Amazon Web Services

So, how DID an online book retailer end up building the infrastructure layer that powers the entire internet? (Or at least 39% of it, per latest market share data.) While many myths, legends, and some downright falsehoods exist, the real answer to that question deserves a full Acquired episode of its very own. So here it is: the story of Amazon Web Services. Who’s got the truth? Tune in and find out. :) *Links:* - Steve Yegge’s Platforms Rant: https://gist.github.com/chitchcock/1281611 (so good!) - Ben Thompson on AWS and Snowflake: https://stratechery.com/2020/snowflakes-s-1-snowflake-vs-the-public-cloud-snowflakes-sales-marketing/ - Episode sources: https://www.acquired.fm/episodes/amazon-web-services#sources *Carve Outs:* - Moon Knight: https://www.disneyplus.com/series/moon-knight/4S3oOF1knocS - John Carmack on The Lex Fridman Podcast: https://lexfridman.com/john-carmack/ *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

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

• 0:08Ben Gilbert?

  Oh, massively. By far and away, our biggest episode ever. Is this how George Lucas felt when he was doing Empire Strikes Back?

• 0:17David Rosenthal?

  You did not just compare us to George Lucas, did you?

• 0:21David Rosenthal?

  I swear we're humble.

• 0:23Ben Gilbert?

  All right, let's do this.

• 0:40Ben Gilbert?

  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.

• 0:56David Rosenthal?

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

• 1:04Ben Gilbert?

  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, $1 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 98.5 cents to give me that lemonade. And you're happy you're turned a profit, I'm sure. But man, you are going to have to sell a lot of lemonade.

• 1:32David Rosenthal?

  So you're telling me I'm amazon.com in the fourth quarter of 2001, which is actually where we're going to start our story.

• 1:39Ben Gilbert?

  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 70 cents to make it. So 30% margins, instead of something like a percent and a half, you have to sell a lot less of those services than you ever did on lemonade to make the same amount of money.

• 2:17David Rosenthal?

  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 70% margins on their stands and cups. And so I would be quite happy to take 30% margins and disrupt them and still do better than my lemonade business.

• 2:41Ben Gilbert?

  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 15% 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 2015, when they started breaking out AWS's financials, the total operating income from AWS has actually been bigger than the retail business.

• 3:25David Rosenthal?

  There may have been some quarters where it was off, but generally, that trend is accurate.

• 3:31Ben Gilbert?

  Wild. So we're going to 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. All right, listeners. Now is a great time to tell you about a longtime friend of the

• 4:12Ben Gilbert?

  show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:27David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:48Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 5:10David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:28Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. After you finish this episode, come discuss it with David and I, and 13,000 other smart members of the Acquired community at acquired.fm/slash/Slack. And if you're dying for more Acquired in the meantime, go check out the LP show by searching "Acquired LP" in any

• 6:11Ben Gilbert?

  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 slash LP.

• 6:30Ben Gilbert?

  Now that 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 the show is for informational and entertainment purposes only.

• 6:45David Rosenthal?

  Well, we left off the amazon.com episode in 2007 with the 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 Kindle. I believe the quote from Eric Schmidt in the Everything Store was, "The book guys finally got technology." 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

• 7:24David Rosenthal?

  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, kind of early 2002, the immediate post.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'd just gotten rid of COO Joe Golly, the board has brought in Coach Campbell, Amazon's fighting for its life against both eBay and Wall Street.

• 8:02Ben Gilbert?

  Isn't 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 scale CEO and help this guy out." Friggin Jeff Bezos. Obviously, that did not pan out and Bezos came valiantly riding back in and ran the business for another 20 years.

• 8:21David Rosenthal?

  Another 20 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.

• 8:36Ben Gilbert?

  Yep.

• 8:37David Rosenthal?

  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.

• 8:44Ben Gilbert?

  Pioneer, inventor.

• 8:46David Rosenthal?

  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.

• 9:04Ben Gilbert?

  Yep, no doubt.

• 9:05David Rosenthal?

  I don't think it's controversial to say even much more so than amazon.com.

• 9:11Ben Gilbert?

  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.

• 9:19David Rosenthal?

  But everybody also needed to be on the internet and the internet runs on AWS.

• 9:24Ben Gilbert?

  Yeah.

• 9:25David Rosenthal?

  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?

• 9:52Ben Gilbert?

  Ew.

• 9:52David Rosenthal?

  Ew.

• 9:54Ben Gilbert?

  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 is already a specific angle that they're trying to take on the company. You sort of read any of these Amazon analysis pieces, they're like 95% 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 2015. And they'll talk about the relationship with the warehouse workers or was 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.

• 10:39David Rosenthal?

  So we identified you're referring to one origin story of AWS. We identified not one, not two, not three, but four 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, which is ironically also the one that the layperson believes the most.

• 11:13Ben Gilbert?

  Yes, because it's tempting. I mean, it's like an, oh, like it's too convenient.

• 11:18David Rosenthal?

  Yes. And that story is the excess capacity narrative. So the way this story goes is that right around this time, 2001, 2002, 2003, 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.

• 11:51Ben Gilbert?

  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.

• 12:00David Rosenthal?

  That's right.

• 12:01Ben Gilbert?

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

• 12:08David Rosenthal?

  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.

• 12:21Ben Gilbert?

  At our customer service. Oh, how times have changed. Can you imagine someone sitting down in day one North or Doppler, being told that they have to go pick and pack for a while?

• 12:30David Rosenthal?

  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.

• 13:14David Rosenthal?

  Brilliant, brilliant. We are going to turn a large expense line in the business into a revenue line.

• 13:21Ben Gilbert?

  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-

• 13:32David Rosenthal?

  It doesn't work that way.

• 13:34Ben Gilbert?

  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.

• 14:06David Rosenthal?

  In a pre-cloud infrastructure world, you installed your software, your codebase on your servers that you owned. The amazon.com codebase was literally installed on a bunch of boxes that they owned. You couldn't just rent out the capacity.

• 14:24Ben Gilbert?

  Until 2000, 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 80% gross margins on these things. There's 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 because you can go buy

• 15:08Ben Gilbert?

  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 2000, 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 moved to the open source ecosystem and doing a massive rewrite of all of amazon.com to run on Linux and run on these.

• 15:51Ben Gilbert?

  They did this big deal with HP, run on HP servers.

• 15:55David Rosenthal?

  Right, rather than deck.

• 15:56Ben Gilbert?

  That frankly, saved the company from a cost perspective during that really tight time.

• 16:00David Rosenthal?

  But that is not virtualized cloud servers. It's not what we're talking about with AWS. Here's the other reason why this excess capacity myth is a myth.

• 16:11Ben Gilbert?

  How is Amazon supposed to serve their AWS customers if all of them are on excess capacity during Q4 at all?

• 16:19David Rosenthal?

  Right.

• 16:19Ben Gilbert?

  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 going to tell me I can't do it during Q4 when they need the servers? It's ridiculous.

• 16:31David Rosenthal?

  No holiday movies, can't watch Die Hard at Christmas.

• 16:34Ben Gilbert?

  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.

• 16:47David Rosenthal?

  So the best and final word on this that we have to put here, because 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." Maybe, maybe.

• 17:33Ben Gilbert?

  The other interesting thing to point out is it doesn't give Amazon enough credit about their intentionality.

• 17:38David Rosenthal?

  Yes.

• 17:38Ben Gilbert?

  And strategy.

• 17:39David Rosenthal?

  It short sells Amazon.

• 17:41Ben Gilbert?

  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 18 months, Moore's Law is going to 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 in a brand new business school case study type, laser focus on an emerging market that they had reason to believe that they could create.

• 18:22David Rosenthal?

  Okay, that's origin story number one. Origin story number two, we're going to get into this a lot more. And 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 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.

• 19:02Ben Gilbert?

  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.

• 19:23David Rosenthal?

  So there is a similar sort of figure involved in inspiring the vision for AWS. And that is Tim O'Reilly. 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 is the leader of the organization, championed the whole idea of web 2.0.

