have a nice moment kinda halfway through the interview with Lex, where he talks about the relationship with Romero, and became super strained and then blew up, and when id blew up, but I think they've been kind of reconciled, and, eh, it's nice. Anyway, the whole thing, Carmack is... He's just one of those people that operates on a different level than most of humanity, at least in the technical realm, and it's very interesting that he did VR, and he was at Oculus and part of Facebook and Meta, and the thing that he's working on now is AI and, in particular, artificial general intelligence. It's a great interview.

Ben Gilbert 2:47:53 Sweet. Can't wait to finish it. All right, listeners, well, thank you so much to Fundrise, Pilot, and NZS Capital. Links for all three of those are available in the show notes, as well as a link to register for our NZS Talkback, which the first one was super fun and can't wait to do a second one with them on this white paper as well. After you finish this episode, come discuss it with all of us, 13,000 strong now in-

David Rosenthal 2:48:20 Whoo

Ben Gilbert 2:48:20 ... the Acquired Slack community at acquired.fm/slack. Pick yourselves up a sweet shirt or tank or hoodie or crew neck or onesie at acquired.fm/store. You can totally become an Acquired LP and get early access to our LP episodes at acquired.fm/lp, or just get them when they're public. Search the podcast player of your choice for Acquired LP Show, and our latest episode will be live there soon with Nat Manning of Kindergarten Ventures fame and of Kettle as well. Honestly, reinsurance is fascinating, and I never would've thought I would've said that.

David Rosenthal 2:49:03 As is enterprise IT infrastructure. [chuckles]

Ben Gilbert 2:49:07 Amen. All right, listeners, have a good one. See you next time.

David Rosenthal 2:49:12 We'll see you next time.

Speaker 2:49:13 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Huh! [singing]