Summary

• “Death to the mainframe,” says Amazon’s James Hamilton.
• AWS is growing crazy fast.
• Cloud is winner-take-all, zero-sum game.

December 2016

Five years after Jeff Bezos and Andy Jassy launched Amazon (NASDAQ:AMZN) Web Services, in March 2011, Businessweek reporter Ashlee Vance penned an article titled “The Cloud: Battle of the Tech Titans.” This article foretold the eventual obsolescence of the mainframe server business and the impending dominance of Amazon in the nascent cloud industry.

Why am I bringing up this five-year-old article now? Because I believe Vance’s predictions are finally coming true.

In March 2011, AWS made about $750 million for Amazon. A nice sum, but nothing remarkable. Now, fast-forward to Amazon’s most recent four quarters, and AWS has brought in $11.08 billion in revenue. Put simply: That’s stunning growth that signals a seismic shift in IT spending around the globe.

Back in 2011, Vance singled out the three players that would emerge as the leaders in cloud: Amazon, Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG)

(NASDAQ:GOOGL). He also predicted that technology icons – such as Hewlett Packard (NYSE:HPQ), IBM (NYSE:IBM), and Oracle (NYSE:ORCL) – would fall victim to a culture clash in the technology sector and lose out to their more agile and innovative competitors.

It was a classic Innovator’s Dilemma: The big, incumbent companies were stuck in the past. They continued to peddle their mainframe businesses while the cloud undercut everything.

While Microsoft and Google are putting up a fair fight and tout impressive client lists, Amazon reportedly lays claim to more than 30 percent of the market, has an estimated$10 billion run rate, and is adding over an estimated ten thousand cloud servers per day. Business Insider (BI) recently called AWS rise “an astonishing growth rate compared to other large cap enterprise vendors” while MKM Partners, the market research firm, was even more blunt.

“We consider the rise of AWS as the most consequential development in the IT sector in many decades,” MKM Partners wrote in a report quoted by BI. “AWS is by far the fastest growing large-scale supplier of technology to enterprises today.”

So why has Amazon grown so quickly?

In part, I believe it’s because the other big tech firms have been asleep at the wheel. For instance, even as late as 2011, IBM was downplaying the importance of the cloud, dismissing it as inferior to its bread and butter server technology. As we have noted previously, the company barely even mentioned the cloud in its 2011 annual reports.

While IBM and its straining peers are bleeding massive contracts, the biggest startups -like Slack, Box, and Netflix (NASDAQ:NFLX) – are all in the cloud, and are joined by some of the most well-known names in enterprise, many of which – including Johnson & Johnson (NYSE:JNJ), General Electric (NYSE:GE), Netflix, Capital One (NYSE:COF), NASA and Comcast (NASDAQ:CMCSA) – have moved to Amazon’s cloud. Even VMware (NYSE:VMW) and Salesforce (NYSE:CRM) inked partnership deals with Amazon earlier this year.

The problem for many of the companies trying to compete in the cloud is this: Cloud, in my view, is a zero-sum game. As Amazon continues to land big name clients and invest in its infrastructure, I believe it will simply pull further and further ahead of its competitors in the space, who will – Microsoft and Google included – lose out in the end.

Research firm Canalys now estimates that spending on cloud revenue could grow to $190 billion by 2020. And it’s my belief that Amazon is in the perfect spot to capture much of that market.

Another exciting factor to Amazon’s growth: The company keeps innovating on its cloud business.

A couple of weeks ago at Amazon’s “ReInvent” conference, Andy Jassy, the AWS czar, announced more than 10 new services to Amazon’s core cloud service.

In addition to new cloud projects around artificial intelligence and machine learning, AWS unveiled “AWS Snowmobile,” a secure truck that hauls 100PB of data to AWS data centers over the span of weeks. The reviewers were impressed. “Cloud is the new normal and AWS is leading the way,” David Linthicum, a reporter at Info World, wrote after the show.

In Vance’s 2011 Businessweek article, Andy Bechtolsheim – the co-founder of Sun Microsystems and an early investor in Google and VMware – is quoted”: If you’re a startup, you would never build a data center again.” And it’s true.

This is the point he’s trying to make: The Internet has brought on a massive shift in business, not just in tech, but across all industries. At Cisco’s (NASDAQ:CSCO) customer conference in June 2015, outgoing CEO John Chambers issued an ominous prediction to the 25,000 attendees that had flocked to San Diego, California for the event.

“Forty percent of businesses in this room, unfortunately, won’t exist in a meaningful way in 10 years,” Chambers asserted, before he warned companies not to “underestimate your competitor of the future – not your competitor of the past,” and that “either we disrupt or we get disrupted.”

For firms stuck in the past and still peddling mainframe, I’m afraid they might just get pushed out. Onstage at Amazon’s annual ReInvent conference last week, distinguished engineer James Hamilton toasted “to the death of the mainframe.” But while the death of the mainframe means more business for Amazon, it doesn’t bode well for the companies that were late to the cloud.

Disclosure: I am/we are long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Arne Alsin and Nightview Capital clients are currently long Amazon (AMZN), and also own options positions in IBM and stand to benefit if the trading price of Amazon increases and/or the trading price of IBM decreases.

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