Amazon CEO Jassy Says AWS Hit By "Headwinds" While Emphasizing AI's "Transformative" Potential

Amazon's CEO Andy Jassy announced the company's earnings on Thursday morning.

annual shareholder letter

Amazon Web Services, which is facing "short-term headwinds", due to the "challenging macroeconomic environment," is focusing on cutting costs and investing in AI to improve the financial health. He said that the ecommerce giant is working on "transformative AI technology".

Jassy Bezos, Jeff Bezos’ successor, stated that AWS clients are reducing their cloud computing spending as the recession threat has increased in the second half of the year.

AWS is currently facing short-term challenges as companies are more cautious with their spending due to the current challenging macroeconomic conditions.

Jassy said that the headwinds are "short term" and have slowed "growth rates" but the AWS pipeline of new customers remains "robust." He continued:

AWS is in its early stages of evolution and could grow in a way that's unusual in the coming decade.

The CEO outlined Amazon's future including web services and grocery, healthcare satellite internet, as well as generative AI.

The CEO stated that generative AI will be "transformative" in the AI field. Amazon's CEO explained that the company is working on large language models to power AI systems.

We've been working on LLMs since a long time, and we believe they will improve the customer experience in virtually all areas. We will continue to make significant investments into these models for our experiences as a consumer, brand, or creator.

He said, "I'd like to write a whole letter about LLMs and Generative AI, as I believe they are going to be transformative. But I will leave that for another letter."

Jassy concluded the letter by expressing optimism that Amazon would "emerge stronger than we were when we entered this macroeconomic period of challenge."

The full letter is below:

Dear Shareholders:

Amazon's future has me feeling optimistic and energized as I write my second shareholder letter. We still managed to increase demand, despite 2022 being the hardest macroeconomic year in recent history, with our own operational challenges on top. (On top of the unprecedented expansion we experienced during the first half the pandemic.) We innovated to improve the customer experience both short-term and long-term in our biggest businesses. We made adjustments to our investment decisions, as well as the way we will invent in the future, all while preserving long-term investments we believe will change the future for Amazon's customers, employees, and shareholders.

Amazon's businesses operate under conditions that are conducive to rapid change.

Amazon has undergone constant changes in the 25 years that I have been there. Many of these changes were initiated by us. In 1997, when I joined Amazon, we had a $15M revenue in 1996. We were a books only retailer. There was no third-party marketplace and we only shipped to US addresses. Amazon now sells almost every type of physical or digital product you can think of. Our third-party seller network accounts for 60% our unit sales and we reach customers in nearly every country. In the same way, building a cloud-based business was not clear in 2003, when we began pursuing AWS. It wasn't obvious when we launched our services in 2006, either. When we launched Kindle, in 2007, it was still a "thing" to have virtually all books at your fingertips within 60 seconds. Likewise, a voice-driven assistant, like Alexa, that could be used to control your smart home and shop or retrieve information was not yet "a thing".

We have faced new challenges in the past when operating inefficiencies or macroeconomic conditions have arisen. In the dot-com crisis of 2001, for example, we needed to get letters of credit in order to purchase inventory for the holiday season, reduce costs in order to improve profitability, and still prioritise the long-term experience of customers and the business we wanted to build. (If you recall, we actually reduced prices in many of our categories in that rocky 2001 period. This type of balancing was evident again in 2008 and 2009 as we suffered through the financial crisis caused by mortgage-backed securities. We implemented several measures to improve the efficiency and cost structure of our Stores, but we also invested in improving customer experiences which we thought could lead to future business with high returns for shareholders. AWS was a relatively small and fledgling company in 2008. It was clear that we had something special, but we still needed to invest a lot of capital. Both inside and outside the company, there were voices that questioned why Amazon (known primarily as an online retailer at the time) would invest so much in cloud-computing. We knew that we were creating something unique, which would create value for both Amazon and its customers in the future. We wanted to get a jump on our competitors and accelerate the pace of innovation. We decided to invest in AWS for the long term. AWS has grown to an annual revenue of $85 billion, and is profitable. It has changed the way customers manage their technology infrastructure, from startups to large companies. Amazon would have been a completely different company had we not invested in AWS between 2008 and 2009.

The change is always just around the corner. You can invite change in proactively, or it may just knock on your door. When you can see it coming, it is important to be prepared. Companies that have done this over time are usually successful. I am optimistic about the future because I love the way my team responds to the changes that we are seeing.

