Amazon Web Services (AWS) seems unstoppable. What could possibly harm the massive cloud service provider (CSP)? The answer involves the Unicorns and venture-based IT startups. No doubt, hundreds of them -- perhaps thousands of them -- are hosted in Amazon's cloud. That's a big financial blessing today, but it could be a huge financial burden tomorrow.
First, let's look at the numbers. Amazon Web Services revenue is now $2 billion per quarter, for an annual run rate of $8 billion. Plus, it's growing about 81 percent annually. If that growth rate continues, you're looking at a $14 billion to $15 billion business within a year. Yowzers.
But the big, balloon-like numbers don't end there. If you carve Amazon Web Services out of Amazon's overall business, the cloud business is worth $160 billion, according to Deutsche Bank.
Clearly, Amazon CEO Jeff Bezos is laughing all the way to the bank. But he shouldn't. Especially if he's keeping an eye on the Unicorns.
AWS: What Could Go Wrong?
If you explored Amazon's cloud customer list, I'm sure you'd see plenty of healthy global 2000 companies. You know, profitable businesses that are moving workloads into Amazon's cloud. So far, so good.
But if you poke around a little more, I bet you'd find lots of Unicorns -- startups that are valued at $1 billion or more. And I also bet you'd find hundreds -- perhaps thousands -- of venture-funded IT startups.
What does that mean? Rewind to the housing and financial bubble of 2008. There were thousands of good mortgages in the financial system. But there were also thousands of high-risk mortgages in the system. When world economies started going bad, high-risk mortgage defaults infected the entire system.
Just a hunch, but I suspect Amazon's cloud could face the same scenario if the Unicorn and tech startup market turns bad as well.
Want (Potential) Proof?
Some folks may say I'm an alarmist. After all, I don't have any data that pinpoints just how much of Amazon's cloud revenues come from high-risk unicorns and IT startups that could go out of business during a tech correction.
But here are three really important data points and anecdotes to keep in mind.
- First, 40 percent of Unicorn IPOs since 2011 have seen their values fall below their pre-IPO figure.
- Second, Salesforce CEO Marc Benioff says many unicorns made a huge mistake not going public sooner, and some may never make it to public markets.
- Third, this has all happened before. In the late 1990s, a hosting provider called Exodus Communications was a Wall Street darling. It hosted IT systems for thousands of businesses. But Exodus collapsed when many of its customers -- dot-com startups -- went out of business.
Is Amazon Web Services the next Exodus Communications? I won't go that far. After all, AWS is profitable and thousands of really healthy companies run in Amazon's cloud. Still, I think AWS's valuation is out of control.
Remember: There are unicorns in Amazon's cloud. When the tech correction comes, many of those unicorns and startups won't survive -- cutting off existing revenue pipelines and future growth to AWS.
It's gonna happen.
