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Enough about Amazon’s gigantic retail business, let’s talk about its cloud

Amazon Unveils Its First SmartphoneAmazon Unveils Its First Smartphone founder and CEO Jeff BezosPhotograph by David Ryder — Getty Images

Most of the hubbub around Amazon (AMZN)on its 20th anniversary this week will focus on the company’s gigantic e-commerce operation—and its Amazon Prime Day extravaganza. But techies are much more interested in discussing what a phenomenon Amazon Web Services, Amazon’s “side business,” has become since its first service—S3 storage—launched in March 2006. S3 was followed by the EC2 computing capabilities built by Chris Pinkham and his team, which went to beta a few months later.

With these initial offerings, AWS pioneered the public cloud infrastructure model which yokes together massive amounts of computing power and divvies it up among paying customers.

In the ensuing 9 years, it’s no exaggeration to say that Amazon’s cloud revolutionized how information technology is deployed. The model it pioneered—pay-as-you-go computing, networking and storage— enabled a wave of startups to get started without signing their funding checks over to Sun Microsystems and Oracle(ORCL) for pricey hardware and software. With the advent of AWS, and a steady flow of new features and functions, the technology option for startups became a lease-versus-buy decision.

On Amazon’s last earnings call in April, AWS revenue was broken out separately for the first time and chief executive officer Jeff Bezos said AWS, alone, represented a $5 billion business. That figure has been borne out by third party financial analysts and has prompted speculation, always denied, that Amazon will eventually spin out that business. At the AWS Re:invent conference two years ago Andy Jassy, the senior vice president in charge of cloud, quoted Bezos saying that AWS could well be Amazon’s biggest business some day.

AWS started out in cloud by selling the fundamental building blocks. After S3 and EC2 were announced in the U.S., the company broadened its reach first to Europe and then to Asia Pacific and beyond. Then it started adding more complicated options, things like workflow and database services.

Developers, especially at the aforementioned startups, were already enamored with the flexibility AWS provided. But the company started to talk more to IT managers and chief information officers of large companies about what they needed from a cloud. AWS rolled out new products like the AWS Storage Gateway in early 2012. The gateway made it easier for a company to pump data from its own data center or server room to Amazon’s cloud. Then came things like the Redshift data warehousing service. Rolled out in February, 2013, Redshift took the battle to Oracle, Teradata and other enterprise software companies. Meanwhile, Amazon got more serious about building out its partner ecosystem. It launched AWS Re:invent, a user and partner conference in 2012.

And, even as it brought out higher level services, AWS kept up a steady drumbeat of price cuts, mostly on the more basic stuff, 49 in total , the most recent one coming last month.

In March of 2013, word leaked that AWS won the contract to build a cloud for the CIA and other intelligence agencies, beating out IBM(IBM) even though its bid was higher. That deal gave the company credibility even among big security-obsessed financial services and other companies that eyed public cloud infrastructure warily in the past.

That’s not to say the public cloud in general and AWS specifically, is infallible. There are complaints that resources, in part because there are so many of them, are hard to track and manage. Customers may spin up EC2 instances for a project then shutter the project and forget to turn off their instances. Even at AWS prices, that can add up. A cadre of third-party companies like Cloudyn and Cloudability has sprung up to address these issues and Amazon itself has updated its user console and Trusted Advisor dashboard to help customers.

So, AWS has built up a prodigious lead in cloud services over its 9 years. What’s changed in the past three is the arrival on the scene of two extremely large public cloud rivals, namely Microsoft(MSFT)Azure and Google(GOOG) Cloud Platform. And then there are aggressive cloud computing moves by legacy IT players including IBM, Cisco(CSCO), and every telephone carrier you can name.

Given all that, AWS can still parlay first-mover advantage—it runs 10 times the computing capacity than the next 14 cloud companies combined, according to Gartner’s most recent cloud computing survey. But it no longer has the pie all to itself.

What’s heartening for AWS and its biggest competitors is that for all the hype about cloud adoption, the world is still very early in this migration. The pie is only going to get bigger.

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