Bad Unicorns, Amazon’s Cloud: Deadly Mix?
Amazon Web Services (AWS) seems unstoppable. What could possibly harm the massive cloud service provider (CSP)? The answer involves the Unicorns and venture-based IT startups. No doubt, hundreds of them — perhaps thousands of them — are hosted in Amazon’s cloud. That’s a big financial blessing today, but it could be a huge financial burden tomorrow.
First, let’s look at the numbers. Amazon Web Services revenue is now $2 billion per quarter, for an annual run rate of $8 billion. Plus, it’s growing about 81 percent annually. If that growth rate continues, you’re looking at a $14 billion to $15 billion business within a year. Yowzers.
But the big, balloon-like numbers don’t end there. If you carve Amazon Web Services out of Amazon’s overall business, the cloud business is worth $160 billion, according to Deutsche Bank.
Clearly, Amazon CEO Jeff Bezos is laughing all the way to the bank. But he shouldn’t. Especially if he’s keeping an eye on the Unicorns.
AWS: What Could Go Wrong?
If you explored Amazon’s cloud customer list, I’m sure you’d see plenty of healthy global 2000 companies. You know, profitable businesses that are moving workloads into Amazon’s cloud. So far, so good.
But if you poke around a little more, I bet you’d find lots of Unicorns — startups that are valued at $1 billion or more. And I also bet you’d find hundreds — perhaps thousands — of venture-funded IT startups.
What does that mean? Rewind to the housing and financial bubble of 2008. There were thousands of good mortgages in the financial system. But there were also thousands of high-risk mortgages in the system. When world economies started going bad, high-risk mortgage defaults infected the entire system.
Just a hunch, but I suspect Amazon’s cloud could face the same scenario if the Unicorn and tech startup market turns bad as well.
Want (Potential) Proof?
Some folks may say I’m an alarmist. After all, I don’t have any data that pinpoints just how much of Amazon’s cloud revenues come from high-risk unicorns and IT startups that could go out of business during a tech correction.
But here are three really important data points and anecdotes to keep in mind.
- First, 40 percent of Unicorn IPOs since 2011 have seen their values fall below their pre-IPO figure.
- Second, Salesforce CEO Marc Benioff says many unicorns made a huge mistake not going public sooner, and some may never make it to public markets.
- Third, this has all happened before. In the late 1990s, a hosting provider called Exodus Communications was a Wall Street darling. It hosted IT systems for thousands of businesses. But Exodus collapsed when many of its customers — dot-com startups — went out of business.
Is Amazon Web Services the next Exodus Communications? I won’t go that far. After all, AWS is profitable and thousands of really healthy companies run in Amazon’s cloud. Still, I think AWS’s valuation is out of control.
Remember: There are unicorns in Amazon’s cloud. When the tech correction comes, many of those unicorns and startups won’t survive — cutting off existing revenue pipelines and future growth to AWS.
It’s gonna happen.
Joe this is a great provocative article and you raise some great points. I think its important that articles like this are written to counter the Cool Aid views by certain Analysts and Journalists.
I agree that a 20x Revenue valuation seems a stretch and should be challenged. It is important to remember that Amazon has always gone against the tide and survived so I think some credit should be given to the mangement team to work out the challenges that lie ahead. AWS claims over 1 Million paying customers and this excludes the many startups that get upto $100K or more in free credits that all the majors use to attract Startups to the platform. It is true they have many startups on the platform and many will fail. Failure in many case’s may mean the technology and customers are acquired by another company so the investors loose money & possibly the Cloud provider for a month or so. The application & customer’s data is likely to survive and it may stay on AWS.
Lets assume that AIrBNB & Uber fail due to regulatory or other financial reasons, yes that may affect AWS but both companies have proven a need and it will be solved by them or their successors with Cloud Technology likely to be on AWS. AWS has already lost huge customers like Dropbox or Hubspot in the current numbers so it doesn’t seem to be affecting them !
In the event of a massive consolidation in the Startup community I think its more likely to bring Amazon’s growth back to half or so. This would still be 40%. Most CEO’s would love this problem. AWS is likely to be very successful in Enterprise due the sales team investment and the partner ecosystem that has been built. The other thing to counter Unicorn failure is the huge failure of AWS competitors including HP & Ninefold – both folded in the last few weeks and more will fail in coming months. Where are these customers going to go ?
So yes I think there will be some bumps the Amazons revenue in the future but to call this a pyramid scheme or comparing it to the financial bubble where illegal practices took place is a stretch to far.
Disclose. CloudMGR is an AWS Advanced Technology Partner.
Craig: Thanks so much for your readership and for taking the time to post a great comment. I really appreciate some of the financial variables you shared as well. Overall, I feel like AWS and Azure are the safest bets for mass public cloud adoption. (With IBM having a role, especially for global 2000 CIOs.) But for AWS in particular, I would expect incredibly wild swings on valuation.
PS: I look forward to stopping by the CloudMGR booth at IT Nation.
-jp