Podcast Summary
How AWS Disrupts Retail and Fundrise Disrupts VC.: By providing cloud computing services, AWS disrupts retail while Fundrise's Innovation Fund promotes fair profits distribution in VC, where GPS should not be overcompensated. Markets get more efficient and returns should be shared between investors and team members.
Amazon Web Services (AWS) is a cloud computing pioneer with margins significantly higher than Amazon's retail business. By providing AWS services, Amazon has disrupted the companies making profit on stands, cups, and other related items. AWS's operating income has consistently been bigger than Amazon's ecommerce store. Fundrise's Innovation Fund eliminates carried interest and gives back profits to the team rather than the GPS. Overcompensation in VC has made it overcrowded and undisciplined. Capital deserves good returns for taking risks but GPS who didn't put up money and didn't do the work shouldn't get 20% of returns. In the long-term, markets get more efficient and returns get split between investors and team members.
The Need to Restructure the Venture Industry: Lowering fees and increasing benefits is crucial for a more efficient market. Restructuring the venture industry will lead to more benefits for those taking the risk. The success of AWS highlights the importance of innovation and technological advancements.
The future of venture is to lower the fees of the intermediaries and increase benefits to the people taking the risk. This will make markets more efficient, which is the future of markets. The venture industry started when the market was inefficient, but now with all the data, every company being available to anyone, it's just not justified anymore to take 20% carried interest. The structure and incentives dictate behavior and by restructuring the venture industry, it will lead to more benefits to the people taking the risk. AWS is one of the biggest and most important businesses, technologies, products of the modern world and probably much more important than amazon.com.
The myth of excess capacity and the birth of AWS: AWS was not created due to excess capacity, but rather the revolution of Linux and virtualization technology that allowed for the birth of cloud infrastructure.
The excess capacity narrative, which claims that Amazon realized they had excess technical infrastructure capacity in quarters one through three and thus decided to rent it out to other developers, is a myth. In reality, the pre-cloud infrastructure world made it impossible to simply rent out capacity, since software was installed on servers that the company owned. It was Linux that revolutionized infrastructure and allowed for the birth of AWS, which had nothing to do with excess capacity. Werner Vogels, the CTO of all of Amazon, clarified in a 2011 Quora post that the excess capacity story is a myth. This history of AWS reveals how Amazon tackled technological challenges and how Linux and virtualization gave birth to cloud infrastructure.
The Birth of Amazon Web Services as a Separate Business: AWS was intentionally created as a technology investment to dominate the emerging market of cloud computing. Tim O'Reilly's vision for Web 2.0 inspired the creation of AWS, democratizing the movement of data.
Amazon Web Services was always intended to be a separate business and not just a means to sell excess capacity. Amazon always considered themselves a technology company and saw technology as an investment rather than a cost center. This was an intentional strategy, focused on the emerging market of cloud computing, that they had reason to believe they could create. Tim O'Reilly, who championed the idea of Web 2.0, inspired the vision for AWS. Web 2.0 was about participatory culture, interoperability, and APIs. It was a democratizing force that allowed data to move freely and without silos. O'Reilly pitched the idea of transforming amazon.com into a Web 2.0 participatory website, which eventually led to the creation of AWS.
The Importance of APIs and Cloud-Based IT Infrastructure: APIs are vital in connecting businesses and allowing for programmable access to products, while cloud-based IT infrastructure is necessary for scalability in business operations.
Amazon's creation of APIs paved the way for the development of Amazon Web Services (AWS). AWS was created to provide access to Amazon's product catalog to affiliates as a way to generate revenue. The origin of the term 'cloud' as applied to IT infrastructure began at General Magic, an Apple spin-out. The codebase of amazon.com, designed in 1995, was not built for scalability and was a major issue for the company. AWS became Amazon's solution to scalability with its cloud-based IT infrastructure. APIs have great business value as they allow for programmable access to companies and their products, enabling businesses to connect and conduct transactions automatically without the need for human interaction.
Jeff Bezos' solution to Amazon's technical complexity problem: Amazon's focus on profitability and efficiency led them to face technical constraints with their monolithic software codebase. Creating a legendary role for Andy Jassy helped re-architect and innovate despite the constraints.
As Amazon expanded and tried to enter new businesses, they faced technical complexity due to their monolithic software codebase. They had to freeze codes during holidays to avoid server crashes and ensure that new features didn't break anything. Amazon's focus on profitability and efficiency led them to face difficulties in getting things done. Although this was a common problem for internet companies, Jeff Bezos was highly focused on solving it. He created a legendary role called 'Jeff's shadow' for Andy Jassy, who was an MBA with no technical background. Jassy's brilliance and experience in launching new categories helped Amazon re-architect and innovate despite the technical constraints caused by their monolithic software codebase.
