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People turns out love the Amazon calm episode. That was so awesome. It makes me a little nervous for this one. Oh Massively by far and away our biggest episode ever. Is this how George Lucas felt when he was doing Empire Strikes Back? You did not just compare as the George Lucas did you? I swear we're humble. Alright, let's do this. Who got the truth? 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'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund PSL Ventures. And I'm David Rosenthal and I am an angel investor based in San Francisco cold San Francisco here in August. And we are your hosts. Alright 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 your turn to profit. I'm sure but man you are going to have to sell a lot of lemonade. 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. 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. Well then if you told me that I would dig into a 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. 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. There may have been some quarters where it was off but generally that trend is accurate. Wild so we're going to talk about a completely different type of business today and 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. Speaking of e-commerce we have huge news you can finally finally buy acquired merch on the internet that is available at acquired.fm slash store or click the link in the show notes you can grab your favorite tea 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. Now for our presenting sponsor this episode we have a company that we are very excited about fund rise on our Amazon dot com episode they shared some news about a fascinating new product they have called the fund rise innovation fund that enables their customers not only to invest in real estate but also now private late stage growth tech companies which is of course a very interesting place to be investing right now now that prices are very different than they were six and 12 months ago. We are back today with Ben Miller CEO and co founder of fund rise. We know that you've been personally love dissecting investing markets from first principles and you've been neutering on how to disrupt VC for a while. Tell us why you think growth VC in the traditional sense is broken and why what you're doing with retail investing in private companies is the future. When you want to start a big business you find a big problem you find something that's broken 20% of the upside of a company success goes to the people who work at the VC fund 20% of carried interest. So who creates the value people who build the company people who invest in the company. So the team in my view breaks the value they put in 2500 hours a year how many hours typical VC put into a company 150 so that's like 2% of what a typical employee does. So what happens when like a sector is like over compensated overpaid it gets over crowded right gets overfunded gets undisciplined and you look at 2021 you can see it in what's happening venture is because it's over compensated basically gotten messed up so we basically created the fund rise innovation fund with the idea of eliminating carry interest give it back to the team give it back to employees. So obviously capital deserves a good return for taking the risk. But 20% of that returns shouldn't necessarily going to GPs didn't actually put up the money didn't actually do the work in the long term markets get more efficient so probably those returns get split between the investors and the team members. But our mission is basically to lower the basically the fees of the intermediaries and increase basically the benefits to the people who are taking the risk and doing the work. And that is really I think the future of venture means like a nightmare for the venture guys the worst thing could ever happen to them is to lose their 20% carried interest the most disruptive thing we could do if you think about us being a disruptor. But yet the future of markets is markets become more efficient. The vast majority of public stock managers do not take a 20% carried interest it's not justified by the efficiency of the market and when the venture industry started 30 40 years ago that market was inefficient there was very little money and it was justified. But as the market's gotten much much larger huge and all the data every company it's all available to anybody it's just not justified anymore. So you can do the job and still have successful amount of profits without taking the 20% carried interest I mean the biggest public as a manager is black rock and you don't see them taking a carried interest right they have a you M fee but by having really good efficient systems and scale their great business. And so it's structure and incentives to take behavior it's like what Charlie Munger says. And so we're trying to restructure the whole venture industry. Our thanks to Fundrise the largest private investment platform in the world for retail investors if you want to join the over 350,000 individuals investing with fund rise you can click the link in the show notes and if you're a founder and you want to get in touch about having the innovation fund participate in your next funding round email not VC that's no TVC at fundrise.com. 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 required in the meantime go check out the LP show by searching acquired LP in any podcast player. The next episode is with David's partner in crime and kindergarten ventures not 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. Now that further do David take us in and listeners as always the show is not investment advice David and I may certainly do have investments in the companies we discuss and the show is for informational entertainment purposes only. Well we left off the Amazon calm episode in 2007 with the sort of 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 the 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 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 dot 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 it just gotten rid of COO Joe golly the board is brought in coach Campbell Amazon's fighting for its life against both eBay and Wall Street is 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. For Jeff Bezos obviously that did not pan out and Bezos came valiantly riding back in and ran the business for another 20 years another 20 years until. And he was a little bit here talking about of course current Amazon CEO Andy jassy yep so I don't even know what the right word is to use to describe AWS was going to say I wrote behemoth in my notes pioneer inventor I don't think there's anything you can say the captures how big and how important. AWS is it is one of the biggest and most important businesses technologies products of the modern world yep no doubt I don't think it's controversial to say even much more so then Amazon dot com yeah I mean it's interesting during the pandemic you could argue that Amazon dot com was more important because everybody needed to sort of buy goods and get them at home but everybody also needed to be on the internet and the internet runs on AWS yeah so today we're going to 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 so we did there you 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 specific angle that they're trying to take on the company you sort of read any of these Amazon analysis pieces there 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 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 so we identify you're referring to one origin story of AWS we identified not one not to not three but four separate origin stories and we're going to 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 lay person believes the most yes because it's tempting I mean it's like a two convenient 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 dot com 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 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 that's right it was so all hands on deck that no new features were unless it was a red flag bug fix on we didn't talk about this in Amazon dot 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 that our customer service oh how times of change 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 I think for a while they continue 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 that again when they're trying to achieve profitability that they had access 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 the capacity was just sitting there and so they decided let's rent out that capacity to other developers brilliant brilliant we're going to turn a large expense line in the business into a revenue line 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 it doesn't work that way 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 setup 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 in replace any pre cloud infrastructure world you installed your software your code base on your servers that you owned the Amazon dot com code base was literally installed on a bunch of boxes that they owned you couldn't just rent out the until 2000 they were servers from digital equipment corporation deck they were deck alpha servers these were unbelievably high margin servers that you believe least from the manufacturer was the same business model that IBM had forever an 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 is 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 by 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 pulls from all of this infrastructure don't have to be captured by say a deck 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 on a business because they were so tight on cash and they were spending so much on infrastructure that this sort of move to