Which Has the Brighter Future, Apple or Amazon Web Services?

There is a limit to the number of things you can manufacture, move and sell. Cloud services don't have those limits.

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By Tien Tzuo


Opinions expressed by Entrepreneur contributors are their own.

Would you rather work at Apple or Amazon Web Services right now? Both are doing great.

Apple makes beautiful devices. It generates daily profits of around $200 million. Its gross margin is around 40 percent. It's a truly global business -- two-thirds of its revenue comes from outside the United States.

Roughly a hundred databases a day migrate to AWS. It has more than a million customers worldwide, and brought in $2.4 billion in revenue last quarter, up 69 percent year-over-year. Despite its parent company's famous allergy to profits, all the charts are moving up and to the right for AWS.

So it's a toss up, right? Both operations are on fire. But what if you framed the question differently: Would you rather deal in unit margins, or usage-based fees? Would you rather deal with capital expenditures, or operating expenditures? Would you rather sell products or services?

Those are admittedly leading questions. Apple isn't going anywhere. But it's expecting a year-over-year decline in revenues next quarter. And it's highly possible that it will make less money in 2016 than it did in 2015. There are inherent supply chain constraints and market limits in selling expensive physical goods. Apple seems to be hitting theirs.

Perhaps that's why the company has been taking great pains to emphasize its service revenue lately. As its CFO Luca Maestri noted in their last earnings report, Apple users bought more than $31 billion worth of apps, games, music and cloud services last year, or roughly 13 percent of its total annual revenues of $234 billion.

Related: Researching Cloud Solutions? Lessons from Amazon Web Services.

Those are impressive numbers. But right now almost 70 percent of Apple's revenue is built on iPhone margins. When those margins stall out, so does Apple. Cloud storage has its own challenges and constraints, of course, but compared to the supply chain weight and downward market pressures of Apple, AWS looks positively buoyant. Ben Thompson, of the excellent Stratechery blog, recently quoted Social Capital founder Chamath Palihapitiya on its upside potential:

"If you believe that over time the software industry is a multi, deca-trillion industry, then ask yourself how valuable a company would be who taxes the majority of that industry? One percent, 2 percent, 5 percent -- it doesn't matter because the numbers are so huge -- the revenues, profits, profit margins etc. I don't see any cleaner monopoly available to buy in the public markets right now."

Related: How Apple's New iPhone Leasing Program Stacks Up Against Contracts From Mobile Carriers

Value is shifting from static products to cloud-based services. More and more companies are changing the question from "How many products can I sell?" to "What does my customer want, and how can I deliver that as an intuitive service?"

It isn't just about just shifting units anymore. It's about growing and monetizing a dedicated customer base.

When I was helping to build Salesforce.Com in the late 1990s, we were very focused on defining our company as a service that people subscribe to. That forced us to put ourselves in a position where we were always pleasing the customer. All of a sudden, we cared less about what product features sounded cool, we focused on what customers were using, what they needed.

Over the past decade, the Internet, spread by mobile technologies, has forced more and more businesses to start thinking the same way, to take a "customer first" mindset. Amazon, Netflix, Zipcar, all reinvented what they did as a service. They tracked customer preferences, tailored their offering to individual needs, and always took the long-term view of creating lifetime customer value.

The focus shifted from the transaction, to the customer. So instead of selling static products that disappeared after check-out (along with their customers), or "set it and forget it" on-premise installations, they could offer ongoing services that resulted in smart, responsive relationships.

Related: Tour Amazon's Funky Pop-up Loft Designed for Tech Entrepreneurs

Running on a subscription model, they could offer lower up-front costs, continuously improve their offering, and learn way more about their customers through usage and behavior analytics. The analyst firm MGI just released a report on Agile Monetization Platforms, or the back-end systems that power recurring revenue business models. They're projecting a total addressable market of over $102 billion over the next five years, as more and more companies shed legacy ERP systems in favor of quicker, nimbler solutions. Subscription models tend to break things like SAP and Oracle.

Today everything is moving to a Subscription Economy: media, transportation, agriculture, health care, consumer goods, education. Companies have woken up to the fact that people want outcomes, not ownership. They want customized experiences. And they want continuous improvement, not planned obsolescence.

AWS powers all of that. So I'd go with AWS.

Tien Tzuo

Co-founder & CEO of Zuora

Tien Tzuo, widely recognized as one of the thought leaders in the software-as-a-service industry, founded Zuora in 2007 after serving as Chief Strategy Officer at salesforce.com. As Zuora's CEO, Tzuo has not only built one of the fastest growing SaaS companies, he's also evangelized the shift to subscription based business models and the complex billing structures they inherit, coining the phrase Subscription Economy. 

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