How Amazon Revolutionized Its Software Architecture with SOA: Amazon's use of SOA allowed for separate application architectures for individual features, reduced communication and coordination issues between teams, and created a group of individual startups that operate in a nimble, entrepreneurial way.
Amazon revolutionized its software architecture with service-oriented architecture (SOA), which allows for separate application architectures for individual features. This helped reduce issues of communication and coordination between teams, by enabling communication through APIs, which eliminated the need for constant communication and coordination between teams. This approach was in contrast to Microsoft's invention of program management as part of their engineering organization, which relied on communication mouthpieces for developers. Amazon's approach was inspired by the concept of Web 2.0 and APIs. The implementation of SOA was a significant cultural and engineering shift for Amazon, which helped them build a group of individual startups that operate in a nimble, entrepreneurial way and reduced the impact of Metcalfe's Law.
Amazon's Customer-Centric Approach to Technology and the Role of Service-Oriented Architecture and API Infrastructure: Amazon's focus on standardizing and improving data communication through service interfaces has heightened precision in API endpoints, benefiting customers and driving profits. Pilot.com provides a comprehensive financial solution for startups.
Amazon's focus on customer experience paved the way for service-oriented architecture and API infrastructure. Bezos mandated that all teams expose their data and functionality through service interfaces. The goal was to standardize and get rid of all communication methods that did not contribute to improving the customer experience. This hardened documentation-oriented computing brought about true precision in the API endpoints, ensuring that the documentation is up-to-date with the way it actually performs. Amazon's customer-centric approach to technology has paved the way for better customer satisfaction, revenue, and profits. Pilot.com is an innovative solution for startups and growing companies that takes care of their financial stack, including accounting, tax, and CFO services.
The Benefits of API-Based Services for Startups and Established Companies: Utilizing API-based services like Pilot can streamline internal communication and provide external integration of services, saving time and resources while keeping up with industry advancements. Transforming internal processes into API-accessible resources can lead to significant benefits in efficiency and scalability.
Using APIs can help streamline internal communication and allow for external integration of services, as demonstrated by Amazon's transformation of both their software and IT infrastructure. Startups and founders should consider API-based services like Pilot to save time and resources, while also keeping up with the latest integrations and technologies. Investing in a team of expert accountants and finance professionals who utilize APIs can automate tedious tasks and provide accurate financial reporting. Companies like Pilot can integrate with various platforms and update their services to keep up with industry advancements. Transforming internal processes into API-accessible resources may require a multi-year journey, but it can lead to significant benefits in efficiency and scalability.
Andy Jassy's Role in the Development and Launch of AWS: Andy Jassy's six-pager proposal and leadership were crucial in the successful launch of AWS, which has since evolved into a game-changing cloud IT infrastructure with all the services needed to build web applications at scale.
Andy Jassy, who was Jeff Bezos' TA, played a crucial role in the development of Amazon Web Services (AWS) and its launch as a commercial offering to third-party customers. Andy wrote a six-pager proposal that was presented to the board and the S-Team, which got approved. He was then given the opportunity to lead AWS and recruit 57 people for the project. One of the external recruits was Jeff Lawson, who later went on to become the CEO of Twilio. Andy got approval to launch AWS with all the services that developers would require to build web applications of scale. AWS evolved from being a fledgling API-based IT infrastructure to a game-changing cloud IT infrastructure under Andy's leadership.
The Birth and Growth of AWS: AWS was born out of the need to provide cost-efficient and flexible cloud solutions for developers. Its success can be attributed to pioneering virtual compute servers sold as a service and a continuous focus on developing new features and services.
AWS started with the launch of S3 in March 2006 and EC2 a few months later in beta in August 2006. It allowed developers to access, store and use their data on the cloud without having to buy and maintain servers, resulting in cost efficiency and flexibility. AWS grew organically in-house with Benjamin Black and Chris Pinkham's proposal to restructure Amazon's network engineering part, suggesting that they could also sell virtual compute servers as a service to third-party developers. This idea eventually reached Jeff Bezos, who not only greenlit their project but also hired 57 people to build additional features and services like CloudFront and RDS in the following years. Success has many fathers, but ultimately it's AWS's ability to provide cloud solutions that transform businesses and industry landscapes.