the open source ecosystem and doing a massive rewrite of all of Amazon dot com to run on Linux and run on these they did this big deal with HP run on HP servers right rather than deck that frankly save the company from a cost perspective during that really tight time but that is not virtual eyes cloud servers not what we're talking about with AWS here's the other reason why this excess capacity myth is a myth how is Amazon supposed to serve their AWS customers if all of them are on excess capacity during q4 at all right 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 is ridiculous no holiday movies can't watch die hard at Christmas 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 dispel so the best and final word on this that we have to put here because it literally is from part of the horses mouth itself comes from Warner Vogels the at the time AWS CTO now CTO of all of Amazon who wrote flat out in a core 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 dot 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 dot com retail operation maybe maybe the other interesting thing to point out is it doesn't give Amazon enough credit about their intentionality yes and strategy it short sells Amazon 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 more laws going to make it so we have twice the time 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 that's origin story number one origin story number two working and 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 you know is one of those crazy stories of L who is responsible for the inspiration for the Kindle and turned out it was Tesla founder Martin ever heard crazy he had invented the first e reader that wasn't quite viable yet and tried to sell it to Amazon and try to get investment from Amazon and Amazon said no will 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 used to and of course that would be a few years later and Amazon would create the Kindle internally so there is a similar sort of figure involved in inspiring the vision for AWS and that is Tim O'Reilly and 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 as the leader of the organization championed the whole idea of Web 2.0 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 and 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 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 flicker you would upload your photos and you would interact and change 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 been like mashing up api's 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 flicker head an api it was api's it was interoperability it was anybody can access its democratizing what we've built 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 a lot of different 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 it was like all the web instead of being in these silo applications was magically free for data to sort of move about in a utopian way without anybody's capital without anybody's capitalist intentions getting in the way and siloing the data all to themselves so in the early days of all this it was early 2002 tim or ily 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 to a rally is 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 dot com into a participatory website and this is a great idea being a web 2.0 company means that you can do business with the web to do it 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 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 under 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 yes and Jeff totally gets it he gets this in so many ways Amazon dot com has this obvious business use case for apis and allowing other developers and other websites to access data and content from amazon dot com which is they have a giant affiliate program that's called the amazon associates program 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 to so wouldn't 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 display the CD right there and then share the revenue with Amazon it's good for both of us if I can do that so after this meeting Jeff does two things one he completely embraces this idea tim and oh Riley he invites him up regularly to Seattle hasn't speak at all hands within the company evangelize this idea of web 2.0 and apis within Amazon to 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 dot com product catalog do everything you just said been and the stated goal in mission of this team is to make Amazon dot 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 announce to the world the launch of this new division within Amazon that is called Amazon Web Services 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 a hundred thousand people who watch the keynote very different world very different world 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 dot com product catalog and indeed it lives Amazon Web Services lives within the Amazon on associates program and that is run by a guy named Colin Briar 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 about this episode and the previous episode on Amazon dot com but for now in 2002 Colin technically becomes the first head of AWS 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 dot 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 now all of that is absolutely true there is no element of myth or falsehood to anything in the 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 API's that really starts to take hold at least in Jeff Bezos's mind we have not once in this story said the phrase cloud computing or the cloud we 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 call the 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 not these restful API endpoints that you used to fetch and post information fun sidebar do you know the origin of the term cloud as applied to IT infrastructure oh I do not this is so cool it started at general magic really yeah how crazy is that the Apple spin out the 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 back end 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 general magic was a pioneer in so many ways it's amazing 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 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 dot com that shall cap and designed back in 1995 has been you know amazing you meet so many great technical decisions that we talked about on the Amazon dot com episode 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 dot com at this point when it's now you know multi multi billion dollar company is running on one monolithic software code base yeah I do know after talking to some folks who are 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 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 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 my Amazon at this point they've got a nine they're working on search lab 126 is just kind of starting up getting going they've got all of these teams huge numbers of engineers 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 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 nest of complexities involved on the technical and infrastructure side and as word articulating problems here that were happening one of them is of course you're going to tip the server over if you add an 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 dot com idea where they're spending supplier money 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 do and so they're continuing to look for new categories to expand into their looking around they're seeing competition everywhere so they're just trying to get big fast so you have the issue of well we don't want to come 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 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 held the buy button worked on the website now imagine with a monolithic software code base what was involved in that 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 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 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 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 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 time Andy jassy who was the first a lot of listeners maybe don't know about this but anybody familiar with Amazon or who worked at Amazon knows Jeff shadow that's a legendary role to have which was a Microsoft thing before Bill Gates's TA was sort of the blueprint for this right technical assistant exactly so the reason that jassy becomes Jeff's first shadow is jassy it was 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 acts as the whole marketing department because you're not doing ads anymore we gotta get profitable and jassy was going to get laid off with the whole department but Jeff liked him and so Jeff said I'm going to save Andy wow he's not going to get laid off I'm going to find some from to do while we're figuring this out let's take this technical assistant idea for Microsoft he can come be my shadow and he creates the role for him and he'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 launch but he was the launcher music 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 oh yeah he wanted to be a sportscaster 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 fast-cil person 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 that Andy's focused on and this is where all these threads come together I'm just kind of in all 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 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 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 right specs and the engineers right there engineering documents 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 now I don't know this you make is you were one of these people that was my job yeah break was the Microsoft PM program and it was program