Every November, Amazon (AMZN 0.89%) holds its Re:Invent conference. where it unveils new innovations under Amazon Web Services.
AWS is the first-mover in cloud computing, a juggernaut that is likely Amazon's most valuable segment, and with tremendous resources to continue innovating. At this year's Re:Invent, Amazon unveiled some eye-opening high-end products and services built completely in-house, which should perhaps make its current third-party hardware and software suppliers nervous.
Vertically integrating more in-house software and hardware on AWS is akin to Amazon releasing private-label products to compete with high-end brands on its retail platform. However, due to AWS' ability to tightly integrate software and semiconductors with its underlying infrastructure, the vertical integration could end up being even more effective.
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New in-house chips to power high-performance computing
One of the ways in which Amazon can lower costs for customers is by having them run workloads on its in-house processors. Amazon bought Annapurna Labs in 2015 in order to develop its own ARM-based semiconductor designs, and AWS has been building its chip capabilities ever since.
At first, Amazon used in-house processors to execute simple tasks at low costs; however, in recent years, Amazon's in-house processors have become more advanced. This year, AWS unveiled its latest Graviton 3E chips, which now have the capability to execute high-performance computing in the most advanced workloads, such as weather prediction and drug discovery. That's normally the arena of Advanced Micro Devices (AMD 2.33%) and Intel (INTC +1.15%).
Additionally, Amazon unveiled its second-generation Inferentia chip, which enables a system to learn from vast arrays of data, a process in AI called "inference." That puts Amazon in competition with Nvidia (NVDA 1.56%) GPUs, which are currently the gold standard in artificial intelligence processing.
While it's difficult to compare the new AWS chips with the current industry leaders, it seems likely that Amazon's silicon could be used to power workloads for customers highly concerned with cost and price-performance.
Make no mistake, the current chip leaders are very advanced as well, with tremendous research budgets at their disposal, and should retain their leadership status for the highest-performance workloads. However, if high-performance computing becomes more commoditized as time goes on, it's possible Amazon may be able to steal market share in highly advanced computing applications.
Image source: Getty Images.
New data analytics offerings to take on software leaders like Snowflake
In addition to vertically integrating its server systems with its own chips, AWS also unveiled more vertically integrated cloud software services, which take on some of the world's top data analytics software companies. Examples of new offerings include AWS DataZone, AWS Clean Rooms, and AWS Supply Chain, among several others.
AWS DataZone is a service that enables customers to link up their data from AWS, on-premises data centers, and other third-party data sources more seamlessly than current solutions. AWS Clean Rooms allows companies to collaborate by analyzing their combined datasets, without revealing private or sensitive underlying information within each set, thereby enabling greater data insights through collaboration. And AWS Supply Chain is a new software platform that analyzes data from a multitude of supply chain systems, allowing for real-time insights and collaboration across a company's entire supply chain, to get a better handle on the current state of supply and aligning it with changing customer demand.
The new DataZone services seem to put Amazon in competition with software juggernauts like Salesforce (CRM 3.44%), with its Tableau and Mulesoft services. Amazon Clean Rooms appears to take on Snowflake (SNOW +0.80%) and its Snowflake Data Exchange service. And AWS Supply Chain takes dead aim at enterprise resource planning juggernauts like SAP (SAP 0.27%).
Vertical integration brings many benefits to AWS and its customers
Could these new competitive services turn off the world's leading software companies and chipmakers from working with AWS? Probably, but the fact that AWS is the leading cloud infrastructure platform means these companies can't afford to boycott Amazon. AWS has a leading 33% share of the global cloud infrastructure market, according to Statista, and even more when you exclude Chinese vendors in their closed-off market.
For AWS customers, they benefit from having more choice. Third-party hardware and software companies will remain attractive for their concentrated R&D efforts and the ability to work across multiple clouds. However, the more in-house services Amazon can provide, the more attractive AWS becomes, as it provides optionality and bargaining power for AWS customers with these other vendors.
Amazon won't all of a sudden dominate the hardware or software space, but its vertical integration efforts certainly give investors in top tech stocks like AMD or Snowflake something to think about. After all, Apple (AAPL 2.15%) was able to completely cut out the once-dominant Intel processors for Macs, and it's working to fully replace Qualcomm (QCOM 1.02%) chips for the iPhone by next year with its own in-house designs.
Amazon will likely never cut out its software and hardware partners, because it will want to offer choice and selection, whereas the iPhone is just a single device. Still, the total addressable market for leading semiconductor and software firms in advanced computing and data analytics, the encroachment of AWS, and perhaps other vertically integrated clouds for that matter, is certainly something to consider for the long term.
