AWS in fight of its life as customers like Dropbox ponder hybrid clouds and Google pricing

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Credit: Barb Darrow

For many years Amazon(s amzn) Web Services was the only public cloud in town. That is no longer true as Microsoft(s msft) and Google(s goog) are now aggressively selling their infrastructure to startups and enterprises alike. In that superheated battle, they are wooing even Amazon’s biggest and best customers; companies like Dropbox, Airbnb, and, yes, Netflix(s nflx).

That could be one reason AWS sales dipped this quarter. Amazon announced Thursday that for its second quarter, which ended June 30, the category that includes AWS saw a 3 percent sequential revenue slip. That “other” category — which also includes advertising services and co-branded credit card agreements — also logged 38 percent growth year over year. That sounds great until you realize year-over-year growth in the first quarter was 60 percent. There have been other slight quarterly dips in the category’s otherwise relentless rise over the past few years, but they’ve mostly happened between fourth and first quarters.

The other thread in this narrative is that many big companies — including startups that were nurtured on AWS and then grew — are finding the hybrid cloud model attractive. This involves keeping some workloads on public clouds like AWS, Microsoft Azure or Google Cloud Platform and others in-house on a company’s own servers. And for workloads that will remain in public cloud, companies would be fiscal dopes if they did not spec out AWS competitors; if only to wring pricing advantages from AWS. Starting a few years ago, this is exactly how big Microsoft Office shops wielded Google Apps to wrangle concessions on their Microsoft enterprise licenses. What’s old is new again.

Witness Dropbox. While the company says it remains a happy AWS camper, it’s clear — although nobody wants to talk about it — that changes are afoot.

Infrastructure changes under the covers?

Up until March, for example, Dropbox’s own help page said user files were stored on AWS S3 with helpful links to Amazon’s sites. That page changed sometime in mid March. Now users are informed that their files are stored by an unnamed “managed service provider.” See the screen captures below.

Dropbox page as of March 12, 2014.

Dropbox page as of March 12, 2014.

Dropbox page as of March 14, 2014

Dropbox page as of March 14, 2014

The page change happened about a month before Dropbox unveiled its new Dropbox for Business product which executives said was completely rewritten. It is possible that at that time, the company changed underlying platforms as well.

Before I go on, here is Dropbox’s official statement on its current relationship with Amazon:

“We are a happy and satisfied AWS customer. Since early days, we’ve had a hybrid model that leverages EC2 and S3 along with co-location datacenters. We look forward to building upon our relationship in the future.”

Amazon declined to comment.

However, a source familiar with Dropbox’s current strategy said the company lately has been moving more of its IT infrastructure away from AWS and onto its own turf. There are now 10,000 servers in Dropbox facilities running loads that had been on Amazon EC2, although it’s not clear what percentage of Dropbox’s computing requirements that represents. Dropbox is currently storing data both in its own data centers and on Amazon S3 until the end of the year, this source said.

To further complicate matters for AWS, several sources noted that Google is making a concerted effort to win over AWS reference accounts, including Dropbox, with aggressive pricing. This shouldn’t come as a surprise: It doesn’t take a genius to know that Microsoft is likewise pitching these customers. Imagine the press release opportunities if Google or Microsoft can claim a huge AWS shop for their own cloud.

As competition heats up, price cuts may be taking their toll on the king of price cutters. On Amazon’s earnings call Thursday, CFO Thomas Szkutak acknowledged “very substantial price cuts” ranging from 28 percent to 51 percent depending on service this quarter. It is indeed true that Amazon launched dozens of price cuts before it had competition, but now that it has rivals willing to trade price cut for price cut, things are a bit more fraught, even for a company known to sacrifice short-term profits for growth and dominance.

AWS: Partner? Competitor? Both?

AWS’s position vis-a-vis customers like Dropbox is complicated by the fact that it now competes with many of them. Just three weeks ago, it announced Zocalo a collaboration and file share service that competes with Dropbox, for example.

That competitive landscape is reshaping the relationships growing companies have with AWS. Initially Dropbox depended heavily on AWS and vice versa, as Om wrote last year. But as companies grow and have a better grasp of their workloads, it may make sense and actually be cheaper to move to more loads onto internal infrastructure. Even AWS execs appear to have accepted this, because they’ve talked more positively about hybrid deployments in the past few months. Look for the company to add more tools — like its VPC and Direct Connect — to make AWS more amenable to use in hybrid situations.