• 19:55Ben Gilbert?

  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.

• 20:25David Rosenthal?

  And there were a few core tenants 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

• 21:04David Rosenthal?

  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?

• 21:23Ben Gilbert?

  Like mashing up APIs?

• 21:25David Rosenthal?

  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 Flickr had an API. It was APIs, it was interoperability, it was anybody can access. It's democratizing what we've built.

• 21:50Ben Gilbert?

  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.

• 22:32Ben Gilbert?

  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.

• 22:48David Rosenthal?

  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. But he wants to make the pitch to Jeff that Amazon should embrace web 2.0 and transform amazon.com into a participatory website.

• 23:25Ben Gilbert?

  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.

• 24:03David Rosenthal?

  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. That's called the Amazon Associates Program.

• 24:27Ben Gilbert?

  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.

• 24:46David Rosenthal?

  Display the CD right there and then share the revenue with Amazon.

• 24:49Ben Gilbert?

  It's good for both of us if I can do that.

• 24:51David Rosenthal?

  So after this meeting, Jeff does two things. One, he completely embraces this idea, 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

• 25:31David Rosenthal?

  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. They announced to the world the launch of this new division within Amazon that is called Amazon Web Services.

• 25:59Ben Gilbert?

  So to your point here, this is not an important thing in the world yet. Amazon having a developer conference with eight people there. You look at Reinvent Now, and I think it has 100,000 people who watch the keynote. Very different world.

• 26:17David Rosenthal?

  Yes, very different world and very different product. This is called Amazon Web Services, but it is not 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. And that is run by a guy named Colin Breyer, 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.

• 26:59David Rosenthal?

  But for now, in 2002, Colin technically becomes the first head of AWS.

• 27:05Ben Gilbert?

  Wow. And it was just within Amazon Associates at this point because 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.

• 27:37David Rosenthal?

  Now, all of that is absolutely true. There is no element of myth or falsehood 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.

• 28:11Ben Gilbert?

  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.

• 28:42David Rosenthal?

  Fun sidebar. Do you know the origin of the term cloud as applied to IT infrastructure?

• 28:50Ben Gilbert?

  Oh, I do not.

• 28:52David Rosenthal?

  This is so cool. It started at General Magic.

• 28:57Ben Gilbert?

  Really?

• 28:58David Rosenthal?

  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 backend IT infrastructure for all the services that were going to be on the mobile device. And so they started calling what they built for that a cloud infrastructure that the devices could access.

• 29:30Ben Gilbert?

  General Magic was a pioneer in so many ways. It's amazing.

• 29:33David Rosenthal?

  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 Shel Kapin 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.

• 30:09David Rosenthal?

  He designed it for how websites were built in 1995, 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.

• 30:37Ben Gilbert?

  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 souped up server they possibly could from Deck or whoever else, and they would just try to make it through Christmas.

• 31:04David Rosenthal?

  Yes, Amazon would do code freezes going into the holidays. And think about this, this is just so far until 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, Lab126 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.

• 31:49Ben Gilbert?

  Yeah.

• 31:50David Rosenthal?

  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.

• 32:19Ben Gilbert?

  And as we're articulating problems here that were happening, one of them is, of course, you're going to 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 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.

• 33:02Ben Gilbert?

  So they're just trying to get big fast. So you have the issue of, well, we don't want to 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 because more customers is more traffic, which is also going to tip the server over.

• 33:20David Rosenthal?

  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?

• 33:46Ben Gilbert?

  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 also brittle that you basically need to talk to people, a bunch of people before you're ever editing code because you might break something.

• 34:24David Rosenthal?

  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

• 35:07David Rosenthal?

  or who worked at Amazon knows Jeff's shadow, that's a legendary role to have.

• 35:13Ben Gilbert?

  Which was a Microsoft thing before. Bill Gates's TA was sort of the blueprint for this.

• 35:18David Rosenthal?

  Right. Technical assistant. Exactly. So the reason that Jassy becomes Jeff's first shadow is Jassy, it 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 2000, 2001 dot com crash, Amazon axes the whole marketing department. Cause 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.

• 35:54Ben Gilbert?

  Wow.

• 35:54David Rosenthal?

  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.

• 36:05Ben Gilbert?

  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.

• 36:23David Rosenthal?

  He did music.

• 36:23Ben Gilbert?

  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.

• 36:33David Rosenthal?

  Oh yeah. He wanted to be a sportscaster.

• 36:35Ben Gilbert?

  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.

• 36:54David Rosenthal?

  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.

• 37:07David Rosenthal?

  I'm just kind of in awe thinking about this. If I were looking at this problem of my technical, you know, infrastructure is 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 got to 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 going to get really efficient to be able to solve this complexity challenge.

• 37:47Ben Gilbert?

  And at Microsoft, when they encountered this problem a decade or two earlier, they invented the program management role. That was basically 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 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 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.

• 38:32Ben Gilbert?

  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.

• 38:37David Rosenthal?

  Now, I don't know this, you may, because you were one of these people.

• 38:40Ben Gilbert?

  That was my job. Yeah.

• 38:42David Rosenthal?

  Right. Was the Microsoft PM program, and it was program management, not product management. But was that the origin of the modern Silicon Valley product manager?

• 38:51Ben Gilbert?

  Well, it is specifically the origin of program management. Microsoft considers product management a marketing function.

• 38:58David Rosenthal?

  Ah.

• 38:59Ben Gilbert?

  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.

• 39:11David Rosenthal?

  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.

• 39:18Ben Gilbert?

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

• 39:22David Rosenthal?

  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.

• 39:34David Rosenthal?

  That is not what Jeff and Andy decides to do.

• 39:38Ben Gilbert?

  How about less communication?

• 39:40David Rosenthal?

  How about no communication?

• 39:44David Rosenthal?

  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 is TA, to this concept of Web 2.0, 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 going to say no communication. You cannot talk to anybody.

• 40:27David Rosenthal?

  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.

• 40:37Ben Gilbert?

  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 paying 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.

• 41:14David Rosenthal?

  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, completely separate from everything else?

• 41:37Ben Gilbert?

  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 all interact to create the user facing thing.

• 42:15David Rosenthal?

  Yep, via APIs. So there is a legendary, legendary post about this. This is one of the top all time posts in the history of the internet.

• 42:27Ben Gilbert?

  Is this the Steve Yegge?

• 42:28David Rosenthal?

  This is the Steve Yegge rant 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 in the acquired Slack for reminding us about this.

• 42:46Ben Gilbert?

  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 because 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.

• 43:15David Rosenthal?

  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 like they don't care. But he talks about the hardened interface that that's how Amazon thought about things. He talks about Rick Dalzell. 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 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.

• 44:00David Rosenthal?

  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. And it's this.

• 44:16Ben Gilbert?

  And I think this is like 2010 ish to anchor this time period.

• 44:19David Rosenthal?

  Yeah, 2010, 2011 was whenever Google Plus launched. So that feels about right. Steve writes that Jeff and Andy, it was 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 inter-process communication allowed. No direct linking, no direct reads of another team's data store, no shared memory model, no backdoors whatsoever.

• 45:03David Rosenthal?

  The only communication allowed is via service interface calls over the network. Four, it doesn't matter what technology they use, HTTP, Cobra, PubSub, custom protocols, doesn't matter. Bezos doesn't care. Five, all service interfaces without exception must be designed from the ground up to be externizable. 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. 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 because he's so mean.

• 45:47Ben Gilbert?

  And this is crazy at the time. If you think about this sort of edict, I remember building web applications in the late 2000s. And if you told me, and of course I was writing PHP and querying 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.

• 46:17David Rosenthal?

  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. 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

• 46:58David Rosenthal?

  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, APIs, 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.

• 47:27Ben Gilbert?

  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.

• 48:11Ben Gilbert?

  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. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 48:45David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 48:59Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 49:09David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 49:26Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 49:42David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 49:59Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 50:08David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 50:19Ben Gilbert?

  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 Yegay 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

• 51:01Ben Gilbert?

  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 blunt force trauma, just trying to keep their infrastructure up and modern.

