Amazon’s Advantageous Model for Cloud Investments

While catching up with industry developments earlier this week, I came across a Reuters piece on Amazon’s now well-established approach toward investments in startup companies. If you haven’t seen it, I recommend that you give it a read.

As its Amazon Web Services (AWS) cloud operations approach the threshold of a $1-billion business, the company once known exclusively as an online bookshop continues to search for money-making opportunities well beyond Internet retailing.

Privileged Insights

An article at GigaOM by Barb Darrow quotes Amazon CEO Jeff Bezos explaining that his company stumbled unintentionally into the cloud-services business, but the Reuters item makes clear that Amazon is putting considerably more thought into its cloud endeavors these days. In fact, Amazon’s investment methodology, which sees it invest in startup companies that are AWS customers, is an exercise in calculated risk mitigation.

That’s because, before making those investments, Amazon gains highly detailed and extremely valuable insights into startup companies’ dynamic requirements for computing infrastructure and resources. It can then draw inferences about the popularity and market appeal of the services those companies supply. All in all, it seems like an inherently logical and sound investment model, one that gives Amazon privileged insights into companies before it decides to bet on their long-term health and prosperity.

That fact has not been lost on a number of prominent venture-capital firms, which have joined with Amazon to back the likes of Yieldex, Sonian, Engine Yard, and Animoto, all of whom, at one time or another, were AWS customers.

Mutual Benefits

Now that nearly every startup is likely to begin its business life using cloud-based computing infrastructure, either from AWS or another cloud purveyor, I wonder whether Amazon’s investment model might be mimicked by others with similar insights into their business customers’ resource utilization and growth rates.

There’s no question that such investments deliver mutual benefit. The startup companies get the financial backing to accelerate its growth, establish and maintain competitive differentiation, and speed toward market leadership. Meanwhile, Amazon and its VC partners get stakes in fast-growing companies that seem destined for bigger things, including potentially lucrative exits. Amazon also gets to maintain relationships with customers that might otherwise outgrow AWS and leave the relationship behind. Last but not least, the investment program serves a promotional purpose for Amazon, demonstrating a commitment and dedication to its AWS customers that can extend well beyond operational support.

It isn’t just Amazon that can derive an investment edge from how their customers are using their cloud services. SaaS cloud providers such as Salesforce and Google also can gain useful insights into how customers and customer segments are faring during good and bad economic times, and PaaS providers would also stand to derive potentially useful knowledge about how and where customers are adopting their services.

Various Scenarios

Also on SaaS side of the ledger, in the realm of social networking — I’m thinking of Facebook, but others fit the bill — subscriber data can be mined for the benefit of advertisers seeking to deliver targeted campaigns to specific demographic segments.

In a different vein, Google’s search business could potentially give it the means to develop high-probability or weighted analytics based on the prevalence, intensity, nature, and specificity of search queries. Such data could be applied to and mined for probability markets. One application scenario might involve insiders searching online to ascertain whether prior knowledge of a transaction has been leaked to the wider world. By searching for the terms in question, they would effectively signal that an event might take place. (This would be more granular than Google Trends, and different from it in other respects, too.) There are a number of other examples and scenarios that one could envision.

Getting back to Amazon, though, what it is doing with its investment model clearly makes a lot of sense, giving it unique insights and a clear advantage as it weighs where to place its bets. As I said, it would be no surprise to see other cloud providers, even those not of the same scale as Amazon, consider similar investment models.

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