The Importance of Decentralization in Amazon's Success: Amazon's success is not just about having great ideas, but also about the micro decisions made during execution. Decentralized innovation and retaining valuable talents can lead to new and successful business ventures like AWS.
Decentralized innovation and execution are key to Amazon's success. Idea itself is not enough, it's about the micro decisions made during execution that matter. History is written by victors, and it's not about who came up with the idea but who actually turns it into a world-changing business. Amazon's pathfinding algorithm involves launching and gathering data, tearing down, and starting again to find the correct way through the maze. Internal tensions can arise, but retaining valuable talents can lead to new innovative ideas. Ultimately, the success of AWS was a result of multiple teams working on multiple related things within the company, in line with Amazon's mantra to invent and wander.
Embracing Startups and Offering Unopinionated Primitives Helped AWS Succeed: AWS became successful by offering unopinionated building blocks and a disruptive pricing model, while embracing the startup community. This strategy helped startups build quickly and propelled AWS to become a world-changing innovation.
AWS's success was based on offering unopinionated primitives as building blocks instead of developing a new OS or programming paradigm. AWS's pricing model with credit card payment and no financial approval or vendor selection process was disruptive. Startups could use AWS to stand up their products in a matter of days as opposed to spending millions figuring out data center placement. AWS embraced the startup community and hosted the AWS Startup Challenge in 2007 which had Justin.tv as a contestant. AWS realized that startups were the perfect market for them as large enterprises would not easily move wholesale over. This playbook theme of embracing startups helped AWS become successful and was a world-changing innovation.
Benefits of AWS for Startup Applications: AWS provides cost-effective and efficient services for startups to build and scale their applications in the cloud, allowing developers to focus on improving the product rather than infrastructure.
Startups building from scratch can benefit greatly from using AWS, which started as a popular choice for non-mission critical applications. With their impressive blitz and active efforts in the startup community, AWS became the obvious default for building applications. While lift and shift is a good option for saving costs, building in the cloud and building for the cloud are the future of computing. AWS provides benefits like paying only for what you use, not guessing on infrastructure capacity ahead of time, elastic scaling, and global availability. By using cloud-native services like Lambda and DynamoDB, developers can focus on writing code and architecting applications to take advantage of the cloud's unique computing capabilities. This allows for more time spent improving the product rather than infrastructure.
How AWS Disrupted the Cloud Market with IaaS and Metered Billing: AWS's Infrastructure as a Service and disruptive pricing model revolutionized the cloud market by enabling startups and enterprises to build and scale without worrying about infrastructure and compliance. Their advantage over competitors led to significant customers like Netflix and changed the game on cloud usage.
AWS disrupted the market with its Infrastructure as a Service and disruptive pricing model. The platform enabled both startups and enterprises to build and scale without worrying about infrastructure and compliance requirements. Amazon's early movers' advantage led to significant customers like Netflix moving to AWS. While Microsoft focused on Platform as a Service and Google made a similar mistake, IBM and Oracle's proprietary solutions created audited solutions on licenses that were sold on a license basis instead of a usage meter. AWS's ability to offer Infrastructure as a Service and metered billing model changed the game for building and scaling on the cloud.
How AWS Disrupts Traditional Business Models: AWS offers constantly updated cloud infrastructure with no version upgrade costs, while traditional companies charge for upgrades and give up on annuity. AWS's high margins leave old school companies in the dust. Microsoft missed out on recognizing their key advantage: their customers and distribution, leading to their downfall in the cloud infrastructure race.
Amazon's AWS has disrupted the traditional business model maintained by companies like IBM and Oracle by offering constantly updated cloud infrastructure with no version upgrade costs. Traditional companies are fat and happy on their operations and give up on this annuity along with charging for upgrades, unlike AWS. AWS targets gross margins and operating margins in the 20-40% range, which gives them 10X-20X, which even old school companies can't match. Microsoft should have done better as they had the golden goose, but they made the mistake of not recognizing their magical thing which was all their customers and distribution. They got caught in the middle of people building new apps, didn't know how to build for their platforms, and didn't want the lock-in.
The Rise of Google and AWS in Cloud Computing: While Google dominated the search and data space, AWS gained enterprise sales and marketing muscle to become a leader in cloud computing. Both companies offer unique strengths and weaknesses in the industry.