With a variety of open source options available, companies can now build private infrastructure to get the same scale as Amazon. So, companies like Box or Dropbox can now deploy storage at scale with software defined storage that they couldn’t do earlier.

Amazon CTO Werner Vogels (left) at Structure 2014. (c) Jakub Mosur

Amazon CTO Werner Vogels (left) at Structure 2014. (c) Jakub Mosur

“It does not surprise me one bit that independent of everything Amazon has announced recently, Dropbox is looking at getting out of Amazon, because the economics of scale doesn’t support it,” said Ryan Floyd, managing director for enterprise investment firm Storm Ventures.

Amazon already lost one big customer this year after Instagram moved over to Facebook infrastructure (as outlined in this Instagram blog post), although that was hardly surprising given Instagram’s acquisition by Facebook two years ago and Facebook’s strong focus on its own infrastructure. Netflix, which is arguably AWS’ highest-profile account, already uses Google storage for some of its needs, as former Netflix cloud guru Adrian Cockcroft has said.

Now it’s time to watch what happens with Dropcam, which claims to ingest more video per minute than YouTube to its AWS infrastructure. Dropcam, in case you missed it, has been acquired by Google’s Nest group. I’m guessing there might be a replatforming in its future as well.

So as rival public cloud powers add services and cut prices, and as more customers see the benefits of hybrid as opposed to pure public cloud computing, expect the pressure on AWS to ratchet up.

Jonathan Vanian contributed to this report.

27 Comments

John

Per NSA PRISM revelations, Microsoft Public Cloud services & Google Public Cloud services have Backdoor Access….once your Data is in the Public Cloud services, the Vendor OWNS your Data…

Nick

Per NSA PRISM revelation, Microsoft “Cloud” & Google “Cloud” servers have Backdoor Access……….Once your Data is in the “Cloud”, the Vendor OWNS your Data……….

badtux99

Amazon reduced their pricing by a significant amount. That certainly is going to reduce their revenues in the short term.

Regarding Google and Microsoft: I’ve looked at their product offerings. They’re not competitive feature-wise with Amazon EC2 for a public cloud that needs to be able to dynamically grow and shrink as load grows and shrinks and needs to store a large amount of data on self-managed databases. There is nobody else out there who is providing the complete stack of solutions that Amazon is offering to AWS customers. If your application only needs the limited functionality provided by Google and Microsoft, fine. But our experience is that their pricing is about the same as Amazon’s but you don’t get some of the features needed to provision a burstable application.

I am not surprised that Dropbox is moving off of the Amazon cloud. Past a certain point it makes sense to do so, and I have migration plans for my own employer’s application for that purpose. Once you’re at a scale where you can create your own internal clouds from commodity servers in multiple data centers, using the Amazon cloud (or some other cloud) makes sense only for purposes of temporary scaling of applications. That said, the vast majority of Amazon’s customers have fewer than 20 virtual machines. Setting up a cloud infrastructure as reliable as Amazon’s for just 20 virtual machines is a difficult and expensive proposition.

chris

I would think VMware licensing would be a huge cost here. Dropbox probably has a lot of expertise in this area and they could probably make use and contribute a bit towards OpenStack to meet their needs.

Barb Darrow

yeah i would expect cost would make reliance on vmware prohibitive for dropbox. Unless a super deal was cut. Quite a reference account, no?

Latino Bar Adana

​Actually free Dropbox account is 2Gb and it’s way too few to use as online space. I used http://Dropbox18gb.com service and expand it 18Gb. This can be good add on for people :)

Ric

Dropbox is a bit player that will not get the traction everyone thinks they will. Google allowing flexible access to the files it stores will require the same from Amazon and that will take a little time for the later to impliment.

Some like myself will avoid the cloud all together. Zero faith in the Internet state under NSA!

Jason McKenzie

Funny how an article about the value of hybrid cloud never mentions VMware, the company that has been making that term common parlance for nearly 2 years.

Wouldn’t it also be funny if we discovered that maybe, just maybe, Dropbox has decided to start using VMware as a key strategic plank in it’s hybrid cloud platform? Nahh… who could imagine that!?

Carter Foxgrover

Barb, what do you think is going to happen to companies like Rackspace, Digital Ocean, and other smaller scale IaaS vendors given the competitive scale and commoditization-driven price war between giants like Amazon, Google, and Microsoft?

Barb Darrow

@carter i think there’s room for smaller players in specialized markets but i agree w/ other analysis that aws, goog, msft azure — will be the big three in public cloud….