In the past few months,

We looked at the entire company, department by department

We then evaluated each invention to determine if we were confident that it would generate enough revenue over the long term, as well as operating income, cash flow and return on investment. It led us to close certain businesses in some cases. We stopped pursuing concepts such as our Bookstores, 4 Star Stores, and Amazon Fabric, and closed our Amazon Care and Amazon Fabric efforts. In addition, we moved away from newer devices that we did not see a way to generate meaningful returns. We also looked at programs that were not generating the results we hoped for (e.g. We amended the free shipping offer for online grocery orders above $35. We reprioritized our spending, and this led us to make the difficult decision of eliminating 27,000 corporate positions. We've also made a number other changes over the past few months to streamline our costs. Like most leadership teams we will continue to evaluate our business to make adjustments.

We also examined closely

We showed our employees how we worked together as a group and asked them to return to work at least three times a week

Starting in May. Our employees did their best to cope with the unexpected circumstances during the pandemic. It was impressive, and I am proud of how our team worked together to overcome unprecedented obstacles for our customers and communities. We don't believe it is the best approach for long-term success. We are convinced that working together in person and sharing ideas is the best way to collaborate and innovate. It's easier to riff on each other's ideas and the energy is more free. Many of the most successful Amazon inventions were the result of people staying after meetings and working out ideas on whiteboards, or carrying on the conversation as they walk home from the meeting. It is not uncommon for inventions to be messy. It wanders, meanders, and marinates. It is helped by serendipitous encounters, which are more common in person than online. When we are in the same office and with our colleagues, it is much easier to learn and practice our culture. In our first 29 years, innovation and our unique culture were incredibly important. I expect that it will continue to be so in the following 29.

The rising cost of serving in our Stores network is a critical challenge that we have continued to address. The cost of getting a product to the customer from Amazon.

We've made several improvements that we think will improve our fulfillment costs as well as speed of delivery

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In the early stages of the pandemic when many stores were closed, our consumer business grew rapidly, increasing revenue from $245B to $434B by 2022. In just two years, we doubled the footprint of our fulfillment centers that we built in the previous 25 years. We also accelerated the construction of a last mile transportation network the size of UPS. It was not an easy task, and Amazonians from all over the world worked hard to achieve this. It was not surprising that with such a rapid and massive change, a great deal of optimization was needed to achieve the desired productivity. In the past few months, we have redesigned a number of processes in our fulfillment centers, as well as in the transportation network. This has resulted in a steady increase in productivity and cost savings. We still have a lot of work to do but are pleased with the trajectory we're on and the positive outcomes that lie ahead.

This was also an opportunity to make structural changes to our business that will allow us to continue to offer lower costs and greater speed in the future. Reevaluating the organization of our US fulfillment network is a good example. Amazon used to have a national US fulfillment system that distributed stock from fulfillment centers located across the country. We would have to ship the product from another part of the country if a local fulfillment centre didn't carry the item a customer had ordered. This increased our costs and lengthened delivery times. As our fulfillment network grew to hundreds of nodes in the past few years, the challenge became even more acute. Inventory was distributed across more locations while the difficulty of efficiently connecting fulfillment centers and delivery stations increased. We began redesigning our inventory placement strategies and using our larger footprint of fulfillment centers to transition from a national network to a network with a regionalized model last year. We have made major internal changes, including: We made significant internal changes (e.g. These regions have a wide range of relevant options to enable them to be self-sufficient, but still have the ability to ship nationwide when needed. The most important and difficult work was optimizing the connections among this vast amount of infrastructure. We continue to refine our machine learning algorithms in order to better predict the needs of customers in different parts of the country. This allows us to have the correct inventory in the appropriate regions at the right times. This regional rollout was completed recently and we are pleased with the results. The shorter travel distances translate into lower costs to serve and less environmental impact, as well as faster delivery of orders. We're thrilled to see more same-day and next-day delivery, and are on track to reach our fastest Prime delivery speed ever in 2023. We remain confident in our plans to reduce costs, improve delivery times and grow a retail business with healthy margins.

AWS, with an annualized revenue of $85 billion, is early in the adoption curve. But at this point, it's important to focus on what will matter most to its customers for the long haul.

AWS is facing short-term headwinds, despite its projected growth of 29% on an annual basis (YoY) in 2022, based on a base revenue of $62B. This is because companies are more cautious with their spending due to the current challenging macroeconomic conditions. We're not going to try and squeeze as much money out of customers as possible, because that's not what they want or best for them in the long run. AWS's cloud computing allows you to scale up your business as it grows. If your business shrinks, you may choose to stop paying for that capacity. Cloud computing offers a level of flexibility that is not possible when you have invested in expensive datacenters, networking equipment, or servers on your premises. AWS is no different from other businesses. We don't optimize for a particular quarter or year. We want to build a customer relationship (and business) that will outlast us all. As a result, AWS's sales and support teams spend a lot of time helping customers maximize their AWS spending so they can better weather the uncertain economy. These AWS customers are telling us they're not happy with their AWS spend.