management not product management was that the origin of the modern silicon Valley product manager well it is specifically the origin of program management Microsoft considers product management a marketing function so it's owned in the marketing organ is much more go to market oriented whereas Microsoft's program manager is in the engineering work it's on the same comp ladder and same promotion ladder as engineering oh we have fun maybe special to do with somebody of like let's trace the history of PM in tech in silicon Valley let's be specific about what the peace stands for there since it can be very different things yeah yeah okay so that's what most companies would do even incredibly successful brilliant smart companies and founders like Microsoft Bill Gates etc that is not what definitely decides to do how about less communication how about no communication so this is where the tim or ily web 2.0 influence comes to play and such a bigger way for amazon and for the internet Jeff has been exposed here in the Andy too is his TA to this concept of web 2.0 concept of API's 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 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 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 a fall these startups out there communicating with each other without a bd person and they're all just paying each others APIs and commerce is flowing and things are getting built maybe that's the right internal model to for the modern next generation type of company academically thinking around this was in process but I think Amazon is really the first company that did this in practice is 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 is worth using out one is a sort of human cultural thing which is basically trying to reduce the issue of met Caffes 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 is a completely separate application that then I'll interact to create the user facing thing. Yep VAP eyes so there is a legendary legendary post about this is one of the top all time posts in the history of the Internet is this the Steve Yeggy this is the Steve Yeggy rant by then Google engineer at the time this post happened much later but about this period in time of Amazon he had been working in 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 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 obviously what 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. 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 Dalzel 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 though the developers and he himself was a hardened interface and Amazon is so terrible and Bayzo says so terrible and they're so mean and blah blah blah blah blah all this stuff but it's all just a warm up 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 and I think this is like 2010ish to anchor this time period Yeah 2010 2011 was whenever Google plus launched the feels about right Steve writes that Jeff and Andy it was part of this since a memo out the whole company in Amazon it was a big mandate and quote Jeff's big mandate when 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 interprocess communication allowed no direct linking no direct reads of another team's data store no shared memory model no back doors whatsoever 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 externalizable 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 in Amazon you know he didn't say thank you have a nice day because he's so mean and this is crazy at the time if you think about this sort of edic I remember building web applications in the late 2000s and if you told me and of course I was writing PHP and creating my SQL database and if you told me oh yeah you can't query the my SQL 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 it's funny you 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 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 API size 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 dot com 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 pages and the PR FAQs where we're not doing PowerPoint slides were 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 can do it. 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 stop using for this purpose and started using for this other purpose so just keep that in mind there's no keep that in mind in apis and 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 well while we're talking here about this earth shattering realization of focus on what makes your beer taste better and turn into api infrastructure that which doesn't I think we should talk about our second sponsor of this episode and all of season 11 one of our very favorite long time companies in the acquired family pilot dot com pilot sets up and operates your entire financial stack as a startup and a growing company including finance accounting tax even higher level cfo services like investor reporting all of which you would otherwise be mucking around yourself in there as a founder or hiring somebody on your team to do don't do that it does not make your product better it does not make your beer taste better there are many of you out there who are opening quick books when you shouldn't be so don't you know you feel guilty when you're doing it you're like I shouldn't be doing this but I am doing this call pilot I should probably be thinking about my customers and instead I'm spending the Saturday reconciling yes for the vast majority of the world of the past majority of companies and especially startups doing it yourself as a founder terrible use of your time hiring your own you know deep finance team also probably a terrible use of your limited venture capital or bootstrapped resources instead you should just go on over to pilot they take all of that headache off your plate as a founder and what's cool you know we're talking about api is here not only that pilot has teams of expert accountants and financial professionals who can do your books and your financial reporting for you they also are a technology company run on api's because today you know fast forward the legacy of everything AWS creates here is straight it's plaid it's modern treasury so much of your financial stack as a company and your revenue runs on api based services will pilot integrates with them so good luck having a traditional accounting firm be able to do that pilot integrates with stripe brex gusto Shopify square you name it and they take all of that data right into your financial stack directly and importantly you can just count on the fact that they're going to keep integrating with whatever the next leading edge financial thing is whereas I think for a lot of people if you say oh they have a Shopify integration will sure but they're probably not a company full of engineers that is looking for the next Shopify to make sure that they integrate with at the deepest level pilot co founders and good friends will see you Jessica and Jeff are all MIT engineers this is their third startup they sold their last startup to drop box they very much know what they are doing on a technical front and this is frankly just a brilliant idea and piece of infrastructure that I'm so glad exists and for everything as we always say relevant to this episode Jeff Bezos himself is an investor in the company alongside Sequoia index and many many other great BC's so thanks to what seeming crew everybody in the acquired community if you use pilot go on over to pilot dot com slash acquired sign up there and if you use that link you will get 20% off your first six months of service thanks pilot thanks pilot you guys the best 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 away 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 you get rights as rant and publishes on the internet they start realizing okay there are parts of this where it may make sense to start being 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 the same kind of blunt force trauma just trying to keep their infrastructure up in modern 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 dot com code base but what AWS is is abstracted hardware IT infrastructure and software to but the core like s3 easy to 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 when you transition your software architecture to the service oriented architecture and no longer a monolithic code base 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 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 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 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 and it's brilliant of like well let's just make that an API you we place an API call into IT they have a pool of computing resources but much harder than it sounds yes oh yeah IT can just become an API 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 Yeggy described and everything happened overnight yeah okay so what you're telling me then is Bezos gets excited about this jassy starts working with them 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 API is 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 all right so we're now in mid 2003 this has been this huge transformative project with an 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 got to go become a leader of something within the company it's almost like an echo of Jeff and David Shaw back at D. Shott they start thinking together like okay Andy what are you going to do what's a new thing you're going to go lead within Amazon yep and he'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 third parties so the legend goes and he puts together a six-pager and this is the official Amazon legend you can read about stuff on about Amazon dot com yep it's in official Amazon documents you know everything in Amazon happens in written narratives and six pages he writes the six-pager