eWEEK at 30: How Amazon Survived the Dot-Com Crash to Rule the Cloud

 
 
By Rick Dagley  |  Posted 2013-12-27
 
 
 

eWEEK at 30: How Amazon Survived the Dot-Com Crash to Rule the Cloud


Amazon.com founder and CEO Jeff Bezos once said he wanted to minimize the number of regrets he would have when looking back on his life. And one regret that would haunt him every day was never having tried his hand at building an Internet company. It was that revelation in 1994 that led Bezos to quit his job at a Wall Street firm, move across country and, in his garage, start up an online bookstore.

Today, Amazon is more than just the company that helped popularize online shopping: It is also a virtual landlord hosting thousands of e-commerce sites and a technology-for-hire company whose cloud computing services will, by some estimates, bring in $4 billion in revenue in 2013.

From selling books (and just about everything else, including the kitchen sink) online to offering cloud services and possibly a radical delivery system, Amazon certainly isn't afraid to try something different, always innovating and transforming.

It's the classic story of the rabbit and the tortoise. The cocky dot-coms of the mid-'90s were—just like jack rabbits—popping up everywhere, with dollar signs in their eyes, making a mad dash for some fast and easy cash, and lots of it. Young entrepreneurs were living the high life, and venture capitalists were ignoring all they were taught, believing the Internet was some sort of magical moneymaker. Amazon, meanwhile, was the proverbial tortoise, with Bezos deciding that a slow and steady pace to profitability would ultimately win the race—much to the dismay of his investors.

Nearly 20 years later, Bezos still stands by that approach. In the same Dec. 1 "60 Minutes" interview in which Bezos revealed that his company is developing airborne drones capable of delivering packages to customers in 30 minutes, he discussed why he believes Amazon's long-term approach to ROI gives it a distinct edge.

"The long-term approach is rare enough that it means you're not competing against very many companies because most companies want to see a return on investment in, you know, one, two, three years. … I'm willing for it to be five, six, seven years. So just that change in timeline can be a very big competitive advantage," he said.

Of course, keeping true to the rabbit-and-tortoise tale, Amazon went six years from its launch in 1995 before it finally reached profitability in the fourth quarter of 2001. As for many of the other dot-com companies, the Internet bubble burst in 2000, and they never even reached the finish line.

Amazon's success, however, wasn't just due to its slow and steady approach. For one thing, the company looked at the customer. Plus, it had a business model that actually worked. "Amazon survived the dot-com bust because it had a viable and innovative business model built around a market-changing customer value proposition and a radical profit formula," wrote Mark Johnson in Businessweek.

Indeed, the company's mission is "… to be earth's most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online."

In his "60 Minutes" interview, Bezos said, "I would define Amazon by our big ideas, which are customer centricity, putting the customer at the center of everything we do, invention. We like to pioneer, we like to explore, we like to go down dark alleys and see what's on the other side."

 

eWEEK at 30: How Amazon Survived the Dot-Com Crash to Rule the Cloud


And one thing customers like are low prices. So Amazon took a page out of Walmart's playbook, according to Scott Strawn, an IT analyst with IDC. "When they first were getting started, they approached a large number of executives from Walmart to help them better understand how to create a low-margin business," Strawn told eWEEK.

"What they were able to do is build out a massive organization based on the idea that if you go to Amazon, you can reasonably expect to find relatively inexpensive prices because there are efficient processes for basically connecting buyers and sellers. That approach was being able to provide these goods at a low cost, even taking shipping costs into consideration."

Survival of the Fittest

When the dot-com boom started in the mid-1990s, it wasn't just Internet startups that saw the value of the Web. The tech giants of the day also understood its significance. On May 25, 1995, then-Microsoft CEO Bill Gates warned his executives that his company was not prepared for the approaching "Internet tidal wave." In an internal memo to them, Gates made the Internet the "highest level of importance," saying their "focus on the Internet is crucial to every part of our business. The Internet is the most important single development to come along since the IBM PC was introduced in 1981."

It was a time when the common belief was that if a company operated online, it was going to be worth millions of dollars. So Internet companies were being launched at a high rate, and investors were backing them. If you had ".com" at the end of your name, investors were interested.

The boom hit a peak in January 2000 when 19 online businesses bought very expensive Super Bowl ads ($1.1 million per 30-second ad spot) to herald their arrival. Perhaps the face of this boom was Pets.com's sock puppet. The sock puppet was so popular that the year before, it even appeared as a 36-foot balloon in Macy's Thanksgiving Day Parade.

It was also in 2000—on May 8—that PC Week changed its name to eWEEK (with the tagline "Building the .com Enterprise")—to better portray its coverage for and of companies undertaking e-commerce and Internet-based business initiatives.

And while Amazon still was a couple years away from making a profit, it was the darling of the e-commerce world. Because of Amazon's role in popularizing online shopping, Time in 1999 named Bezos Person of the Year (an honor he was again nominated for this year).

Then it happened. The dot-com bubble burst. Many of the dot-coms didn't have a sustainable business model and so didn't survive the crash. Pets.com folded in November of that year. Grocery delivery service Webvan, perhaps the biggest dot-com bust, managed to hold on until July 2001. By the time it announced it was closing shop, its stock, which peaked at $30 a share, had fallen to 6 cents a share. Investors lost $5 trillion. Amazon wasn't immune either, with its stock price plummeting from $107 to $7 a share. But, unlike many other dot-coms, Amazon had a solid business plan and so survived.

