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Why Amazon Is Both a Boon and a Threat to Startups

January 19, 2017, 8:55 PM UTC
Political And Business Visitors At Trump Tower During President-Elect's Transition To The White House
Jeff Bezos, chief executive officer of York, U.S., on Wednesday, Dec. 14, 2016.
Albin Lohr-Jones— Bloomberg via Getty Images

You can thank Amazon and its cloud computing business for ushering a wave of fast-rising startups like Airbnb and Lyft that are upending industries like hospitality and transportation.

But while Amazon Web Services (AMZN) is making a big business out of selling computing resources to companies on demand, it may not fare as well as it expands to related areas like business productivity software or other document management services.

At least, that’s the belief from a few business software companies that have both benefited from the rise of AWS while facing increased competition from the retail giant as it steadily debuts new features. Additionally, Amazon’s cloud computing business keeps on booming, with sales rising roughly 55% year-over-year to $3.2 billion in its third quarter.

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“They probably overestimate their ability to move up the stack,” said Okta CEO Todd McKinnon in reference to Amazon attempting to sell more software than just basic infrastructure resources like computing and storage. McKinnon made his comments during a Thursday panel on enterprise software and the workplace.

McKinnon praised Amazon for letting companies like Okta to rapidly build their software and jumpstart their businesses faster than the past. Additionally, with Amazon selling its computing resources for cheaper than it costs to buy data center hardware, the company has saved Okta “tons of money,” he said.

April Underwood, the vice president of workplace software company Slack, echoed McKinnon’s comments and said it’s “never been easier than it was now” for companies to build new business software services like expense reporting tools because of cloud computing companies like AWS and Google (GOOG).

But selling data center infrastructure services and enterprise software are two different businesses, and just because one company is strong in one area doesn’t mean it will be strong in another, McKinnon explained. McKinnon compared Amazon’s foray into new software services to Oracle (ORCL), which dominates the database the market but is considered by some analysts to be behind companies like SAP and Salesforce (CRM) in its apps business.

Still, the fact that Amazon continually debuts new features like its own database services and a new service intended to reduce the mundane legwork needed to manage corporate software puts some pressure on companies that rely on AWS while competing with it.

Okta, for example, sells so-called identify management services that IT staff use to keep track of employees using multiple apps at work. Amazon sells a similar service as well as Microsoft.

It should be noted that Microsoft disinvited Okta to one of its tech conferences in March due to increased competition between their respective services. After the news became public, Microsoft then re-invited Okta back to the conference, according to Business Insider.

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One thing newer software companies must do to compete with larger companies is to ensure their respective software works well with each other, said Aaron Levie, the CEO of document management company Box. Smaller companies must ensure that customers find a simple experience using multiple apps from multiple companies like they would using software from just one big company, Levie explained.

“As an industry, we need to be better at a unified front,” Levie said.