The United States was coming out of a pretty deep recession in 2002.
The Fed Chair at the time was Alan Greenspan. The 50-basis point interest rate hike he dropped on the U.S. economy on March 21, 2000, is often cited as the hike that broke the internet bubble’s back.
While it’s true that tech stocks took that rate hike badly, the U.S. economy was still buzzing along, posting 6% GDP growth in the second quarter of 2000.
But, another 50-basis point hike on May 16 took rates to 6.5% and that was it. The U.S. economy barely beat 1% growth in the third quarter. Greenspan started cutting rates on January 3, 2001, but it was too late to save the economy from recession.
Overall, U.S. GDP growth fell from 4.1% in 2000 to barely 1% in 2001.
Interest rates were down to 3% when terrorists flew airplanes into the World Trade Center and the Pentagon. Rates would go all the way down to 1% by the time the economy bottomed in early 2002.
Needless to say, many companies went into survival mode during the second half of 2000. S&P 500 earnings fell an incredible 40% from 2000 to 2001. The unemployment rate spiked from 4% to nearly 6% by the end of 2001. 243 companies went bankrupt that year.
But not every company was scrambling just to survive. One company was laying the groundwork for what has become one of the world’s most unique and valuable businesses. The company is Amazon and the business is Amazon Web Service (AWS).
The 2002 Memo from Jeff Bezos
So in 2002, Jeff Bezos sent a 6-point memo that laid the groundwork for what would become Amazon Web Services. Today this memo is the stuff of tech-geek legend. It is taught in business schools. It has been deconstructed and explained countless times.
The memo itself is 6 bullet points. 121 words. Short, sweet – and powerful. Amazon Web Services will likely post $100 billion in revenue for 2024.
With this memo, Jeff Bezos was articulating how Amazon could become the backend for every business on the planet. Just a little audacious…
I’m going to share the memo in a minute. But first to understand exactly what it means for AWS to be the “backend for every business on the planet.”
A business needs a website, it needs inventory tracking, it needs to take orders and track them, it needs to route shipping, it needs customer service, it needs reporting, it needs to process payments, it must handle returns, and accounting – just to name a few.
And Bezos wanted AWS to be plug and play – so that you don’t even have to talk to anyone to get set up.
So, the memo:
- All teams will henceforth expose their data and functionality through service interfaces.
- Teams must communicate with each other through these interfaces.
- There will be no other form of inter-process communication allowed: no direct linking, no direct reads of another team’s data store, no shared-memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network.
- It doesn’t matter what technology they use.
- All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.
- “Anyone who doesn’t do this will be fired. Thank you; have a nice day!”
Now, I’ve read a bunch of explanations for what each item means. It is always amazing to me how smart people on the internet can make things so complicated…
First point: everything must be easily accessible to a customer when they go to AWS.
Second point: Everything and anything must be available through the AWS system
Third point: that’s customer service
Fourth point: AWS must be compatible with any programming language or database software the customer may use
Fifth point: each aspect must be built so that anyone can use it, immediately
Sixth point: speaks for itself
Basically, as a business owner you decide what and how to sell, Amazon Web Services handles the rest.
This is why AWS counts NetFlix, AirBNB, McDonald’s, NASA, Twitter (sorry, X), Comcast, Disney, Facebook (sorry, META), Pfizer and General Electric among its customers.
Of course, all that is history. Right now, you’re probably more interested in what’s ahead for Amazon…
What’s Next for Amazon
I’ve noticed a pattern in how investors recognize big tech stocks and their AI aspirations. It started with Google (NASDAQ: GOOG) at the beginning of this year. The stock was waffling the $135 level. I don’t know if you remember when it released its first AI chatbot thing, but, it was underwhelming. It didn’t work well, was prone to mistakes, and panned by reviewers.
Then the story changed. Investors realized that data is perhaps the single most important input for any AI application, Google has a lot of data from its search business, that must be good. Google took off and it’s now trading in the mid-$180s.
Apple was next.
In the first part of the year, lower iPhone sales in China pushed the stock down to the $170s. Then the “Apple has no AI strategy” handwringing pushed it down to the $160s.
But the recent release of its AI plans reminded investors that there are a billion iPhone users and some simple AI upgrades could set off an upgrade super cycle for iPhones. Today the stock is pushing $220.
Amazon doesn’t have an AI chatbot yet. It doesn’t have a phone. But what it does have is data. Given its reach into our daily lives via Prime, it probably has a more valuable data set than Google.
Amazon was one of my top picks for 2024. I predicted Amazon shares would double in 2024. It’s spent much of the year bouncing between $170 and $190. It’s breaking out now.
Godspeed.
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
You might like these articles:
I Had the Most Bullish S&P 500 Target Out There, It’s Happening
https://www.outsiderclub.com/check-up-on-my-2024-predictions/
Hammer Nailed it on India Stocks
https://www.outsiderclub.com/the-indian-economic-miracle-is-happening-now/
Is That It for Nvidia?