Google accidentally became a business with search and feeding all data directly, making them a cash-generative, consumer-sponsored monopoly. However, they have never had to go into a hard business and lack the sales and marketing muscle. They made the mistake of building too far in the future, like with Google App Engine. Despite this, Google Cloud Platform is now a viable player in cloud computing. Amazon and AWS deserve credit for figuring out how to do enterprise sales, even though they started with serving startups and academia. They overcame the hurdle that Google faced and brought big enterprises along with lift and shift. AWS served NASA in 2009, which taught them some of that enterprise muscle.
The Future is Bright for AWS Database Business: Businesses need to consider the practical challenges of migrating to a new database platform, including the stickiness of database software, exponential growth of data storage, and time constraints. AWS offers faster, more performant technology compatible with relational databases, but the migration process can take up to six months.
AWS has a huge database business, having taken a lot of share from Oracle. The global market size for database software is $100 billion and growing at 10% per year. The stickiness of database software and the exponential growth of data storage make it practical concerns for companies to migrate to a new database platform. The AWS Snowmobile is a semi-truck full of Snowballs that takes six months to migrate data into the cloud. Amazon.com took 13 years to finish their migration off of Oracle databases and onto AWS products. AWS has invented new database technologies that are compatible with relational databases, but way faster and more performant. Companies should consider the challenges when shifting to a new database platform.
AWS - An Unregulated Public Utility Powering the Internet: AWS is a dominant player in the cloud market, generating huge profits with its unregulated utility that can take a tax on anything a computer touches. With a revenue backlog of over $100 billion, it is a game-changer business for Amazon's growth.
AWS is a game-changer business for Amazon's growth. The revenue backlog of committed contractual signed revenue is over $100 billion. Amazon could shut down all sales efforts today, and they still have $100 billion more business that is contractually coming their way. AWS is an unregulated public utility that can generate enormous margins on billions and billions of dollars in profits by operating. Its market size is unconstrained, and it powers the Internet. AWS takes a tax on anything that a computer could touch. AWS has about a 39% market share of the cloud and is the dominant player in China. AWS's Snowmobile operation on the International Space Station is a recent feat.
Amazon's custom chips for machine learning and its missed opportunity in the data warehouse market.: Amazon's machine learning capabilities, while not as strong as Google's, are still attractive to customers, but their failure to streamline a competitive data warehouse product allowed Snowflake to become a $50 billion company.
Amazon has started custom designing chips for machine learning, making use of their massive pillar of compute in the business. They also have a wide range of cloud-hosted ML offerings, and they run TensorFlow, which is from Google. Even though their machine learning capabilities don't have to be as good as Google's, customers will use whatever ML is available near their data, which is where Amazon comes in. However, despite their success in many areas, Amazon missed out on the data warehouse market, which has allowed Snowflake to run the gauntlet and become its own $50 billion company. Amazon's Redshift requires a lot of customization, while Snowflake is awesome for developers out of the box. The reasons for this failure are many, including competing with Oracle, hamstrung by their own success, and not being able to streamline a product to market.
AWS shifts focus from numerous features to vertical solutions while new entrants have more cohesive product strategies: While AWS continues to launch new services, they now prioritize vertical solutions and guardrails for customers. Meanwhile, NZS Capital emphasizes adaptability of management teams and business cycles for safe investments, not just valuation.
AWS's success has led to an overwhelming number of services, making it difficult for customers to navigate. To address this, Amazon has shifted their focus to pitching vertical solutions and dialled back their emphasis on releasing numerous significant features. While newer entrants like Google come in with a more cohesive product strategy, AWS continues to launch new services to provide guardrails for customers. Meanwhile, NZS Capital redefines the margin of safety as a focus on a company's management team's adaptability and the business cycle. While valuation is important, it alone cannot determine the margin of safety. The management's adaptability and the business cycle's length also play major roles in ensuring safe investments.
AWS - A Powerful Tool for Sustainable Growth and Profitability: AWS enables businesses to surpass competitors, build enterprise value with high margins, establish customer loyalty, and achieve scale economies by staying innovative and adapting to the evolving market demands.
AWS is a great case study in power as it enables a business to achieve persistent differential returns, becoming more profitable than their closest competitor, and sustainably build enterprise value with high-profit margins. Amazon's cloud computing services have transitioned over time from Infrastructure as a Service (IaaS) to Platform as a Service (PaaS) with customer lock-in to generate 30% margins. They have achieved scale economies at a massive level, and mobile computing has also accelerated this trend. Furthermore, they have established real switching costs for customers and are dominating the market with their branding. AWS is a testament to the power of innovation and staying ahead of the curve.