famously he has to tinker with the margins and adjust them to fit everything on the 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 ST human 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 proposal to hire 57 new people to go pursue this initiative and he talks about he's so nervous going into the meeting this is 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 esteem loves it it gets approved and I think all that actually happened or happened in some way shape reform Andy literally we mentioned Colin Briar who was running AWS until this point and he and Colin swap places so Andy goes in takes over AWS Colin becomes Jeff's next shadow 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 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 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 is brilliant they now have a consulting firm together as part of working backwards to help companies implement the Amazon culture great perfect freaking brilliant so back to Andy he gets approval is can hire 57 people he recruits Adam Selipsky to come in join 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 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 Selipsky and it's like 10 11 years of jesse up there on stage and you finally get a different voice and it's a little bit jarring especially when you're all back to back when it's suddenly not Andy jesse but yeah Adam is the guy now yeah do you know who else was in that first wave of external recruits who come into join AWS I do not Jeff loss it oh no way the CEO Twilio yes wow which totally makes sense the Twilio would come out of AWS yes of course 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 to 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 yeah it's actually really good interview that Andy does with the Harvard iLab in 2013 that's on YouTube they're talking about the origin of AWS I think the topic is entrepreneurship companies which my god the most disgusting word of all time but Andy in the talk he's like well you know we had to decide as part of the vision document 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 dot 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 figured out what you would need to re architect 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 acima was to be able to recreate any internet service of scale I love that you say was like what acima was 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 is great quote 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 is that going to launch with everything they need to build a whole operating system this is where the official narrative just completely falls apart because that is totally not what happened not even a little bit nope and in fact I can recall personally using Amazon S3 for something I was working on and there was no easy to yes so unlike myth number one about AWS origins you couldn't just take access Amazon dot com IT capacity and externalize it they had to go build all this from scratch as external services it takes a couple 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 yes three is the first service to launch by itself in march 2006 and let's talk about it it wasn't 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 you are all 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 yeah S3 launches in March 2006 EC2 launches a few months later in August 2006 I think in beta in August 2006 and what is EC2 EC2 is elastic compute cloud which is the compute counterpart to the storage part of AWS and S3 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 tell net to and paying and see it had an IP address 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 it's your processor in the cloud cloud front which is the content delivery network the CDN the acimipart 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 and it was important to use 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 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 at this point the compass and story number one was like 180 degrees off and then story number two it got 90 degrees off or 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. And I think story number four is basically right to but three and four are kind of the same success as many fathers yes concurrently and separately to everything we just said in story number three and he 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 head 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 overseas all of network engineering within IT at Amazon and Chris reports to Rick Bell's L the CIO of Amazon so the two of them Benjamin and Chris they rate 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 mention 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 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 yeah I think first to Rick and then to Jeff and he green lit their project yes separately from the rest of AWS and what I can't tell is did this before it got in front of Jeff get merged into and use proposal and it was sort of green let us one big thing or where they're actually two different concurrent efforts 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 says hey I'm actually going to leave and move back move family back and Rick is like oh no no no we're in the middle of this huge architecture transition this is a key moment in the company you're a super valuable person at the company what if we do the same thing we're doing in Palo Alto with a nine and lab 126 will set up a new Amazon subsidiary 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 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 yep so Chris and Chris go off to South Africa they start working independently on this compute server idea and they do that becomes easy to it's that team in South Africa that builds easy to Bradstown writes in the everything store quote EC2 was born in isolation with pink them talking to his colleagues in Seattle only sporadically at least for the first year pink them later said that the solitude was beneficial as it offered a comfortable distance from Amazon's intrusive CEO quote from pink him I spent most of my time trying to hide from business pink him says he was a fun guy to talk to you but you did not want to be his pet project he would love it to distraction whole areas you can start to see even in these very public reasonably nice quotes that there's enough tension between Chris pink and the Nizzo's jassie leadership that even in the official Amazon things that they put out about the development in South Africa like Chris pink him's name is sort of know where 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 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 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. Right, who cares? 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, it's Jeff's Inventon Wander, is the mantra of him and the company. I think that's what actually happened. The official version now of AWS history of it was all centrally planned. It was all in that 2003 document that just seemed sort of silly to me and counterproductive. Yeah. I agree. The other thing that becomes clear is it's really not about the idea. It's about the execution. 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 history is written by the victors. We're seeing some of that play out here. 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. 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? You know, you had that great playbook theme and take away 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. Yeah. It was brute forcing its way through AMAs to eventually find the correct way by just gathering data, launch stuff, gather data, tear it down, start again. 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. Early on, but I want to get to that in my playbook because I think it actually contrasts that in some ways. Oh, okay. Fun, fun, fun. 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 unapunynated about this as a platform. They said we're going to launch with primitives. It's the most basic story. 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, 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. 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 that 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. 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 bill for the entire development and test of this application was $3.08. 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. 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. It's like it's priced so dynamically. If it was a big successful project holding a lot of data, then it would be expensive. They actually have pretty good margins on S3 and on bandwidth and some of these things. But because it was a band and project for which I do not know what the email address to login to AWS is from whatever team I was working on, I kind of just don't care. Could you imagine back in 2006, let alone even probably today, Oracle or Microsoft or IBM or HP or you name it. 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. And we'll charge you $3.08. This was unbelievably world changing, truly world changing. This is how Dropbox, Instagram, Airbnb, Uber, Zinga, all of these companies get started. I remember being at all these startup weekends and all these hackathons where the audience, the family members who came, the 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 and three months figuring out what data center you were going to put something in. You actually could just have an idea and get it out there within two days. This birthed that movement. We all lived it. Rover.com. We were in all in various ways, part of adjacent to next to our great friend and mentor, Greg Gautismen. He was a VC. He wasn't technical. It got built in a weekend. Yeah, Phil Kimmel. Phil, our buddy built it. Yep. 