4 Sources of AWS’ Business Moat

Amazon Web Services is the leader in cloud computing. Providing cloud computing infrastructure would at first seem to be a commodity-like business but Amazon has built a moat around AWS. Below are the four factors we see creating the business moat around AWS.

First Mover Advantage

The first reason for AWS’ business moat is its first-mover advantage. Amazon has invested in and built the most cloud infrastructure. You could start a business to compete against AWS but it will take a lot of capital to get to the size, scale, and quality of AWS.

First mover advantage doesn’t mean anything unless the company also has product market fit. Amazon Web Services was built to suit Amazon’s needs. Once Amazon built AWS they saw they had what other cloud-based based businesses needed. It was an easy sell. If AWS could handle everything Amazon needed then it was likely to handle any other business’ needs.

Low-Cost Provider & Economies of Scale

The second reason for AWS’ business moat is it is also the lowest cost producer. This flows from its first mover advantage. The quote below from Barron’s explains AWS’ low-cost provider advantage.

But “you are never going to get greater economics than Amazon,” says Ferragu, because the company is able to spread the cost of AWS across all its cloud customers. Hence, there’s very little economic or strategic advantage, says Ferragu, for most people building tech companies to do anything other than hand over their credit cards to AWS. Consequently, he says, “Amazon and Google have won the cloud war.

Network Effect

AWS also has a slight indirect network effect working for it. From The Economist

But they are also platforms that benefit from “network effects”—the more people buy from them, the better they get. As more firms use AWS, more developers know how to use it, giving Amazon more data with which to optimise it, which makes it more attractive in its turn.

Switching Costs

AWS offers cost effective leading cloud computing capabilities. The time, cost, and labor alone to switch from AWS to someone else are immense. To lure a company away from AWS, a competitor has to offer equal or better services and large financial incentives to induce the switch. Once a company is built on AWS we don’t think a competitor can offer enough financial incentives to make the switch worthwhile to them.