• 51:22David Rosenthal?

  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 codebase. 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.

• 52:06David Rosenthal?

  When you transition your software architecture to the service oriented architecture and no longer a monolithic codebase, 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

• 52:45David Rosenthal?

  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.

• 52:57Ben Gilbert?

  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 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.

• 53:14David Rosenthal?

  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.

• 53:22Ben Gilbert?

  But much harder than it sounds.

• 53:24David Rosenthal?

  Yes.

• 53:25Ben Gilbert?

  Oh, yeah. IT can just become an API.

• 53:28David Rosenthal?

  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.

• 53:40Ben Gilbert?

  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?

• 54:13David Rosenthal?

  All right. So we're now in mid 2003. This has been this huge transformative project within Amazon over the last 18 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. 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?

• 54:51Ben Gilbert?

  Yep.

• 54:52David Rosenthal?

  Andy's probably happy he didn't leave Amazon, I think. 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. Parties. So the legend goes, Andy puts together a six pager.

• 55:16Ben Gilbert?

  And this is the official Amazon legend. You can read about stuff on about amazon.com.

• 55:21David Rosenthal?

  Yep, it's in official Amazon documents. Everything in Amazon happens in written narratives and 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 57 new people to go pursue this initiative.

• 56:05David Rosenthal?

  Andy talks about he's so nervous going into the meeting. This is such a huge career moment. He's asking for 57 people. Nobody asks for 57 people. It's a ballsy move. He's risking everything and Jeff loves it. 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 Breyer, 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.

• 56:45Ben Gilbert?

  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.

• 56:55David Rosenthal?

  Either that happened, or this is part of the Amazon corporate history, hand waving, you know, 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." And 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.

• 57:27Ben Gilbert?

  That's great. Perfect.

• 57:28David Rosenthal?

  Freaking brilliant. So, back to Andy. He gets approval. He's gonna hire 57 people. He recruits Adam Slobosky 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.

• 57:47Ben Gilbert?

  So I watched every single reinvent 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 Slobosky. And it's like 10, 11 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.

• 58:08David Rosenthal?

  Yeah. Do you know who else was in that first wave of external recruits who come in to join AWS?

• 58:16Ben Gilbert?

  I do not.

• 58:17David Rosenthal?

  Jeff Lawson.

• 58:19Ben Gilbert?

  Oh, no way. The CEO of Twilio.

• 58:21David Rosenthal?

  Yes.

• 58:22Ben Gilbert?

  Wow.

• 58:23David Rosenthal?

  Which totally makes sense that Twilio would come out of AWS.

• 58:26Ben Gilbert?

  Yes, of course.

• 58:27David Rosenthal?

  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.

• 58:45Ben Gilbert?

  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.

• 58:56David Rosenthal?

  Yeah. It's actually a really good interview that Andy does with Harvard iLab in 2013 that's on YouTube. They're talking about the origin of AWS. I think the topic is intrapreneurship at companies, which, my God, the most disgusting word of all time.

• 59:14David Rosenthal?

  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 10 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

• 59:58David Rosenthal?

  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.

• 1:00:19Ben Gilbert?

  I love that you say was, like what Akamai was.

• 1:00:21David Rosenthal?

  Yeah. 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 going to build them all. And that's why we need 57 people. Andy would later say, it's 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 going to launch with everything they need to build a whole operating system. This is where the official narrative just completely falls apart

• 1:01:03David Rosenthal?

  because that is totally not what happened, not even a little bit.

• 1:01:07Ben Gilbert?

  Nope. And in fact, I can recall personally using Amazon S3 for something I was working on, and there was no EC2.

• 1:01:17David Rosenthal?

  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 of 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 is the first service to launch by itself in March 2006.

• 1:01:53Ben Gilbert?

  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.

• 1:02:32David Rosenthal?

  Yeah, S3 launches in March 2006. EC2 launches a few months later in August 2006. I think in beta in August 2006.

• 1:02:42Ben Gilbert?

  And what is EC2?

• 1:02:43David Rosenthal?

  EC2 is Elastic Compute Cloud, which is the compute counterpart to the storage part of AWS in S3.

• 1:02:53Ben Gilbert?

  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 local host 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.

• 1:03:21David Rosenthal?

  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 2009.

• 1:03:42Ben Gilbert?

  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.

• 1:04:09David Rosenthal?

  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 dissenting narrative, if you will.

• 1:04:24Ben Gilbert?

  At this point, the compass in story number one was like 180 degrees off. And then in story number two, it got 90 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.

• 1:04:40David Rosenthal?

  And I think story number four is basically right, too. But three and four are kind of the same.

• 1:04:45Ben Gilbert?

  Success has many fathers.

• 1:04:46David Rosenthal?

  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 57 people. In 2003, 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

• 1:05:31David Rosenthal?

  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 mentioned 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.

• 1:06:07Ben Gilbert?

  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 going to 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.

• 1:06:33David Rosenthal?

  Yep, I think first to Rick and then to Jeff.

• 1:06:36Ben Gilbert?

  And he greenlit their project.

• 1:06:38David Rosenthal?

  Yes, separately from the rest of AWS.

• 1:06:42Ben Gilbert?

  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 greenlit as one big thing? Or were there actually two different concurrent efforts?

• 1:06:56David Rosenthal?

  We're going to 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 going to 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 126? We'll set up a new Amazon subsidiary

• 1:07:38David Rosenthal?

  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? So they do. Benjamin doesn't come along, but Chris and a really, really great engineer named Chris Brown.

• 1:08:10Ben Gilbert?

  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 going to build in South Africa.

• 1:08:20David Rosenthal?

  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.

• 1:09:04David Rosenthal?

  He would love it to distraction." Hilarious.

• 1:09:07Ben Gilbert?

  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.

• 1:09:35David Rosenthal?

  Yep. In Andy Jassy's infamous one-star review 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 2003. 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 to build the initial version of EC2. Chris played an integral role in the definition,

• 1:10:18David Rosenthal?

  team building and product building of EC2 despite leaving before EC2 was launched. So clearly there's some bad blood here, but my thoughts, I want your thoughts too. I just find this whole thing ridiculous because A, of course it doesn't matter.

• 1:10:33Ben Gilbert?

  Right. Who cares?

• 1:10:34David Rosenthal?

  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 invent and wander, you know, is the kind of 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 2003 document. That just seems sort of silly to me and counterproductive.

• 1:11:13Ben Gilbert?

  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.

• 1:11:56Ben Gilbert?

  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 going to end up turning this thing into a world changing business?

• 1:12:16David Rosenthal?

  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.

• 1:12:32Ben Gilbert?

  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.

• 1:12:42David Rosenthal?

  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.

• 1:12:51Ben Gilbert?

  Early on, but I want to get to that in my playbook because I think it actually contrasts that in some ways.

• 1:12:56David Rosenthal?

  Oh, okay. Fun, fun, fun, fun.

• 1:12:58Ben Gilbert?

  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 storage. It'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,

• 1:13:43Ben Gilbert?

  but they did not say, let's try and build a new OS, a new programming paradigm. No, we're just going to give you super basic building blocks and you run with it.

• 1:13:54David Rosenthal?

  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.

• 1:14:39David Rosenthal?

  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

• 1:15:18David Rosenthal?

  bill for the entire development and test of this application was $3.08, 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 $0.07.

• 1:15:37Ben Gilbert?

  So no joke, David. Every month I get a bill from AWS for like 71 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.

• 1:16:09David Rosenthal?

  Could you imagine back in 2006, let alone even probably today, Oracle or Microsoft or IBM or HP or you name it?

• 1:16:21Ben Gilbert?

  They all have six, seven and eight figure contracts. There's no way that they're going to invest in, hey, let's let people pay with a credit card and service this tiny little market.

• 1:16:28David Rosenthal?

  And we'll charge you $3.08. This was unbelievably world changing, truly world changing. This is how Dropbox, Instagram, Airbnb, Uber, Zynga, all of these companies.

• 1:16:44David Rosenthal?

  Get started.