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 you know who was part a contestant in that very first AWS startup challenge? Is it like Teach Street? Is it going to be some Amazon inside baseball? Oh, even better. Justin.tv. No way. Which of course would pivot into Twitch? Which Amazon would then buy? Of course, Amazon would then buy. Wow. For like the better part of a billion dollars, right? Yep. I don't know a good sense of how Twitch is doing now. I assume Amazon got a good deal on that almost no matter what we got to find the right way to revisit that. For sure. But that is a great use case. Justin, TV early, I mean, they were using a lot of bandwidth to stream video. They were using a lot of S3 just or 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. 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 it 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. 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, you know, 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, you know, 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 buddy. 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, you know, your bank's application is on AWS and everything is moving to the cloud or 120 billion dollars a year of revenue has already moved to the cloud of at least Microsoft Amazon or Google. So there's these 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 are running, you know, 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. 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. Jesse 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. And 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. They're getting better deals on their servers. So they're passing those along to you. 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 your instantly global on AWS versus when you run your own on-prem data centers, you're like wherever your data centers are. 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 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, 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. 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, the very early thing that they launched, which is, hey, this isn't just your 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 DynamoDB. 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 aware in the world at what you just know that your code executed. And so that's really like building for the cloud. You're completely architecting your application differently to take advantage of this very different world of computing the cloud offers. 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 in your infrastructure. As for the cloud, you know, lambda everything is like that's taking it down to zero. 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 and its earliest days, let's call it the first couple of years was really start up focused new applications from a whole cloth that want to use our infrastructure as a service primitive building blocks. 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 at up time and all this stuff, replication requirements of enterprises, get sucked to audited with phantom. There you go. Perfect. So very quickly, AWS could serve these two markets of startups 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 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 from a market that doesn't yet exist. 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 for like the first five years with nobody competing with them. It's incredible. So 2006 is when the first services launch 2007 and 2008, that's when these startups are getting started Airbnb Uber, 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. 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 silver light. They had this big partnership with Microsoft. That's right. Oh my God. That was so terrible. Yes. 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. We're moving all of it to AWS. And I believe Netflix is still to this day. I think 100% on AWS. I don't know about 100% but yes, they're still an enormous customer. Rehastings was actually the very first guest interviewed on stage at the first reinvent in 2012. I think in that interview, if it wasn't that one, it's another one around that time. He talks about people say, read, 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, 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. 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 any of these things that Amazon was competing on and read 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. Okay. So why is read in 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 praising model. And let's not loop them together because I actually think it's worth analyzing each company failed to claim this opportunity for a unique reasons. Hmm. Okay. First couple, it's worth analyzing, I think what you're pointing out is these old server companies. So the IBMs and Oracle on the database side that made these ridiculous gross margins and they sold you this complete proprietary solution. Yeah. 80% gross margins. 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 private cloud private cloud. They might do it in their data center, they might do it in yours, but is 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 a license and you bought this many licenses. People 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. Amazon targeted gross margins and operating margins for AWS in the 20 to 40% range, which felt like a 10 X and a 20 X for them, but was unattractive to the traditional. 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 20 X are margin basis with this new business. Awesome. But that's still less than half of the margin that the old school guys are getting. 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 because they're so cogs sensitive on everything. So here's another thing though. You mentioned call it the oracles of the IBMs, whoever did 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. And then two years later, your pain, 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 years later to version 21 and you're going to pay a bunch of money every time you migrate. Right. But this annuity that you have, 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. Yep. Okay. So that's super old guard that IBMs and oracles, which is very funny. And you watch all these keynotes. I wonder if anyone's ever watched them all mainline like I did because I have this unique perspective, seeing them also close to each other. They used to, on stage, refer to IBM and Oracle in a tongue in cheekway. 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 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's actually been a extremely viable competitor and made a big, big comeback. They're the best competitor to AWS by far. Amazon now loves attacking SQL server licenses and stuff like that that Microsoft of course comes in an audit 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 PC is taking 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 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. This is probably happening when you were there, right? 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 realize, 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 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. But 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 WIM32 runtime, the dot net platform were 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 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 Baron ball later, they just had five years of watching pitches go by. Yeah. Well, 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? So Google's the third place Amazon's got 35, maybe 40 percent. Microsoft's got 20 to 22 percent. Google somewhere around 10 percent. Which that Microsoft having 22 percent. Very impressive. That's an enormous win. 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 to 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. So their entire existence, it's not that it's been easy because it's been a computer science challenge. It's been very academic and 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 it. I guess it depends if you put sales above the line or below the line, but 80 percent gross margins, a 30 percent 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, 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. It was 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. Well, I think they also made the mistake that you are 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. Yep, that's totally true. I mean, the first for I was Google App Engine, which was in no way infrastructure was 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 GIE and you can make app engine apps. And it was all abstracted away from you. It was kind of the same Microsoft thing. If we're going to get really clever and build you a platform of the future, but Google per the Steve Yeggy ran 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. 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. That's a great point. And when AWS started, like we talked about, the obvious core product market fit and first set of customers with 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 institutions and did the lift and shift thing and then brought those big enterprises along. 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. Yeah. NASA was famously a customer starting in 2009. Yes. That's right. They did the data streaming and then the video distribution of the Mars landing, right? Yep. That's right. 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. You know, those folks don't want to pay with a credit card. Right. 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 a reinvent. They had to have poached a bunch of Oracle sales people because the Amazon sales machine is a lot like the Oracle sales machine of old. 