Chris

No mention of a true hybrid cloud with VMware… Over 221 powered hybrid VMware clouds on the market=big time player

Mikes

VMware… please… bit player… even more than Amazon is about to be.

Clement Chen

“With a variety of open source options available, companies can now build private infrastructure to get the same scale as Amazon….” I really doubt that. Are you referring to OpenStack/CloudStack/… etc? The private infrastructure they built is in no comparison to Amazon in terms of scale.

jhesr

Amazon shares are currently selling at a P/E of 500+… Generally speaking a fully valued company would have a P/E of 15. Historically investors have done the best when the S&P 500 had a P/E of 10 or less.

Amazon is projecting close a billion dollar loss next quarter. They will probably have to take on more debt soon to remain solvent.

When the Amazon bubble pops, its going to be really nasty.

Bill

This article is absurd. It’s purely speculative with no facts at all. Why even write it other than as click bait? Dropbox’s statement is counter to what the title is, and there is nothing about any of their other customers. Just a really odd article to read, much less to write.

Barb Darrow

iook at the Dropbox screen captures. Customer files that were stored in AWS s3, as of mid-March 2014, were being stored by storage by managed service providers.

Jason McKenzie

“Pics or it didn’t happen!”? Well… she provided pics. Speculation not required.

Eddie

The interest in hybrid clouds makes sense, especially in the post Snowden era we’re now living in. Secondly, that AWS might some day become a competitor to one of their customers (i.e., Zocalo effect) is a cloud computing risk to all cloud customers by all cloud providers, not just AWS. Hence, its incredibly important for a cloud customer to be guarded and keep its intellectual property close to its vest. What happens when Google’s stock price, for example, stops rising? Can Google (with its ever expanding tentacles) be trusted not to take a peek under the hood at, say, the algorithms and source code running on their customers’ cloud instances to see what ideas and property they can steal? How would anyone ever know if a rogue employee at Microsoft, Google, or Amazon does such a thing or not? Not to pick on Google, but Larry Page recently said that he no longer knows if Google’s mission statement of “to organize the world’s information” applies anymore to Google. Well, does this mean that “don’t be evil” also no longer applies? This is why Snowden is correct (per his recent interview in Moscow published by the Guardian) that cloud providers must implement a “zero knowledge” system in order to gain trust of their customers and attract potential customers.

Barb Darrow

We were just talking about this…. at some point the selection of one of these three cloud giants could be seen as picking the least scary. we’re at a point where the behemoths are the only check on each other. But having 3 cloud powers is certainly better than having one, no?

Assaf Lavie

So Dropbox outgrew AWS. Big whoop. Good for them, the entire internet isn’t supposed to run on AWS. But to stretch that tidbit so far as to say AWS is in danger by “competitors” such as DB, that’s just unnecessary. No one is even close to AWS’s offering right now, especially not any of their former customers…

Barb Darrow

No one is close? Well they’re getting closer and in terms of sheer scale/ raw resources some would say Google and/or Microsoft has more servers etc than AWS — what they lack is some of the higher-level services but those will come. If you’re a startup you have to be happy now — competition is good, isn’t it?

Scott Holdren

Some would say that AWS doesn’t have serious competition yet. Some would say there’s a lot of sensationalized misinformation about cloud computing companies.

Mikes

I think you are talking to a AWS fanboi… Its like and apple fanboi. They will ignore the facts until it actually bites them in the foot.

Google and Microsoft are no chumps… And will show Amazon how its done and the “developers, developers, developers” are enjoying tighter integration…

VS online… Everything MS has is going online. Google is trying to chase MS as fast as it can to the cloud… AWS is left to play in its “server pool” and tripped when they tried to jump the shark.

Cloud Insider

Look at the graph. There has always been a bit of a drop after each price reduction. This one was an especially large price cut, and hence a drop in revenue is understandable. It will catch up later, as with the rest of the graph. Note that as announced in the call, AWS usage has grown 90%+ YOY, and even more in crown jewels like EC2. The customer moves you mention hardly make a dent in the overall usage. While things might change later, I think it is a little premature to say that AWS is having the fight of its life just yet.

Ray Nugent

To elaborate on your point, the drops each come in Q1. They are obviously planned. While Barb’s statement about competition being good is valid, it doesn’t mean it’s happening yet.

Cloudwatcher

Great article, one important point not explicitly mentioned is the fact that Amazon’s free cash flow is 1/3 GOOG’s and about 1/6 Microsoft’s. Amazon will loose the spending battle. Especially tough when they need the top line rev growth to justify their multiple.

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