• 1:16:45Ben Gilbert?

  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 48 hours because suddenly you didn't have to spend $5 million in 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.

• 1:17:14David Rosenthal?

  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.

• 1:17:26Ben Gilbert?

  Yeah, Phil Kimmy.

• 1:17:27David Rosenthal?

  Phil, our buddy, built it.

• 1:17:28Ben Gilbert?

  Yep.

• 1:17:28David Rosenthal?

  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?

• 1:17:47Ben Gilbert?

  Is it like Teach Street? Like, is it gonna be some Amazon inside baseball?

• 1:17:51David Rosenthal?

  Oh, even better. Justin.tv.

• 1:17:54Ben Gilbert?

  No way!

• 1:17:55David Rosenthal?

  Which, of course, would pivot into Twitch.

• 1:17:59Ben Gilbert?

  Which Amazon would then buy.

• 1:18:00David Rosenthal?

  Of course, Amazon would then buy.

• 1:18:02Ben Gilbert?

  Wow, for like, the better part of a billion dollars, right?

• 1:18:05David Rosenthal?

  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. We gotta find the right way to revisit that.

• 1:18:13Ben Gilbert?

  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 going to be the first beachhead market. But for startups who were building something from scratch, who could go on to become 50-plus billion-dollar companies. My God, let's get them on AWS.

• 1:18:56Ben Gilbert?

  And the blitz was so impressive. I mean, I remember the first time I met Dave Chappelle, 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 going to build. There's a famous Andy Jassy refrain that you hear

• 1:19:39Ben Gilbert?

  at basically every reinvent where he talks about, first, 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.

• 1:20:02David Rosenthal?

  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 test project. And then it was like, oh, well, startups can run in AWS, but like real enterprises wouldn't do that. And then it was like, well, as a real enterprise, we can run non-differentiated, non-mission critical stuff in AWS, but we're not going to put our mission critical stuff in AWS. That's going to be on-prem. And then it was like, oh, my God, take my money.

• 1:20:31Ben Gilbert?

  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 your bank's application is on AWS and everything is moving to the cloud or $120 billion a year of revenue has already moved to the cloud of at least Microsoft, Amazon, or Google. So there's this 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, 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.

• 1:21:16Ben Gilbert?

  And you're not going to take advantage of any cool stuff. You're just going to 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.

• 1:21:31David Rosenthal?

  Jassy, actually, at the first Reinvent 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 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.

• 1:22:03Ben Gilbert?

  They're getting better deals on their servers, so they're passing those along to you.

• 1:22:06David Rosenthal?

  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. 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.

• 1:22:42Ben Gilbert?

  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 that they were going to abstract that away and you were going to 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 going to have so much traffic from so many customers that we're going to consume WAN, we're going to 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

• 1:23:24Ben Gilbert?

  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 Dynamo DB. 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 want to 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.

• 1:24:05Ben Gilbert?

  You're completely architecting your application differently to take advantage of this very different world of computing the cloud offers.

• 1:24:15David Rosenthal?

  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 70% of their time on infrastructure and setup and 30% of their time on software development. And then AWS shifted it to, okay, spend 70% of your time on software development and 30% of your time on worrying about our APIs and your infrastructure.

• 1:24:58David Rosenthal?

  This for the cloud, you know, Lambda, everything is like, that's taking it down to zero.

• 1:25:03Ben Gilbert?

  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 want to 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. Get SOC 2 audited with Fanta. There you go. Perfect. So very quickly, AWS could serve these two markets of startups

• 1:25:46Ben Gilbert?

  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

• 1:26:31Ben Gilbert?

  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 because 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.

• 1:27:03David Rosenthal?

  Okay, so let's talk about what happens because this is just, man, Amazon ran the table on maybe the most important market of all time.

• 1:27:12Ben Gilbert?

  For like the first five years with nobody competing with them.

• 1:27:16David Rosenthal?

  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.

• 1:27:34Ben Gilbert?

  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.

• 1:27:48David Rosenthal?

  That's right. Oh, my God, that was so terrible.

• 1:27:51Ben Gilbert?

  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 going to use AWS instead.

• 1:28:02David Rosenthal?

  We're moving all of it to AWS and I believe Netflix is still to this day, I think 100% on AWS.

• 1:28:09Ben Gilbert?

  I don't know about 100%, but yes, they're still an enormous customer. Reed Hastings was actually the very first guest interviewed onstage at the first Reinvent in 2012.

• 1:28:18David Rosenthal?

  I think in that interview, if it 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, I'm not worried at all about being on AWS. It is legitimately the smart infrastructure decision for us to make.

• 1:28:37Ben Gilbert?

  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 want to do business with Amazon if they were a retailer, or they didn't want to 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.

• 1:29:10David Rosenthal?

  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.

• 1:29:30Ben Gilbert?

  And let's not loop them together because I actually think it's worth analyzing. Each company failed to claim this opportunity for unique reasons.

• 1:29:40David Rosenthal?

  Okay.

• 1:29:41Ben Gilbert?

  So the first couple, it's worth analyzing. I think what you're pointing out is these old server companies. So the IBM's and Oracle on the database side that made these ridiculous gross margins. And they sold you this complete proprietary solution.

• 1:29:57David Rosenthal?

  Yeah, 80% gross margins.

• 1:30:00Ben Gilbert?

  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.

• 1:30:07David Rosenthal?

  Private cloud, private cloud.

• 1:30:08Ben Gilbert?

  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 the 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 going to change that business model. I mean, it was a license to print money.

• 1:30:46David Rosenthal?

  Amazon targeted gross margins and operating margins for AWS in the 20 to 40% range.

• 1:30:54Ben Gilbert?

  Which felt like a 10x and a 20x for them, but was unattractive to the traditional.

• 1:30:59David Rosenthal?

  Right. This is the perspective. Amazon.com is operating on like a 2% operating margin basis. For Amazon, they're like, oh shoot, we get 10 to 20x. 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.

• 1:31:18Ben Gilbert?

  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.

• 1:31:30David Rosenthal?

  So here's another thing, though. You mentioned, call it the Oracles, the IBM's, 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 19.

• 1:31:47David Rosenthal?

  And then two years later, you're paying your maintenance costs, you're going to pay an upgrade cost to go to Oracle Database Version 20. And then you're going to go a couple of years later to Version 21, and you're going to pay a bunch of money every time you migrate.

• 1:31:59Ben Gilbert?

  Right. Why would you give up this annuity that you have?

• 1:32:01David Rosenthal?

  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 going to ship a big update. No, no, it's just constantly changing.

• 1:32:23Ben Gilbert?

  Yep. Okay, so that's super old guard, the IBM's and Oracle's, which is very funny. When you watch all these keynotes, I wonder if anyone's ever watched them all mainlined like I did, because I have this unique perspective, seeing them all so close to each other. They used to onstage 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 2016, 17, they totally did an about phase and they just start directly attacking them. And they start directly attacking Microsoft

• 1:33:04Ben Gilbert?

  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 has actually been a extremely viable competitor and made a big, big comeback.

• 1:33:19David Rosenthal?

  They're the best competitor to AWS by far.

• 1:33:22Ben Gilbert?

  Amazon now loves attacking SQL Server licenses and stuff like that, that Microsoft, of course, comes in and audits, just like the old guard for. So let's look at Microsoft, though. Let's think back to the mid 2000s, because this really should have been their business to take. They should have figured this out. But there are 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 going to be big for a while, PCs taking over. 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

• 1:34:05Ben Gilbert?

  business. So anything that looked too much like that within Microsoft got gobbled up in an internal power struggle because it could look like it would cannibalize that thing.

• 1:34:15David Rosenthal?

  This was probably happening when you were there, right?

• 1:34:18Ben Gilbert?

  Yes. 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 because 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

• 1:35:00Ben Gilbert?

  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 want to build for the things that we make. So let's make the next generation set of APIs and platforms for building great

• 1:35:42Ben Gilbert?

  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 want to 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 barren bull later, they just had five years of watching pitches go by.

• 1:36:24David Rosenthal?

