One of Amazon's biggest cloud bets is paying off with hundreds of millions of dollars per year (AMZN)

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Before cloud computing was as ubiquitous as it is today, Amazon Web Services found its early niche by selling to startups and smaller companies.
Now, even as AWS continues to lock down large deals with the likes of Apple and Comcast, its early momentum with startups is paying off: as those companies get bigger, so too does their business with Amazon.
On Friday, Slack filed to go public, and in so doing, disclosed that it's under a $250 million, five-year contract with AWS.
Other recently public tech companies have struck similar deals: Lyft will pay a total of $300 million to AWS through 2021, while Pinterest is about halfway through a $750 million, five-year AWS deal.
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On Thursday, Amazon announced that Amazon Web Services did almost $8 billion in revenue in the first three months of 2019, reflecting some 41% growth from the same period of 2018 — and proving its continued dominance of the lucrative cloud computing market.

But when AWS first launched in 2006, very few knew what to make of it. There had been web hosting services and other tools to help run web apps, sure, but nobody else matched the promise of AWS, where developers pay as they go for access to fundamentally unlimited supercomputing power out of Amazon's own data centers.

For the first several years of AWS' existence, it was widely considered too unproven for anybody but hobbyists and the earliest of early adopters. Even established tech companies like IBM and Amazon's Seattle-area neighbors at Microsoft mostly stayed away at first, only launching real rivals after it was clear that cloud wasn't just a fad.

It didn't take too long before AWS found a sweet spot, though: startups.

The startup sales pitch

Young tech companies turned to AWS as a cost-effective way to get started. Because you only pay for what you use, startups could use AWS to experiment with an idea, add new features as necessary, and only then invest in scaling up their infrastructure as they attracted users.

Back in 2014, Airbnb's then-engineering chief, Mike Curtis, told Business Insider that the company turned to AWS because, as a new entity, it had no older systems to worry about, and because the less its engineers had to worry about managing and maintaining a bunch of physical servers, the more it could focus on its actual business.

Over time, as the market matured, it became clear that AWS had a much broader appeal: Netflix was one of the first flagship AWS customers, and remains so to this day. More recently, AWS has won deals with large companies like Capital One, Comcast, and even Apple to provide some or all of their cloud computing infrastructure.

At the same time, Amazon Web Services has remained a leading standard for startups. While rivals like Microsoft Azure and Google Cloud have certainly attracted their share of smaller companies, Amazon Web Services seems to be the default for many new tech startups. It's to the point where Brex, a startup that provides corporate credit cards to other startups, offers $5,000 in Amazon Web Services credit as a sign-up bonus.

The payoff

Now, it appears that this appeal to startups has paid off for Amazon in a big way.

On Friday, $7 billion workplace chat app Slack officially released its S-1 paperwork for its long-awaited IPO — and, in so doing, revealed that it's under a $250 million, five-year contract with AWS, under which it'll pay as much as $212.5 million more to the company by the end of July 2023.

While the filing doesn't detail Slack's historic usage of AWS, it's probably fair to say that it wasn't spending that much on the cloud when it first started in 2013. Rather, Slack's meteoric rise to success also likely meant that the company very quickly needed to scale up its use of AWS just to meet demand.

The same can probably be said for fellow newcomers to the public markets like Lyft (which recently signed a $300 million contract with AWS through the end of 2021) and Pinterest (which is a little less than halfway through a $750 million, five-year deal with AWS).

For comparison, CNBC reported earlier this week that Apple recently signed a $1.5 billion, five-year deal with AWS to continue to power its iCloud storage service.

That is, obviously, a bigger deal for Amazon Web Services than its business with those startups — but I'd argue that there are more startups in the world who need cloud computing services than there are companies at Apple's scale, and it appears that this market is worth hundreds of millions, and maybe even billions, in aggregate.

Which isn't to say, either, that a startup using Amazon Web Services now means it will be on Amazon Web Services forever. Famously, Dropbox mostly moved off of AWS in late 2015 after deciding that it was now large enough that it was more cost-effective to operate out of its own data centers.

Still, while all eyes are on Amazon Web Services' increasing momentum with large-scale companies — Ford and Volkswagen recently partnered up with AWS, just for starters — don't sleep on the fact that Amazon's earliest momentum with startups is leading to some serious business today.

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