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. 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? Oh, 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? Oh, that it's like a Doppler effect or something like that. 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 when the sound waves get bunched up or spread out, like when a siren goes by, it's the Doppler effect. And Redshift is the light equivalent. It's like a star moving away from you. There's another part of the story here. Shift away from big red. 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. 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 to database software, maybe the stickiest software of all time. 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 step, 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, I'm here podcasting and David, I'm seeing you and 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 hundred terabyte super secure thing they would ship to your office called the snowball and you'd plug it in. It would automatically get all your data. I 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 it was like tamper proof, bullet proof 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 and a keynote in twenty sixteen seventeen 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 a hundred terabytes is not that meaningful. 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 vendors cloud, there's pretty meaningful lock in there. They're very practical concerns with moving. Oh, I can do you one better on an example. Amazon.com used Oracle databases. Yep. When it was started, Amazon.com did not finish their migration off of Oracle databases and onto AWS products until 2019. Oh, my God. 13 years after AWS launched. That is insane. It took that long for Amazon itself to migrate off of Oracle. 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 DynamoDB 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. Amazing. You know, you just play that forward and you're like, wow, okay, hey, there's still so much revenue that's going to shift to AWS and be it's going to be so sticky, so sticky. One of the most amazing stats that I get 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, 80. 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 basically revenue that's contracted, but not recognized yet. 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 dollars. I don't even know what to say about that. There's a lot more storage and compute not on the cloud than currently in the cloud. 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 dollars more business that is contractually coming their way. It's insane. Crazy. It's crazy. So David, you mentioned there on what is it? $70, $80 billion run rate right now? $80, $80,000. Well, in 2014, Jeff Bezos wrote a memo, the annual memo that comes out to let it assure holders 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. Then the quote unquote AWS IPO, which I think Ben Thompson coined that term, happened in 2015. That was when they reported Q1 2015 earnings. At that point in time, AWS was a $6 billion revenue run rate. 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. Well, enormous for Amazon margins. Okay, but an 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. I always used to think about and talk about the mega trend 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 a full circle, anything a computer could touch is the internet. It only gets one in the same these days. Jeff is, it's a crazy statement, but I think he's right. It's market size, unconstrained. It certainly was in 2014 and I wonder if you could even make it now. Yeah. So, okay. The AWS IPO happens in 2015 IPO quote unquote, $6 billion revenue run rate for AWS 70% annual growth rate. 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. 30 to 35% growth on 80 billion dollars 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. 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. Very cheap, very cheap. 2016. This is interesting. See, Jassy was not technically the CEO of Amazon Web Services. Senior Vice President of AWS. Yep. Until 2016, 2016, the restructure, corporately Jeff Bezos becomes CEO of the whole company. Jassy becomes CEO of AWS and Jeff Walke becomes CEO of everything else. Amazon retail. The 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 and 2020, 62 last year, but $80 billion run rate. And there's today sitting on a hundred billion dollar backlog that's coming rain or shine just freaking unbelievable. Yep. July 5th, 2021. Jeff Bezos retires. Is that crazy? That was only a year ago. It feels like longer. I know. Yeah. Crazy. They announced it before them, but that's one it actually 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 snow mobile operation on the International Space Station. Oh, I didn't know that really. 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 that became the dominant cloud player in China. Be fun to dig into how that happened and Google about 7%. Yep. It's pretty interesting to look at all the ways they're pressing their advantages to 2015 that year they broke out finances. They also bought anapurna labs. This is Rayleigh 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 trainium and then they have inference chips, which are also some crazy name like infuron or in I can't remember exactly, but they have custom machine learning chips. Do you know who makes those chips? TSMC. Of course. Big DSMC customer. Huh. Yeah. The other thing is that in many ways it's the embrace extends 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. 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. There are ways that they generate huge margins like bandwidth. AWS makes 90 plus percent gross margins on their bandwidth charges. 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 announced 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. 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. 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. 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. It's a work in progress. 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? Data warehouses. How is snowflake its own $50 billion company? Unbelievable. It stores data in AWS and other public clouds. It is its own $50 billion company. 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 database is team at Amazon. That whole org has to be very, very unhappy that snowflake managed to run the gauntlet on the data warehouse market. It's crazy that AWS did not do this. It's probably AWS's biggest failure. The question is why? I think there's a few areas. One is just big company stuff. I think before launching something when you're at Amazon 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. I think at 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. 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 their 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 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 probably not a whiff on the order of Microsoft and Google whiffing on cloud. Yeah. It's an order of magnitude or two smaller. 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. The other thing where they're sort of a victim of their own success is the Amazon two 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 were a tardy disimpiguate 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 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 launch what we consider to be 74 significant features this year. And we're excited to tell you all about them. I think that one for a long time. And now it's created so much confusion for customers that that's actually like the bullcase 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 guard reals. Good luck. And AWS keeps launching even more new services now to provide those guard reals and say, well, if you use whatever whatever manager, then you can't get yourself into too much trouble. And it's like, oh, cool. A 13th standard 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. Well, this is a great time to share our next sponsor with you. And I'm just saying extremely unusual, this segment is brought to you by our great friends at NCS Capital. They're just the best. They are. We first had it with Britain and Brad and Joe and John with the idea about doing a paid sponsorship. They jumped on it, but they gave us one very particular caveat because they're such learners. And they said that the only thing we could ask listeners to do as a call to action is to read one of their white papers, think about it and offer feedback and further refine the work. Well, this time in contrast to our last two episodes, we are going to talk about a different white paper. And for those of you who joined us for the talk back, that was awesome to get to talk to all of you with the NCS guys on the call. That was so great about complexity and complexity investing, sort of the founding thesis of the firm. Today, though, we are talking about their white paper redefining the margin of safety. And we'll have a link in the show notes for folks to read it. But it's a super cool concept. So margin of safety for folks who've listened to our crazy 10 hour, three part, Berkshire Hathaway series last year. You'll remember that as an original Ben Graham concept. And then of course Warren and Charlie popularized it at Berkshire. And the idea is actually similar to NCS's core thesis, which is that you can't really predict the future as an investor or anybody else. And thus the idea of having margin of safety in your investments in the Graham concept of it is around valuation. That gives you a wide leeway to be wrong. Yes. In a very wide possible of scenarios rather than a very narrow set of scenarios, you're going to be okay and still may make