With Bezos' return, can Amazon AWS, the leader in the cloud market, reclaim its position amidst fierce competition from Microsoft Azure and Google Cloud in the realm of artificial intelligence?

01

AWS Aims to Address Its AI Deficits

Three and a half years after stepping down as Amazon's CEO, Bezos announced his return this month.

Jeff Bezos, the founder of Amazon who has kept a low profile for some time, recently granted an interview to the media. Bezos revealed that 95% of his focus is on artificial intelligence, stating, "Modern AI is a horizontal enabling layer that can enhance everything and will permeate every aspect of our lives."

However, an intriguing moment arose when the host mentioned that AWS lacked its own large language model. Bezos swiftly responded, "You've been too busy," as AWS had just unveiled its foundational large language model, Nova.

This exchange highlights an awkward truth: despite being the global cloud market leader, AWS has significantly lagged behind its long-standing rivals, Microsoft Azure, and Google Cloud, in AI advancements.

Thus, at the recent 2024 Re:Invent conference, AWS's annual flagship event, the company heavily emphasized AI-related announcements and strategies.

Amazon CEO Andy Jassy, appearing on the Re:Invent stage for the first time in his three-year tenure, announced the launch of six new foundational models. Dubbed "Amazon Nova," these products encompass text, image, and video generation models, offering a 75% cost reduction compared to competitors to stimulate customer interest. Furthermore, Amazon anticipates launching a generative large model capable of accepting and outputting data in any modality by mid-2025.

In addition to the new foundational models, Amazon also announced the release of the next-generation AI chip Trainium 3, which is four times faster than its predecessor, and a collaboration with Anthropic to develop the world's largest AI supercomputer.

According to Peter DeSantis, Senior Vice President of AWS Utility Computing, AWS will focus on increasing the capacity of individual systems rather than adopting a "horizontal scaling" approach by building multiple identical systems and distributing workloads across them. "Our approach to building larger models is to create more powerful servers," he said.

AWS has also reduced the usage cost of Amazon Q, with a starting price of $20, which is lower than Microsoft's Microsoft 365 Copilot and Google Workspace's Duet AI, both charging $30 per month, thus attracting customer attention.

In its renewed pursuit to catch up with competitors in AI strategy, AWS has also witnessed frequent leadership changes.

In June of this year, Adam Selipsky, who had served as AWS's CEO for three years, officially announced his resignation, and he was succeeded by Senior Vice President Matt Garman.

Over the past three years, AWS's business has faced numerous challenges, including a noticeable slowdown in revenue growth. In 2023, AWS's revenue growth rate fell to around 12%, its slowest recorded rate. Additionally, during Selipsky's tenure, AWS underwent multiple rounds of large-scale layoffs, affecting over 27,000 employees.

AWS's Greater China operations were also impacted, with frequent personnel adjustments. In 2023, AWS Greater China underwent a leadership change, with Chu Ruisong, former Vice President of Baidu Group, succeeding Zhang Wenyi. Prior to this, Vice Presidents Tian Zhuo and Duan Weizhi of AWS Greater China also left for Microsoft Azure.

In June of this year, Liang Yan, head of AWS Greater China's Top Acct department responsible for major customers, was also recruited by Microsoft Azure. The departure of a significant number of senior executives to rival companies underscores AWS's precarious position in the AI era.

02

'Amazon is Six Months Behind Microsoft'

Over the past two years, Amazon, once a leader in AI services, found itself lagging overnight.

Months after OpenAI launched the wildly popular ChatGPT, Amazon released its own large language model, Titan, in April 2023, but it failed to spawn a groundbreaking product akin to the ChatGPT chatbot.

In the same month, Amazon AWS also introduced Bedrock, a generative AI service that allows businesses to integrate their data into AI algorithms to create products.

"For Amazon, we're actually talking about being six months behind Microsoft," said Chris Mack, Information Technology Analyst and Portfolio Manager at Harding Loevner.

Pressed by competition from Microsoft and Google in AI, AWS invested in Anthropic, a rising star in the generative AI field founded by a former OpenAI executive in 2021 and considered a competitor to OpenAI, in September 2023. AWS hopes to establish a model similar to that between Microsoft and OpenAI. Following the investment, Anthropic designated AWS as its "primary cloud provider" and utilizes AWS's AI machine learning accelerator chip "Trainium" and inference accelerator chip "Inferentia." The two companies will also collaborate on AI chip development. AWS's investment totaled $4 billion, split into two tranches.

Approximately one year after the launch of ChatGPT, in November 2023, AWS unveiled its AI strategy at the annual re:invent customer conference in Las Vegas: introducing Amazon Q, an AI chatbot tool for enterprises, with a focus on its Bedrock service. AWS also launched a new version of the AI-optimized Trainium computing chip and announced an expanded partnership with AI chip giant NVIDIA.

Adam Selipsky, then AWS's CEO, stated that generative AI "will reshape every app we encounter in work and life" and that "we are ready to help customers transform through generative AI." However, these statements came much later than those of U.S. competitors and even Chinese cloud computing giants.

