Amazon, built by retail, is investing in its AI future

Amazon built a $2 trillion business with years of aggressive spending on its retail and logistics businesses. Its future profits will likely be determined by billions in artificial intelligence funding.

Amazon plans to spend more than $100 billion on data centers over the next decade, an impressive level of investment even for a company known for its spending habits. The Seattle-based company is now pouring more of its investment money into cloud computing and AI infrastructure than it is into its sprawling network of e-commerce warehouses.

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Amazon Web Services, the division that manages Amazon’s cloud services, has been opening data centers for years, but executives say they are now seeing a surge in investment to meet demand driven by enthusiasm around artificial intelligence.

“We have to dig into this. We have to figure this out,” said John Felton, who became AWS’s chief financial officer this year after spending most of his career in Amazon’s retail fulfillment operations.

The company’s financial commitment reflects the importance and high costs of AI. Felton said building for AI today is a lot like building that massive supply network in years past. “It’s a little iffy,” he said. AWS is expanding in Virginia, Ohio and elsewhere.

The company’s overall capital spending fell last year, largely because it cut spending on fulfillment and transportation, but the share of that spending on infrastructure, mostly for AWS, rose sharply. The growth signals a new era of expansion for Amazon, in which investing in cutting-edge cloud hardware is more important to its growth than expanding its network of retail warehouses.

Amazon’s spending on data center capital spending, including leases, compared to total capital spending hit a decade high of 53% last year, according to research firm Dell’Oro Group. Amazon has said it expects AWS infrastructure spending to remain strong this year, and the company has announced multiple investments in AWS in recent months.

Amazon’s cloud business has long been the company’s profit driver, and AI is set to catapult demand for cloud computing to new heights. Executives are looking to take advantage of the AI ​​boom, which relies on cloud services because of the intensive computing resources it requires. Amazon expects tens of billions of dollars in AI revenue over the next few years.

History continues

“We’re just keeping our heads down and focusing on delivering that capacity right now,” said Kevin Miller, AWS vice president of global data centers.

Amazon’s change reflects the changing needs of the company, which, despite having a world-leading cloud computing business and years of experimenting with artificial intelligence, is seen by some experts as lagging behind its big tech rivals in AI. Amazon has said it is not lagging behind others in AI, and its AI capabilities on AWS have been well-received by customers.

Amazon has a history of spending big to stay ahead, making large capital investments in delivery infrastructure for years to establish its dominance in e-commerce and then meet explosive demand during the Covid-19 pandemic.

The large investment helped Amazon last week become the fifth U.S. company to reach the $2 trillion milestone in market value. Shares closed Friday at $193.25, valuing the company at $2.011 trillion.

Amazon’s increased focus on data centers is also reflected in the company’s leadership, which is increasingly staffed by cloud business insiders. Andy Jassy served as AWS CEO for more than two decades before becoming Amazon’s CEO in 2021.

“There’s a natural tendency for people who are lagging behind to invest more in AWS and technology because they’re the ones who grew up and built the company,” said Cayce Roy, CEO of e-commerce fulfillment company Standvast and a former vice president at Amazon.

Amazon plans to add at least 216 new data center buildings over the next few years, said Marc Wulfraat, president of logistics consulting firm MWPVL International. Amazon’s retail capital spending likely won’t increase significantly until 2025, he said, in part because Amazon has extra capacity in that segment after overbuilding during the pandemic.

Faced with a huge demand for AI infrastructure, Amazon and other tech companies have struggled to obtain the parts, assets, and power that supercomputer data centers require. Amazon and other big tech companies have looked to nuclear power to meet their energy needs, a process that took years to build and didn’t require the same technical equipment as data centers.

Jassy has refocused Amazon to focus on AI products across its business. He said generative AI could be a key part of the company’s next growth pillar, alongside its online retail business, Amazon Prime and AWS.

In May, the company named Matt Garman, a seasoned executive with extensive engineering experience, as the new CEO of AWS, in a move that aims to better leverage the potential of artificial intelligence.

Amazon is still by far the largest online retailer in the U.S., and its latest financial results showed it is in as strong a position as ever. The company continues to invest in its retail arm and open new delivery locations. It has expanded its shipping capabilities to reach more Americans faster as it faces competition from newer e-commerce entrants.

But now is the time to invest in artificial intelligence opportunities, Felton said

“It’s a fascinating time to be here and think about how we can really think differently about how cloud computing works and how we can think differently about serving customers in a GenAI world,” he said, referring to generative AI.

Write to Sebastian Herrera at [email protected]

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