a profitable investment. And of course, Graham's a little simplistic viewpoint on this is if it's a high valuation relative to the business's fundamentals, it's a low margin of safety and a low valuation gives you a high margin of safety. Now NCS is different. They believe valuation alone is insufficient to actually think through what the true margin of safety is. So they think about margin of safety really as focusing in today's fast changing world on the adaptability of the management team of a company. A management team that's highly adaptable is going to give you as an investor in the company, a much higher degree of margin of safety if you believe that the pace of change out there is accelerating and things are going to be changing. Valuation doesn't tell you much, but a management team's ability to adapt to changing conditions does. So that's sort of part one of their thesis here. Part two, which is really cool, is that there's also a time element here. So not just management's capability to adapt, but what is the business cycle of the company that they're running? If it's a super, super fast business cycle, well, you could have the best management team in the world at adaptability. They're just not going to have time to react. And then the likelihood that within a narrow window of time they'll make the right choices is low. So an example here is Groupon or Zingha. It wasn't maybe necessarily that the management teams didn't know how to adapt to changing conditions. It's just that the business cycle for those companies was so fast they didn't have time to. They actually use this analogy in the paper where they're saying, well, imagine that you're driving only two feet away from another car and you're going quite fast. If they tap the brakes, you're screwed no matter what, how good of a driver you are. But of course, if you're at a safe distance and you give yourself time to react, then there could be a lot more margin of safety, no matter what the price of the investment. So a little bit about NZS before we close here, they've got over a billion dollars under management. They're a global equity fund. They're long only. They manage money for institutional and accredited investors. They're just some of our very favorite thinkers. They started the firm in 2019 and worked together for many, many years before that. If you find this stuff interesting, you should go read the whole white paper by clicking the link in the show notes. It is well worth the read and we say that just as fans of their ideas, we are not clients of the firm. And finally, they do really, really, really want your feedback on this. So if you got a bone to pick, if you want to understand it further and read the whole white paper, if you totally agree, click the link in the show notes, go check out the white paper. You can email any of them. Their emails are on the white paper itself or even better. We're going to do another Zoom call with them in October to talk about these ideas together. So there's a second link in the show notes to add that to your calendar and we would love to see you there. Our thanks to NDS Capital. Well, should we transition to analysis? Yeah, let's start with power because I think AWS is actually one of the best case studies in power of all time. So long time listen is the show no. 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, do you say 19% 18, 19% operating margins? 19% Now they're at 30% they've gotten more profitable when the landscape got more competitive. Yeah, how did that happen? 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 cost 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 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. It's funny. I'm looking at the list of seven powers here, which are for folks who are new counterpositioning scale economies, switching costs, network economies process power branding and cornered resource. And I'm like, check, check, check, check, check, check, check, check. So early on in the takeoff phase counterpositioning all over the place, all over the place, 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 acquires 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 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. Yeah. Well, and it continues to feed itself now. 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. 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. I mean, Amazon.com took 13 years to offload off of Oracle onto AWS. Yep. If that's not switching costs in this industry, I don't know what is 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. They do Amazon and one of the others. They're 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, 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. Well, there's also the competitors. I 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 in the next several years. Totally, totally agree. Whereas Amazon has just been like consistent. 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 hookline 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 phone gap. 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 the lowest level hardware features. And they're like, yeah, but then you don't need to write an Android app too. 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. 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, they're running the playbook. Yeah. Of course. That's how it works. A cycle of life. 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? 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. It was AWS. There was like a totally 16 maybe near times article that came out where they reported that it was AWS and Apple got very upset about it. 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 a 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. So I totally agree. Apple's a consumer technology company. Yeah, maybe they should be running their own high cloud 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, 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. 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. Yeah. I mean, you never know with Apple, but I think the ship has sailed. Yeah. I do know Facebook uses AWS. Hmm, interesting. So Facebook has their own first party data centers that they operate because they obviously at such massive scale or that makes sense. But then they also use AWS for some stuff. I'm trying to think about does AWS have network economy power? I don't think so. I don't either. I don't think I care if you use AWS. No, it's indirect. It shows up in scale economies because my stuff gets cheaper because you use it. 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 in cornered 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. Yep. 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? Yeah, let's do it. My first thing to highlight in playbook is the 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. They'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. 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. There could be a self-inflicted wound or like soccer people call it an own goal. But once you have this scale economy's power going, I just think it's pretty hard to drop the ball at this point. I mean, look, we've alluded to this for years on a quiet. 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. And 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. 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. It's actually a very similar business at scale. Yes. Another one that I had is price cuts. This is not something we talked about in history in fact, 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. Speaking of Hamilton and seven powers in our conversation with him and Chen Ye, he pointed out that it made sense for TSMC to proactively lower prices for customers 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. 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 the proactive price drops works not quite as well as it does for TSMC, but they get rewarded for it for sure. 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 how ahead of the curve on infrastructure to enable scale economies. Yes. 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. Haha, right. This is why they have a hundred billion dollar revenue backlog from this dimension. That's a terrible thing. Amazon doesn't get this money up front. Their whole thing to customers is you don't have to pay up front to install servers. There are reserved instances, but there's 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 up front 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, their effective cost of capital is higher. Well, I guess Amazon stock price. I don't think drop that much, but people freaked out this past quarter when Amazon reported the hugely negative cash flow. And this is why. 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. Yep. All right. Another one I had is I was reading from friends of the show Tegas. 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 exists 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. 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. It's the old Oracle business model all right. Right. And they're like, well, it gets 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, because it's, you know, AWS Lambda. So it's cloud because it's Lambda, but it's in your data center. It's in the cloud. I'm like, what are 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. 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. Right. I think that's what cloud means. 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. Yeah. You know it when you see it. 