The aftermath of this conference did not generate much buzz, as AI innovation news is constant, and competitors are constantly engaging in a back-and-forth. Compared to Microsoft's momentum in generative AI, AWS is clearly lagging behind.

As early as 2021, a year before OpenAI launched ChatGPT, Microsoft integrated OpenAI's models and technologies into the Azure platform, launching the Azure OpenAI service. In 2019, Microsoft made its first $1 billion investment in OpenAI. Soon after the launch of ChatGPT, the tech giant integrated it into its Azure cloud business. Furthermore, its Copilot tool embeds AI capabilities into widely used Office applications such as Excel, Word, and Teams.

This led to a narrative on Wall Street that "excluded Amazon," prompting Amazon CEO Andy Jassy to refute during the February 2024 earnings call that "generative AI is and will continue to be a key area of focus and investment for Amazon across the company." Andy Jassy succeeded Amazon founder Jeff Bezos in 2021. He stated that generative AI will generate "tens of billions of dollars" in revenue over the next few years.

"We still see momentum from customers who want to work with AWS on long-term generative AI projects," reiterated Andy Jassy, seemingly refuting the notion that Microsoft is the preferred partner for AI.

Earlier, in December 2023, a survey of over 100 enterprise software buyers by UBS analysts found that for enterprises currently running AI workloads, Microsoft Azure was the most popular choice, with 62% of respondents indicating they were using Azure's services. AWS lagged slightly, with 52% of respondents saying they were using it, indicating that enterprises often utilize the services of more than one provider.

Notably, 51% of respondents said they were most likely to use Azure for future generative AI projects, while only 29% would choose AWS. "The survey results suggest that looking ahead, Azure's advantage over AWS may further widen," said UBS analyst Karl Keirstead.

If AWS does not fully change its momentum in AI, it will face challenging issues in the future. There is also an industry view that AI has become the next battleground for cloud services. Global cloud computing companies may experience a reshuffle in the landscape of intelligent computing services.

03

Potential Risks in Revenue Growth

The role of large models and generative AI in driving revenue growth for cloud providers is already evident. Microsoft Azure and Google Cloud have clearly narrowed the gap with AWS, the leader in cloud computing, during this wave of generative AI development.

Initially, as enterprises cut back on IT spending, sales growth for AWS, Microsoft Azure, and Google Cloud had slowed. However, the third quarter of 2023 marked a clear turning point, with Microsoft Azure and Google Cloud rebounding first.

In this quarter, Microsoft's revenue from its Intelligent Cloud segment (including Azure, Windows Server, and enterprise services) reached $24.3 billion, ending multiple consecutive quarters of declining revenue growth with a 19.4% increase and maintaining a stable revenue growth rate of around 20% for the following five quarters.

Google Cloud hit its lowest revenue growth rate in the past eight quarters in this quarter but has since rebounded, with year-over-year growth jumping from 22.4% in Q3 2023 to 35% in Q3 2024, and revenue increasing from $8.41 billion to the latest figure of $11.35 billion.

In contrast, Amazon AWS, which deployed generative AI later, experienced a more delayed surge in revenue growth. In the first quarter of 2024, AWS generated revenue of $25.037 billion, a year-over-year increase of 17.3%, a direct increase of nearly 4 percentage points from the previous quarter's growth rate of 13.2%, and maintained revenue growth rates of 18.7% and 19% in the subsequent two quarters, respectively.

In the latest Q3 2024 earnings call, the management teams of Amazon, Microsoft, and Google all mentioned the driving effect of AI businesses on their respective operations.

Microsoft's management disclosed during the earnings call that revenue from Azure and other cloud services increased by 33%, higher than the market expectation of 29.4%, with 12 percentage points coming from its AI services, up from 11 percentage points in the previous quarter.

Google CEO Sundar Pichai announced during the earnings call that usage of Google's Gemini API had surged 14-fold in the past six months.

While Amazon did not disclose the specific contribution of generative AI to AWS's revenue growth in its earnings report, CEO Andy Jassy revealed during the call that generative AI has become a business with "billions of dollars in revenue run rate" under AWS and is "continuing to grow at a triple-digit annual growth rate." Its growth rate is also more than three times that of AWS itself.

Although in terms of cloud revenue, Amazon AWS remained the clear "leader" in Q3 2024 with revenue of $27.452 billion, surpassing Microsoft Intelligent Cloud's $24.09 billion and Google Cloud's $11.35 billion. However, in terms of revenue growth, AWS's Q3 2024 revenue increased by 19% year-over-year, still lower than Google Cloud's 35% year-over-year growth and Microsoft's cloud business, which reported a 33% year-over-year growth rate for Azure revenue for the first time as a standalone disclosure.

However, the industry believes that AWS cannot be written off in the era of generative AI as some might think. The company is mounting a counteroffensive in AI, and it remains to be seen whether AWS can achieve a turnaround.