  Yeah. Oh, it was such a whiff. Okay, we talked about Oracle and I want to come back to Oracle in a minute. We talked about Microsoft. What about Google?

• 1:36:34Ben Gilbert?

  So Google's the third place. Amazon's got 35, maybe 40%. Microsoft's got 20 to 22%. Google's somewhere around 10%.

• 1:36:43David Rosenthal?

  Which that Microsoft having 22%.

• 1:36:45Ben Gilbert?

  Very impressive.

• 1:36:45David Rosenthal?

  That's an enormous win.

• 1:36:47Ben Gilbert?

  Totally. Here's my sort of 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 into make the results better is that they instantly became a consumer sponsored monopoly. Totally legally done competitions 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.

• 1:37:31Ben Gilbert?

  So their entire existence, it's not that it's been easy because it's been a computer science challenge.

• 1:37:37David Rosenthal?

  It's been very academic.

• 1:37:39Ben Gilbert?

  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 80% gross margins. A 30% 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

• 1:38:24Ben Gilbert?

  eking out every last dollar. And so it just kind of 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 is in the cloud and that way you can use a bunch of stuff that Google invented TensorFlow, 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 kind of grind it out and hard.

• 1:39:09David Rosenthal?

  Well, I think they also made the mistake that you're 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.

• 1:39:20Ben Gilbert?

  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 of we're going to get really clever and build your 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.

• 1:40:06David Rosenthal?

  Yep. So I want to 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.

• 1:40:30Ben Gilbert?

  That's a great point.

• 1:40:32David Rosenthal?

  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 want to 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.

• 1:40:58Ben Gilbert?

  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.

• 1:41:09David Rosenthal?

  Yeah, NASA was famously a customer starting in 2009.

• 1:41:12Ben Gilbert?

  Yes, that's right. They did the data streaming and then the video distribution of the Mars landing, right?

• 1:41:19David Rosenthal?

  Yep, that's right. That's right.

• 1:41:20Ben Gilbert?

  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.

• 1:41:30David Rosenthal?

  You know, those folks don't want to pay with a credit card.

• 1:41:32Ben Gilbert?

  Right.

• 1:41:33David Rosenthal?

  So you got to do contracts, you got to do billing, you got to do discounts, you need a sales force, you need all this stuff. You need to do a big conference like Reinvent.

• 1:41:41Ben Gilbert?

  They had to have poached a bunch of Oracle salespeople because the Amazon sales machine is a lot like the Oracle sales machine of old.

• 1:41:48David Rosenthal?

  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 and 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.

• 1:42:30David Rosenthal?

  They have taken so much share from Oracle. And while it's all related, it's infrastructure, it's also a different kind of business from infrastructure. Famously AWS Redshift, like why is it called Redshift?

• 1:42:46Ben Gilbert?

  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?

• 1:42:57David Rosenthal?

  Oh, that it's like a Doppler effect or something like that?

• 1:43:00Ben Gilbert?

  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 red shift is the light equivalent. It's like a star moving away from you.

• 1:43:18David Rosenthal?

  But there's another part of the story here.

• 1:43:20Ben Gilbert?

  Shift away from big red.

• 1:43:23David Rosenthal?

  Yeah, which is Oracle. 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 $100 billion. And it is growing at 10% 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.

• 1:43:59Ben Gilbert?

  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 11 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 people got their first cable or T1 line, and meanwhile,

• 1:44:40Ben Gilbert?

  I'm here podcasting and David, I'm 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 reinvent talks. They're like, hey, a lot of you want to 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 100 terabyte, super secure thing they would ship to your office called the snowball.

• 1:45:25Ben Gilbert?

  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 automate. It was like tamper proof, bulletproof is the 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 2016, 17, somewhere in there, where they announced Amazon snowmobile. And he's like, hey, because all of us are sitting here on computers that have a terabyte or two terabytes or four terabyte hard drive. You're like, 100 terabytes is not that meaningful.

• 1:46:09Ben Gilbert?

  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 have 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.

• 1:46:54Ben Gilbert?

  There are very practical concerns with moving.

• 1:46:57David Rosenthal?

  Oh, I can do you one better on an example. Amazon.com used Oracle databases.

• 1:47:04Ben Gilbert?

  Yep.

• 1:47:04David Rosenthal?

  When it was started. Amazon.com did not finish their migration off of Oracle databases and onto AWS products until 2019.

• 1:47:17Ben Gilbert?

  Oh, my God.

• 1:47:18David Rosenthal?

  13 years after AWS launched.

• 1:47:21Ben Gilbert?

  That is insane.

• 1:47:22David Rosenthal?

  It took that long for Amazon itself to migrate off of Oracle.

• 1:47:27Ben Gilbert?

  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 Dynamo DB 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.

• 1:47:51David Rosenthal?

  Amazing. You know, you just play that forward and you're like, wow, okay. A, there's still so much revenue that's going to shift to AWS. And B, it's going to be so sticky, so sticky. One of the most amazing stats that one of our friends pointed out to us that I tweeted about this and I posted it on LinkedIn, it's just crazy. AWS today is on an $80 billion 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 10Q, the latest 10Q from Amazon, they have to report the AWS revenue backlog.

• 1:48:35Ben Gilbert?

  Basically, revenue that's contracted but not recognized yet.

• 1:48:38David Rosenthal?

  These are contracts, you know, mostly with big enterprises of revenue they've signed deals for, but that is not yet recognized. It's going to be recognized in future quarters. That backlog of committed contractual signed revenue is over $100 billion. I don't even know what to say about that.

• 1:49:00Ben Gilbert?

  There's a lot more storage and compute not on the cloud than currently in the cloud.

• 1:49:04David Rosenthal?

  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 $100 billion more business that is contractually coming their way.

• 1:49:21Ben Gilbert?

  It's insane.

• 1:49:22David Rosenthal?

  Crazy. Just crazy.

• 1:49:24Ben Gilbert?

  So David, you mentioned they're on a, what is it 70, 80 billion dollar run rate right now?

• 1:49:28David Rosenthal?

  Eighty, eight zero.

• 1:49:30Ben Gilbert?

  Well, in 2014, Jeff Bezos wrote a memo, the annual memo that comes out to letter to shareholders, and said that, quote, "I believe that AWS is market size unconstrained." That was the point at which it was a year before they broke out AWS's financials, and I think it was a $6 billion run rate business.

• 1:49:56David Rosenthal?

  When the quote unquote AWS IPO, which I think Ben Thompson coined that term.

• 1:50:01Ben Gilbert?

  Yeah.

• 1:50:02David Rosenthal?

  Happened in 2015. That was when they reported Q1 2015 earnings. At that point in time, AWS was a $6 billion revenue run rate.

• 1:50:11Ben Gilbert?

  So it was probably like a $4 billion 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.

• 1:50:28David Rosenthal?

  Well, enormous for Amazon margins.

• 1:50:31Ben Gilbert?

  Okay, but 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 120 billion earlier, but I think that's being conservative and growing at 30% per year with no end in sight of this thing continuing to compound at that rate.

• 1:50:55David Rosenthal?

  You know, I always used to think about and talk about the megatrend 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 attacks on that essentially. Now, to bring it full circle, anything a computer could touch is the internet. It like gets the one and the same these days. Jeff is, it's a crazy statement, but I think he's right. It's market size unconstrained.

• 1:51:26Ben Gilbert?

  It certainly was in 2014 and I wonder if you could even make it now.

• 1:51:30David Rosenthal?

  Yeah. So, okay. The AWS IPO happens in 2015. IPO quote unquote, $6 billion revenue run rate for AWS. 70% annual growth rate.

• 1:51:43Ben Gilbert?

  That's right. It was still growing like crazy then. I think now it's growing like 30 to 35%, but then it was nuts.

• 1:51:49David Rosenthal?

  30 to 35% growth on $80 billion is nuts. Yeah, 19.2% operating margin. When that happens, Amazon stock jumps 15%. When that earnings release comes out, it should have jumped like 500% and does over the next year or two.

