The AWS Tax and the Innovator’s Dilemma

This week I participated in a super interesting debate about whether the innovator’s dilemma have changed in the era of cloud and mobile platforms. Certainly, there are a few companies that have become masters at gaming the innovator’s dilemma. The most notorious example: Amazon and the AWS cloud.

For decades, the innovator’s dilemma has been one of the axiomatic principles of enterprise software markets since the industry’s inception. In his famous book, Clayton M. Christensen explains how big companies are often disrupted by smaller, more innovative startups creating an almost unavoidable dynamic in competitive markets. The innovator’s dilemma is applicable to any industry but has been incredibly relevant in the software and technology space in which changes tend to happen incredibly fast compared to other sectors. Despite the relevance of Christensen’s theory, AWS seemed to have found the formula to solve the innovator’s dilemma.

With the emergence of cloud computing, AWS has by far become the most dominant player in the space. Depending of the source, you will find that AWS owns about 60%-80% market share and that seems to still be growing at the same pace or faster than competitors. The growth doesn’t only translate in adoption but also in revenue as shown in the following chart.

With its dominance, AWS seems to be taking every necessary step to avoid falling into the innovator’s dilemma. From the pricing perspective, AWS has started a race to regularly decrease the price of its infrastructure services making it virtually impossible for competitors to offer a substantially better price. From the innovation perspective, AWS seems to be constantly releasing new infrastructure and platform services to power solution in new areas such as IOT, machine learning, etc. From the network effect standpoint, the IOT developer, customer and partner communities seem to be growing stronger than ever. AWS dominance is so remarkable that investors have recently coined a new term for this model: the AWS Tax.

The AWS Tax

The notion of the AWS tax is very simple. If more and more startups and established companies rely on AWS to build its software solutions and products, they are effectively sharing a portion of their financial and growth success with Amazon: they are paying the AWS tax. With software growing to become a multi-trillion dollar industry, the value of a company that owns the infrastructure and services powering the market is pretty much incalculable.

In addition to the strong network effect there are other factors that have allowed AWS to effectively game the innovator’s dilemma. By providing the platform hat powers some of the most innovative startups in the world, AWS is becoming an important participant on any new technology trend not only from the technology standpoint but also from the pricing and adoption perspective. In that sense, AWS has created a model that doesn’t only allow to avoid being disrupted by competitors by to allow their success.