 

eWEEK at 30: How Amazon Survived the Dot-Com Crash to Rule the Cloud


Despite the dot-com crash in 2000, Amazon was looking to expand in areas other than online retail. It was during that year that Amazon began selling its e-commerce platform to other retailers. "Today, hundreds of thousands of world-class retail brands and individual sellers increase their sales and reach new customers by leveraging the power of the Amazon.com e-commerce platform," Amazon claims on its Website.

Amazon sells its platform through its subsidiary Amazon Services, giving businesses the ability to sell their products on Amazon.com or make their own Website more successful. Or, like Target, businesses can have a store on Amazon.com but also use Amazon Services to build and manage its own e-commerce site, Target.com.

Amazon Rolls Out the Cloud

But Amazon didn't stop there. The next stop was the cloud.

When Amazon entered the cloud computing space, it seemed an unlikely company to do so. Again, the company saw a way of taking an internal technology and making it available to everyone. Amazon realized it needed a "massive, distributed system that could handle its retail operation. When it was finished, they realized that they had something big on their hands that could potentially be used by many other people. The result was AWS (Amazon Web Services)," wrote Jeff Cogswell in a tutorial about AWS in eWEEK.

This computing infrastructure came about because Amazon realized that as it continued to sell ever more items beyond books and as its business grew it needed a system that could keep up with the increasing demands on it. Unfortunately, no such solution existed at the time. So Amazon did the only thing it could do: It built the system itself—a system that distributed the work among separate computers, with the computers offering their services on an as-needed basis.

Amazon realized that providing such a large computing capacity to organizations would be much faster and cheaper than their building their own server farms—and another way for Amazon to earn a return on this huge capital expenditure. By doing so, it was providing infrastructure as a service (IaaS) and platform as a service (PaaS). Little did the company know then how much money it could make from this industry.

Officially launched in 2006, AWS is made up of Web services, the most well-known being Amazon Elastic Compute Cloud (EC2) and Amazon Simple Storage Service (S3). EC2 is a Web service that provides resizable compute capacity (like elastic) in the cloud, designed to make Web-scale computing easier for developers, Amazon claims.

When asked why Amazon got into the cloud computing business, Werner Vogels, CTO of Amazon, wrote on Quora, "The thinking [was] that offering Amazon's expertise in ultra-scalable system software as primitive infrastructure building blocks delivered through a services interface could trigger [a] whole new world of innovation as developers no longer needed to focus on buying, building and maintaining infrastructure.

"From experience we knew that the cost of maintaining a reliable, scalable infrastructure in a traditional multi-datacenter model could be as high as 70 percent, both in time and effort, and requires significant investment of intellectual capital to sustain over a longer period of time," he continued. "The initial thinking was to deliver services that could reduce that cost to 30 percent or less (we now know it can be much less)."

 

eWEEK at 30: How Amazon Survived the Dot-Com Crash to Rule the Cloud


And it all goes back to giving the customer what it wants. "[AWS] builds its business by asking business computing customers what they want, creating services that fulfill those wants, and then offering those services at a price below the competition's prices and below what it would cost customers to build for themselves," said eWEEK contributor Eric Lundquist.

Today, Amazon dominates the cloud market, according to data from Synergy Research Group. "Amazon dwarfs all competition," including global IT giants Microsoft, IBM and Google, said Synergy analyst John Dinsdale. Amazon doesn't break out AWS revenue, but in 2013 it could make $4 billion in revenue.

"Amazon is certainly in a leadership role" in the cloud computing industry, Strawn told eWEEK. "My understanding is that it exceeds the combined capacity of the rest of the industry by 14 times. So they're very, very aggressively building out the capabilities and the infrastructure necessary to drive a lot of computing to the public cloud. And they see a great opportunity to do so."

And that opportunity makes AWS' future look even rosier. According to projections by Morgan Stanley analyst Scott Devitt, AWS' revenue could soar tenfold between now and 2022 to more than $30 billion a year. That seems like an outrageous number, but it is one that Strawn said sounds reasonable. "It's a lot of money but … you're creating an alternative to having companies build their own data centers. … That market is very, very large, especially when you look at it globally," he said.

"There's a very large potential market for the public cloud," Strawn continued. "Most computing is taking place in the public cloud. … There are very compelling arguments for the rapid expansion of that market, and Amazon has a meaningful role to play in that market."

There will be challenges, however. As other organizations get up to speed, Amazon will face competitive pressures. The rest of the industry is "working very diligently to in some cases catch up and in some cases have different approaches to cloud computing," acknowledged Strawn, adding that it will be interesting to see how Amazon's biggest rival—Google—works to undercut it over time.

Despite Amazon's success in online retail and cloud computing—major reasons for its No. 49 ranking in the Fortune 500 in 2013—the company is not resting on its laurels. Case in point are its Kindle ebook readers and tablets, including the new Kindle Fire HDX with its one-of-a-kind Mayday button.

And what about those drones that Bezos unveiled on "60 Minutes"?

"The drones are just a publicity stunt," Strawn believes. But more than that, they do give the indication that Amazon is trying to think differently and approach something that really is meaningful to the company, which is finding better ways of delivering physical goods to customers' homes, he said. "This is an indication that they are willing to think differently," Strawn said. And so the company keeps on innovating.

Amazon's logo says it all. The yellow arrow that connects the A and Z depicts Amazon as a company that sells just about everything—from A to Z. And the arrow also represents a smile—which customers experience when shopping on Amazon.com. It is, after all, all about the customer.

 

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