• 1:52:06Ben Gilbert?

  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.

• 1:52:16David Rosenthal?

  Very cheap, very cheap. 2016, this is interesting. Andy Jassy was not technically the CEO of Amazon Web Services.

• 1:52:26Ben Gilbert?

  Senior Vice President of AWS.

• 1:52:28David Rosenthal?

  Yep, until 2016. 2016, they restructure corporately. Jeff Bezos becomes CEO of the whole company. Jassy becomes CEO of AWS and Jeff Wilkie becomes CEO of everything else, Amazon Retail. That year, AWS does $12 billion in revenue, over 50% of the company's operating profits, which as we said, they do every year. 17 billion in revenue the next year, then 25, 45 in 2020, 62 last year, but $80 billion run rate. And there's today sitting on $100 billion backlog. That's coming rain or shine.

• 1:53:11David Rosenthal?

  Just freaking unbelievable.

• 1:53:15Ben Gilbert?

  Yep.

• 1:53:16David Rosenthal?

  July 5th, 2021.

• 1:53:20David Rosenthal?

  Jeff Bezos retires?

• 1:53:22Ben Gilbert?

  Is that crazy? That was only a year ago. It feels like longer.

• 1:53:24David Rosenthal?

  I know. Yeah, crazy. They announced it before them, but that's when it actually

• 1:53:28Ben Gilbert?

  Yeah.

• 1:53:29David Rosenthal?

  Happened. Andy Jassy becomes CEO of all of Amazon. Adam Slipski 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.

• 1:53:49Ben Gilbert?

  Oh, I didn't know that. Really?

• 1:53:51David Rosenthal?

  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 and they lifted and shifted out of the space station. We've said it before, but AWS has about a 39% market share of the cloud, Azure 21%, Alibaba 10%. 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.

• 1:54:15Ben Gilbert?

  Right.

• 1:54:16David Rosenthal?

  That became the dominant cloud player in China. Be fun to dig into how that happened. And Google about 7%.

• 1:54:23Ben Gilbert?

  Yep. It's pretty interesting to look at all the ways they're pressing their advantages too. 2015, that year, they broke out finances. They also bought Anapurna 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 Tranium. And then they have inference chips, which are also some crazy name, like Infuron or Inf, I can't remember exactly, but they have custom machine learning chips.

• 1:54:49David Rosenthal?

  Do you know who makes those chips?

• 1:54:51Ben Gilbert?

  TSMC?

• 1:54:52David Rosenthal?

  Of course. Big DSMC customer.

• 1:54:55Ben Gilbert?

  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 90% plus gross margins on their bandwidth charges.

• 1:55:36Ben Gilbert?

  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? Because 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. And now there's a custom ML keynote. They have a whole bunch of cloud-hosted ML offerings.

• 1:56:21Ben Gilbert?

  They run TensorFlow, which is funny because 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 because 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 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 going to use whatever ML is available with where your data is. Because running machine learning near your data is the most important thing.

• 1:57:06Ben Gilbert?

  So once you've picked Amazon to be your storage vendor and you've sent semi-trucks full of your data into their data centers, you're not shopping around for, oh, where should I run my ML? You're going to 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.

• 1:57:35David Rosenthal?

  Okay. Well, one last element of the story before we transition to analysis. I don't think we can call this a coda because they failed. It's not a coda because they didn't do it.

• 1:57:48Ben Gilbert?

  It's a work in progress.

• 1:57:49David Rosenthal?

  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 want to tell us about it?

• 1:58:05Ben Gilbert?

  Data warehouses. How is Snowflake its own $50 billion company?

• 1:58:11David Rosenthal?

  Unbelievable.

• 1:58:12Ben Gilbert?

  It stores data in AWS and other public clouds. And it is its own $50 billion 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.

• 1:58:42David Rosenthal?

  It's crazy that AWS did not do this.

• 1:58:44Ben Gilbert?

  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.

• 1:59:28Ben Gilbert?

  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

• 2:00:11Ben Gilbert?

  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.

• 2:00:19David Rosenthal?

  Probably not a whiff on the order of...

• 2:00:21Ben Gilbert?

  Microsoft and Google whiffing on cloud. Yeah, it's an order of magnitude or two smaller.

• 2:00:27David Rosenthal?

  Yes. So AWS, we're going to do analysis now, do grading. There's no way this isn't going to be a very high grade, but like, if there's a black mark, this is it.

• 2:00:38Ben Gilbert?

  The other thing where they're sort of a victim of their own success is the Amazon 2 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 disimpuguate 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

• 2:01:19Ben Gilbert?

  than first presenting you with, we have 476 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 74 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,

• 2:02:02Ben Gilbert?

  then you can't get yourself into too much trouble. And it's like, oh, cool, a 13th standards body. 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. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:02:30David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:02:47Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:03:02David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:03:26Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:03:45David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform, from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:04:15Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you.

• 2:04:40David Rosenthal?

  Well, should we transition to analysis?

• 2:04:44Ben Gilbert?

  Yeah, let's start with power because I think AWS is actually one of the best case studies in power of all time. So a long time listener to 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 19%, 18, 19% operating margins?

• 2:05:18David Rosenthal?

  19%.

• 2:05:19Ben Gilbert?

  Now they're at 30%. They've gotten more profitable when the landscape got more competitive.

• 2:05:26David Rosenthal?

  Yeah, how did that happen?

• 2:05:27Ben Gilbert?

  So there's something going on there. So there's a couple of 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

• 2:06:11Ben Gilbert?

  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 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 18% operating margins. And now here they are in a more of a platform as a service world with customer lock-in generating 30% margins.

• 2:06:55David Rosenthal?

  It's funny, I'm looking at the list of seven powers here, which are, for folks who are new, counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And I'm like, check, check, check, check, check.

• 2:07:11Ben Gilbert?

  So, early on in the takeoff phase, counter positioning all over the place.

• 2:07:14David Rosenthal?

  All over the place.

• 2:07:15Ben Gilbert?

  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 2000s? 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's 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, because they needed

• 2:07:54Ben Gilbert?

  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 economies power.

• 2:08:19David Rosenthal?

  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.

• 2:08:38Ben Gilbert?

  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.

• 2:08:47David Rosenthal?

  I mean, amazon.com took 13 years to offload off of Oracle onto AWS.

• 2:08:53Ben Gilbert?

  Yep.

• 2:08:54David Rosenthal?

  If that's not switching costs in this industry, I don't know what is.

• 2:08:58Ben Gilbert?

  Branding is very clear. I mean, by being the leader at this point, they're just winning. I mean, even if people want to 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's 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.

• 2:09:29David Rosenthal?

  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 going to completely change it in the next several years.

• 2:09:48Ben Gilbert?

  Totally, totally agree.

• 2:09:49David Rosenthal?

  Whereas Amazon has just been like consistent.

• 2:09:52Ben Gilbert?

  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.

• 2:10:33Ben Gilbert?

  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 going to 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 want to 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.

• 2:11:18Ben Gilbert?

  And really what we want to 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 launch, now that they're the big incumbent.

• 2:11:39David Rosenthal?

  They're running the playbook.

• 2:11:40Ben Gilbert?

  Yeah.

• 2:11:40David Rosenthal?

  Of course. That's how it works.

• 2:11:43Ben Gilbert?

  Cycle of life.

• 2:11:45David Rosenthal?

  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?

• 2:11:58Ben Gilbert?

  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 backend is Azure, or at least for a long time was Azure.

• 2:12:07David Rosenthal?

  It was AWS. There was like a 2016, maybe New York Times article that came out where they reported that it was AWS and Apple got very upset about it.

• 2:12:17Ben Gilbert?

  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 an 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.

• 2:12:50David Rosenthal?

  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. 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 in a monopoly with their developer 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.

• 2:13:25Ben Gilbert?

  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.

• 2:13:32David Rosenthal?

  Yeah. I mean, you never know with Apple, but I think the ship has sailed.

• 2:13:37Ben Gilbert?

  Yeah. I do know Facebook uses AWS.

• 2:13:40David Rosenthal?

