Amazon Web Services

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

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]

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

All right, let's do this.

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?

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.

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

[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.

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.

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.

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]

[chuckles]

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

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.