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.
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.
“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.