  Hmm, interesting.

• 2:13:42Ben Gilbert?

  So Facebook has their own first party data centers that they operate because they obviously at such massive scale where that makes sense. But then they also use AWS for some stuff.

• 2:13:52David Rosenthal?

  I'm trying to think about, does AWS have network economy power? I don't think so.

• 2:13:59Ben Gilbert?

  I don't either.

• 2:14:00David Rosenthal?

  I don't think I care if you use AWS.

• 2:14:02Ben Gilbert?

  No, it's indirect. It shows up in scale economies because my stuff gets cheaper because you use it.

• 2:14:08David Rosenthal?

  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 coordinated 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.

• 2:14:31Ben Gilbert?

  Yep.

• 2:14:32David Rosenthal?

  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?

• 2:14:43Ben Gilbert?

  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 12 months because of these continued unbelievably large investments.

• 2:15:25Ben Gilbert?

  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 soccer people call it an own goal. But once you have this scale economies power going, I just think it's pretty hard to drop the ball at this point.

• 2:15:55David Rosenthal?

  I mean, look, we've alluded to this for years on acquired. 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. In 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.

• 2:16:34Ben Gilbert?

  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.

• 2:17:07David Rosenthal?

  It's actually a very similar business at scale.

• 2:17:10Ben Gilbert?

  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 to this point. They had already done 23 price reductions across the board for all of their services. By 2013, they had done 40. By 2015, they had done 51. 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 Chen Yi, he pointed out that it made sense for TSMC to proactively lower prices for customers

• 2:17:55Ben Gilbert?

  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 $10 billion 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.

• 2:18:38Ben Gilbert?

  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 that proactive price drops works not quite as well as it does for TSMC, but they get rewarded for it for sure.

• 2:18:57David Rosenthal?

  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.

• 2:19:11Ben Gilbert?

  Yes.

• 2:19:12David Rosenthal?

  To enable scale economies.

• 2:19:14Ben Gilbert?

  Yes.

• 2:19:14David Rosenthal?

  Or further drive, scale economies.

• 2:19:16Ben Gilbert?

  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 60 or so to pay a supplier. It's the opposite in cloud.

• 2:19:36David Rosenthal?

  Right. This is why they have $100 billion revenue backlog. From this dimension, that's a terrible thing.

• 2:19:43Ben Gilbert?

  Amazon doesn't get this money upfront. Their whole thing to customers is you don't have to pay upfront to install servers. There are reserved instances, but there are sort of ways that they try to get a little bit more 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,

• 2:20:27Ben Gilbert?

  their effective cost of capital is higher.

• 2:20:30David Rosenthal?

  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.

• 2:20:40Ben Gilbert?

  Right.

• 2:20:41David Rosenthal?

  And this is why.

• 2:20:42Ben Gilbert?

  Right.

• 2:20:42David Rosenthal?

  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.

• 2:20:53Ben Gilbert?

  Yep. All right, another one I had is I was reading from friends of the show, Tegus. They had this great transcript that I was reading from a former AWS business development person on 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.

• 2:21:37Ben Gilbert?

  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.

• 2:22:05David Rosenthal?

  It's the old Oracle business model all over again.

• 2:22:08Ben Gilbert?

  And they're like, well, it's as great because 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, because it's, you know, AWS Lambda, so it's cloud because it's Lambda, but 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.

• 2:22:45David Rosenthal?

  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.

• 2:22:54Ben Gilbert?

  Right.

• 2:22:54David Rosenthal?

  I think that's what cloud means.

• 2:22:56Ben Gilbert?

  Yep. Someone's going to 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.

• 2:23:02David Rosenthal?

  Yeah.

• 2:23:06David Rosenthal?

  You know it when you see it.

• 2:23:07Ben Gilbert?

  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 are like, why aren't you doing? Anything in blockchain and Andy Jassy's comment on stage is he's like, we don't really

• 2:23:48Ben Gilbert?

  understand the customer use case yet. And this was in like 2015 or 16. This is six years before the recent buzz around web three 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.

• 2:24:08David Rosenthal?

  Whereas in that same timeframe, didn't Microsoft have those ads with common blockchain in the cloud on Microsoft? You know, and IBM was doing like a corporate blockchain.

• 2:24:18Ben Gilbert?

  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.

• 2:24:33David Rosenthal?

  Interesting.

• 2:24:34Ben Gilbert?

  Okay. My next one is about asymmetric upside. And this is another Bezos letter that I'm going to quote from 2015 where he says, given a 10% chance of 100 times payoff, you should make that bet every time, but you're still going to be wrong nine times out of 10. We all know that if you swing for the fences, you're going to strike out a lot, but you're also going to 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 1,000 runs. This long tail distribution of

• 2:25:15Ben Gilbert?

  returns is why it's important to be bold. Big winners pay for so many experiments.

• 2:25:21David Rosenthal?

  Market size unconstrained.

• 2:25:23Ben Gilbert?

  Market size unconstrained.

• 2:25:25David Rosenthal?

  I think that's got to be like a catchphrase on acquired that we should incorporate.

• 2:25:29Ben Gilbert?

  Oh, for sure. Let's print it on some merch. But yeah, this is the year after he makes the market sized 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 because 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.

• 2:26:13Ben Gilbert?

  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 100% of.

• 2:26:31David Rosenthal?

  Also that quote, what did he say? In baseball, you have truncated returns.

• 2:26:36Ben Gilbert?

  A truncated outcome distribution.

• 2:26:37David Rosenthal?

  Truncated outcome distribution. That's the most Jeff Bezos thing ever.

• 2:26:41Ben Gilbert?

  Right.

• 2:26:43David Rosenthal?

  I'm sure that Aaron Judge is thinking that when he goes to the place like, oh, if only I didn't have a truncated outcome distribution.

• 2:26:51David Rosenthal?

  Oh, so great. Which also reminds me sidebar, because we're deep in the episode here. Watching the Reinvent keynote with Reed Hastings.

• 2:27:01Ben Gilbert?

  Yep.

• 2:27:01David Rosenthal?

  It's been so long since we did our two Netflix series.

• 2:27:04Ben Gilbert?

  Yeah, we need a part three.

• 2:27:06David Rosenthal?

  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.

• 2:27:13Ben Gilbert?

  Oh, yeah.

• 2:27:14David Rosenthal?

  A huge nerd.

• 2:27:15Ben Gilbert?

  I mean, he started his career doing like a data storage company.

• 2:27:19David Rosenthal?

  Yes. I think of him now as like, oh, Reed Hastings, CEO and founder of Netflix. He's a business guy, like

• 2:27:25Ben Gilbert?

  No.

• 2:27:25David Rosenthal?

  Kind of like Bezos. No, he's like a true geek.

• 2:27:28Ben Gilbert?

  He's an engineer and his engineering project is his company.

• 2:27:32David Rosenthal?

  Yes.

• 2:27:33Ben Gilbert?

  Yeah.

• 2:27:34David Rosenthal?

  And I mean that in the highest possible compliment.

• 2:27:37Ben Gilbert?

  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.

• 2:27:48David Rosenthal?

  Yep.

• 2:27:49Ben Gilbert?

  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 because 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 pathfinding. Well, AWS is different. They don't really have a Fire Phone or a Zshops. 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

• 2:28:31Ben Gilbert?

  having to maintain kind of a crappy service that didn't work, you just maintain the service.

• 2:28:36David Rosenthal?

  Right. Such a good point.

• 2:28:39Ben Gilbert?

  There's stuff that didn't live up to the full potential, like all the productivity applications they've ever tried, Workmail.

• 2:28:44David Rosenthal?

  Chime.

• 2:28:45Ben Gilbert?

  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 2013 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.

• 2:29:23David Rosenthal?

  Yeah. And this is why, you know, you'd log on to the AWS product page and there's 200 services there. Such a good point. You can't like, it's not worth it to them to kill anything.

• 2:29:35Ben Gilbert?

  Yep. All right. Grading.

• 2:29:38David Rosenthal?

  Do we even really need to discuss this?