Amazon's Platform-as-a-Service (PaaS) Dominance in the Cloud Space.: Amazon's strong PaaS functionalities and exclusive service strategy have made them a serious competitor in the cloud space, outdoing Microsoft and Google with unparalleled scale economies. Meanwhile, Apple may have missed out on a potential revenue stream by not offering cloud offerings to developers.
Amazon's consistency and tight integration of their platform as a service functionalities make them a strong contender against Microsoft and Google in the cloud space. Their focus on convincing customers to use their services exclusively rather than diversifying with multi-cloud strategies is a key aspect of their playbook. Apple, although not a major player in the enterprise space, may have missed out on a potential revenue stream with their lack of cloud offerings tailored to developers. AWS has unparalleled scale economies as a result of their massive fixed costs, making them the best scale economy business of all time.
The Scale Economy Business of AWS and its Investment Challenges: AWS requires massive investments for building data centers and uses price cuts to gain market share and invest in more centers. However, it faces negative cash conversion cycle finances and is continually innovating cloud services through multi-cloud development.
AWS is an unregulated utility for the internet with ultimate scale economy business, requiring huge capex, and AWS has to invest much in building out data centers to keep the business going. AWS is a similar business at scale with amazon.com retail business, both require an ungodly amount of investment. Price cuts help in gaining something in the future and acts as an advantage for AWS to win market share and invest more in building out more data centers to keep that thing going. However, compared to their retail business, AWS has a less attractive element of negative cash conversion cycle finances. Multi-cloud is an obsession in AWS business development for evolving cloud services.
The Power of Cloud and Bold Bets: The Amazon Way.: Embrace the cloud, build what customers want, swing for the fences, target asymmetric upside, excel in capital allocation, and make bold bets to score a thousand runs in business.
Cloud now means accessing IT infrastructure through an API and building your application on proprietary services, rather than where it's running. Amazon's success is attributed to building something people want based on customer use cases. They swing for the fences, knowing that big winners pay for many experiments, and target asymmetric upside by seeking longtail returns in market size unconstrained bets. Jeff Bezos excels in capital allocation, making AWS a high-performing venture bet in Amazon's portfolio. Truncated outcome distribution in baseball means hitting four runs at most, but in business, one can score a thousand runs with bold bets.
The challenge ahead for Amazon: transitioning from growth to profit.: Amazon's success is built on reinvesting every dollar into growth, but eventually they will need to generate cash. The challenge now is for Jeff Bezos to answer how they will transition from a growth-focused to profit-focused company.
Amazon's success and valuation are built on their ability to constantly reinvest every single dollar into growing. However, at some point, this strategy will bump up against the total addressable markets, and Amazon will have to start generating cash to justify its $1.5 trillion market cap. The challenge will be to transition from a growth-focused company to a profit-focused company, which Amazon has never done before. It remains to be seen whether Amazon can continue finding more AWS-like businesses to sustain its growth or if it will need to start generating cash. This is the key question that Jeff Bezos needs to answer.
Amazon's Cash Flow and Market Dominance: Amazon's ability to generate cash flow and maintain its position as a market leader through effective competition management, despite challenges such as the pandemic, is admirable. However, the question remains whether buying the entire company is a wise investment decision.
Amazon is a master of generating cash flow and has been growing its free cash flow for years. Although the pandemic caused a temporary halt in their progress, they are working towards profitability and know how to do it. Amazon has created one of the biggest markets of all time and became the leader in it while staving off competition pretty effectively. They own just little enough of the market for it to not be a regulatory concern. A question to ponder is whether buying the whole company of amazon.com for $1.5 trillion would be a good use of capital. Moon Knight on Disney+ has some of the best acting seen in any TV or movie ever, with Oscar Isaac delivering a Broadway-level theatrical performance.
An Interview with John Carmack: From VR to AI and Beyond: John Carmack's interview with Lex Fridman delves into the history of id, his work in VR, Facebook, and Meta, and his current focus on artificial general intelligence. The podcast also offers a platform for community discussion and insightful LP episodes with notable figures.
The interview with John Carmack by Lex Fridman is a must-watch for those interested in the history of id and the technical realm. Carmack operates on a different level than most of humanity, and his work in VR, Facebook, and Meta is fascinating. The interview also delves into his current focus on artificial general intelligence, making it a great resource for those interested in AI. Additionally, the Acquired Slack community provides a platform to discuss episodes with like-minded individuals, and the acquired.fm/store offers a range of merch options. The podcast also features LP episodes that provide early access to content and insightful discussions with notable figures, such as Nat Manning of Kindergarten Ventures and Kettle.