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 stages. He's like, we don't really understand the customer use case yet. And this was in like 2015 or 16. This is six years before the recent buzz around Web 3 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. Where's in that same time frame? Didn't Microsoft have those ads with common blockchain in the cloud on Microsoft? You know, IBM was doing like a corporate blockchain. Yeah. And actually 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. Interesting. 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 a thousand runs. This long tail distribution of returns is why it's important to be bold, big winners pay for so many experiments. Market size, unconstrained. Market size, unconstrained. I think that's got to be like a catchphrase on acquired that we should incorporate. Oh, for sure. Let's print it on some merch. Yeah. But yeah, this is the year after he makes the market size 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. I think Jeff Bezos got that better than most VCs do. He's a phenomenal high beta capital allocator. In running a company, he was also a very good operational CEO and also like an actual genius. All of these things, there's lots to say about Jeff Bezos. He's absolutely a genius. He's absolutely a brilliant operator. But maybe even more than these things, he just gets capital allocation. 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. Also that quote, what did he say in baseball, you have truncated returns? A truncated outcome distribution. That's the most Jeff Bezos thing ever. Right. I'm sure that Aaron Judges thinking that's going to go to the place like, oh, if only I didn't have a truncated outcome distribution. So great. Which also reminds me sidebar because we're deep in the episode here watching the reinvent keynote with three tastings. It's been so long since we did our two Netflix series. Yeah, we need a part three. What was that was years ago, but I think they're still really good. Be fun to go back and relisten to them. Read Hastings is a huge nerd. Oh, yeah. A huge nerd. I mean, he started his career doing like a data storage company. Yes. I think of him now as like, oh, retasting CEO and founder of Netflix. He's a business guy like, no, kind of like Bezos. No, he's like a true geek. He's an engineer and his engineering project as his company. Yes. Yeah. I think that in the highest possible compliment. 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. Yeah. 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 might take away from the last episode. So I use this analogy that Amazon would quickly spin something up, learn from it. 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 path finding. Well, AWS is different. They don't really have a fire phone or a Z shops. 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 having to maintain kind of a crappy service that didn't work, you just maintain the service. Right. Such a good point. There's stuff that didn't live up to the full potential like all the productivity applications they've ever tried work mail. Time. They're IoT offering green grass. 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 simple DB. So dynamo DB comes out. It's way more performant. It has sort of a similar job to be done. And simple DB 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. Yeah. And this is why you'd log on to the AWS product page and there's 200 services there. It's such a good point. You can't like it's not worth it to kill anything. Yep. All right. Grading. Do we even really need to discuss this? I mean, we could be like, OK, 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. Oh, OK. Great. Sort of evaluate it going forward. What is a market cap? Well, market cap. Market cap unconstrained. 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. 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 or somewhere on that order of cash, which we've never seen them do or come close to doing. 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's the edge of the tab. Let's start generating a ton of cash even though we've never known how to do that before. I think on the last episode I said, 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 raised 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. 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, 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 what an a half trillion dollars of value? Yeah, it's a good point. Maybe this is part of Jeff stepping back and Andy Jassy becoming CEO of the whole company is to actually figure out how to do that. Yeah. I mean, I can imagine that that's a challenge that I'm totally projecting here into Jeff Bezos' mind to 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. 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 a 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. 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. Yeah. And that's the exact opposite message of what Jeff Bezos said in the 2020 letter right when COVID hit. Didn't he say like buckle your seat belt? Yeah. He said, if you're a share owner in Amazon, you may want to take a seat. I agree. Yep. He said to cowboy, like we talked about, you know, he wears the cowboy boots. 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 a regulatory concern. Like if they owned 80% of cloud, it probably would be worse for them long term. Oh, here's a question. Where's Amazon strategic in letting Microsoft back in the game? No, I don't think so. I think that's too difficult of a future to see to cannibalize current aid. I'm sure they're worried about an I trust and regulation. Yeah. I mean, it's the same way that Google looks at being. I'm sure which is like, woo, think how that exists. All right. What's your grade? It's an A plus, 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 own 100% of the company, would you ever be profitable on your business to buy it for a trillion and a half dollars? Hmm. It's the Warren Buffett Ben Graham, a stock is a piece of a business. Yes. If you were able to buy the whole company of Amazon.com for $1.5 trillion, is that a good use of capital? Yeah. Great question. I think it probably is. That's all right. I thought you were going. I mean, I have a little bias here. Well, come on. Yeah. A plus for me, get out of here. This division of this company has $100 billion of contracted revenue. A plus. We're done. David thinks it's a stock cheap. Yeah. Carvouts. What do you got? Yes. Carvouts. Mine is a very enjoyable show that I watched on Disney Plus is a Marvel show called Moon Knight. And I would say it's not the best show that I've seen on Disney Plus, but it is the best acting that I have seen in any of the Marvel Cinematic Universe shows. Ah, nice. I still think Loki is probably the best written and what was the one with the Scarlet Witch. Oh, Wandavision. Wandavision. Also, very good. That was good. Fantastic writing. 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. Wait, is he? Poe Dameron. Yeah. That's what he's saying. He's done other Disney Star Wars stuff. He's also done some other crazy roles. I think he's in X Machina. Ah. Have you watched any of the new Star Wars stuff? I just finished Obi-Wan Kenobi and was deeply uninfused. Oh, Palmer. I enjoyed it. Like as a Star Wars fan, just more Star Wars is awesome and like getting to see Obi-Wan on different ages 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 going to be spoilery where I'm not going to tell you the end of the series, but I'm going to 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 3, 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. Yeah, he's the old hermit Ben, right? Right. He brings Luke to Tatooine and then that's his responsibility. And this is like a whole galactic adventure that takes place 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 and 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. I have not watched any of the new stuff, but I mean, I feel like Lucasfilm just needs a new start. It doesn't feel like it's going in a good direction. 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. Yeah. And then I liked when Boba Fett tried to become the Mandalorian by being like, oh, Boba Fett's not that good. Let's just kind of make it the Mandalorian again. Well, that could be a episode for another day. Moon Knight, Oscar Isaac. Go watch it. Awesome. My carve out is one that if you are listening to this now, I'm pretty sure you're going to 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 Friedman's five and a half hour interview with John Carmack. It's so good. It's so good. It's awesome. Carmack's just a legend. I'm an hour in and it's great. It's so, so good. But having not knowing that that was coming, having just recently listened to the audio book of Masters of Doom, I was made for you. It's perfect. Oh, 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 here how he thinks about things and like his history of of it because 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 he blew up. But I think they've kind of reconciled and it's nice. Anyway, the whole 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 an Oculus and part of Facebook Emetta and the thing that he's working on now is AI and in particular artificial general intelligence. It's a great interview. Sweet. Can't wait to finish it. All right, listeners. Well, thank you so much to Fundri's Pilot and NCS Capital. Thanks for all three of those are available in the show notes as well as a link to register for our NCS 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 the acquired Slack community at acquired.fm slash Slack. Take yourself as a sweet shirt or tank or hoodie or crew neck or onesie at acquired.fm slash store. You can totally become an acquired LP and get early access to our LP episodes at acquired.fm slash LP or just get them in their 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. Amen. All right, listeners. Have a good one. See you next time. We'll see you next time. Bye.