• 2:29:40Ben Gilbert?

  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 going to stretch this out from just AWS and talk about all of Amazon.

• 2:29:50David Rosenthal?

  Oh, okay. Great.

• 2:29:51Ben Gilbert?

  To sort of evaluate it going forward. What is a market cap? Well, market cap.

• 2:29:57David Rosenthal?

  Market cap unconstrained.

• 2:29:59Ben Gilbert?

  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 $1.5 trillion 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 2015, they broke even. They know how to do one thing really, really, really well, which is reinvest every single dollar into growing.

• 2:30:42Ben Gilbert?

  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 $1.5 trillion, it does suppose that you're spitting off like $100 billion a year or somewhere on that order of cash, which we've never seen them do or come close to doing.

• 2:31:24Ben Gilbert?

  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 is the edge of the TAM. Let's start generating a ton of cash, even though we've never known how to do that before.

• 2:31:42David Rosenthal?

  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, is architected to always be a day one company in that it needs to always keep growing.

• 2:32:11Ben Gilbert?

  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 one and a half trillion dollars of value?

• 2:32:53David Rosenthal?

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

• 2:33:01Ben Gilbert?

  Is to actually figure out how to do that.

• 2:33:03David Rosenthal?

  Yeah. I mean, I can imagine that that's a challenge that I'm totally projecting here into Jeff Bezos' mind, always a dangerous thing to do, in part because it's so much more expansive than anybody who would try to project into it. But I bet that's not something he's personally very interested in figuring out.

• 2:33:21Ben Gilbert?

  Right. I think it'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.

• 2:33:55David Rosenthal?

  Well, Andy, I think has said on recent earning calls, hey, we're going to be moving back towards profitability. We know how to do this. Don't freak out.

• 2:34:05Ben Gilbert?

  Yeah. And that's the exact opposite message of what Jeff Bezos said in the 2020 letter, right when COVID hit.

• 2:34:12David Rosenthal?

  Didn't he say like buckle your seatbelt?

• 2:34:14Ben Gilbert?

  Yeah, he said, if you're a share owner in Amazon, you may want to take a seat.

• 2:34:19David Rosenthal?

  Oh, great.

• 2:34:20Ben Gilbert?

  Yep.

• 2:34:21David Rosenthal?

  He's such a cowboy, like we talked about, you know, he wears the cowboy boots.

• 2:34:24Ben Gilbert?

  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.

• 2:34:58David Rosenthal?

  Oh, here's a question. Was Amazon strategic in letting Microsoft back in the game?

• 2:35:04Ben Gilbert?

  No, I don't think so. I think that's too difficult of a future to see to cannibalize current day.

• 2:35:11David Rosenthal?

  I'm sure they're worried about antitrust and regulation.

• 2:35:15Ben Gilbert?

  Yeah. I mean, it's the same way that Google looks at Bing, I'm sure, which is like, woof, thank God that exists.

• 2:35:20David Rosenthal?

  All right. What's your grade?

• 2:35:22Ben Gilbert?

  It's an A+, but grading is a silly exercise. I almost want to cut it from these types of episodes. But I do think the interesting question is that I do want to 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?

• 2:35:41David Rosenthal?

  Hmm. It's the Warren Buffett, Ben Graham, a stock is a piece of a business.

• 2:35:45Ben Gilbert?

  Yes.

• 2:35:46David Rosenthal?

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

• 2:35:57Ben Gilbert?

  Yeah. Great question.

• 2:35:59David Rosenthal?

  I think it probably is.

• 2:36:01Ben Gilbert?

  That's where I thought you were going.

• 2:36:03David Rosenthal?

  I mean, I'm a little biased here, but come on. Yeah. A+ for me. Like, get out of here. This division of this company has $100 billion of contracted revenue. A+, we're done.

• 2:36:14Ben Gilbert?

  David thinks the stock's cheap.

• 2:36:15David Rosenthal?

  Yeah. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:36:23Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:36:34David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 2:36:54Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system, so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:37:06David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started. Carvouts, what you got?

• 2:37:19Ben Gilbert?

  Yes, Carvouts. Mine is a very enjoyable show that I watched on Disney+ is a Marvel show called Moon Knight. And I would say it's not the best show that I've seen on Disney+ but it is the best acting that I have seen in any of the Marvel Cinematic Universe shows.

• 2:37:38David Rosenthal?

  Ah, nice.

• 2:37:39Ben Gilbert?

  I still think Loki is probably the best written. And what was the one with the Scarlet Witch?

• 2:37:48David Rosenthal?

  Oh, Wandavision.

• 2:37:49Ben Gilbert?

  Wandavision, also very good.

• 2:37:50David Rosenthal?

  That was good.

• 2:37:51Ben Gilbert?

  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.

• 2:38:17David Rosenthal?

  Wait, is he?

• 2:38:18Ben Gilbert?

  Poe Dameron.

• 2:38:19David Rosenthal?

  Yeah, that's what I was gonna say. I was like, he's done other Disney Star Wars stuff.

• 2:38:22Ben Gilbert?

  He's also done some other crazy roles. I think he's in Ex Machina.

• 2:38:27David Rosenthal?

  Ah.

• 2:38:29David Rosenthal?

  Have you watched any of the new Star Wars stuff?

• 2:38:32Ben Gilbert?

  I just finished Obi-Wan Kenobi and was deeply unenthused.

• 2:38:37David Rosenthal?

  Bummer.

• 2:38:38Ben Gilbert?

  I enjoyed it. Like, as a Star Wars fan, just more Star Wars is awesome. And like, getting to see Obi-Wan in 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 three, but before A New Hope. 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.

• 2:39:23David Rosenthal?

  Yeah, he's the old Hermit Ben, right?

• 2:39:25Ben Gilbert?

  Right. He brings Luke to Tatooine and then that's his responsibility. And this is like a whole galactic adventure that takes place.

• 2:39:33David Rosenthal?

  He's like Han Solo.

• 2:39:34Ben Gilbert?

  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 in big material fights that totally would change the character dynamic and the level of import put on his character on Tatooine. In a way where it feels like it cheapened the canon to date by this existing.

• 2:40:00David Rosenthal?

  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.

• 2:40:09Ben Gilbert?

  The IP also doesn't really lend itself well to cereals. I don't know, maybe that's not true. I did really like The Mandalorian.

• 2:40:18David Rosenthal?

  Yeah.

• 2:40:19Ben Gilbert?

  And then I liked when Boba Fett tried to become the Mandalorian by being like, ooh, Boba Fett's not that good. Let's just kind of make it The Mandalorian again.

• 2:40:26David Rosenthal?

  Well, that could be an episode for another day.

• 2:40:29Ben Gilbert?

  Moon Knight, Oscar Isaac. Go watch it.

• 2:40:32David Rosenthal?

  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 interview with John Carmack. It's so good. It's so good.

• 2:41:01Ben Gilbert?

  It's awesome.

• 2:41:02David Rosenthal?

  Carmack's just a legend.

• 2:41:03Ben Gilbert?

  I'm an hour in and it's great.

• 2:41:05David Rosenthal?

  It's so, so good, especially having, not knowing that that was coming, having just recently listened to the audiobook of Masters of Doom.

• 2:41:14Ben Gilbert?

  It was made for you. It's perfect.

• 2:41:15David Rosenthal?

  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 want to 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 it. Cause Carmack actually says in the beginning of the interview with Lex, John Romero is better at talking about the history of it and being kind of the keeper of that than I am. They have a nice moment, kind of halfway through the interview with Lex where he talks about the relationship with Romero and became super strained and then blew up and when it blew up. But I think they've been kind of reconciled and it's nice. Anyway, the whole

• 2:41:59David Rosenthal?

  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.

• 2:42:23Ben Gilbert?

  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 Talk Back, 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 Woo! 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.

• 2:43:06Ben Gilbert?

  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 have thought I would have said that. As is enterprise IT infrastructure.

• 2:43:37Ben Gilbert?

  Amen. All right, listeners, have a good one. See you next time. We'll see you next time.