Cisco President: AWS Model Is A 'Gamble' And A 'Hiccup' Away From Bankruptcy

Solution providers betting on Amazon Web Services are risking their future on a financial and partnering model that is a "hiccup" away from bankruptcy, said Edwin Paalvast, president of Europe, Middle East, Africa and Russia for Cisco Systems.

"AWS is a gamble," said Paalvast, when asked directly what he thought of the financial model behind AWS during a Q&A session with Canalys CEO Steve Brazier at the Canalys Channel Forum on Oct. 4 in Spain. "If you really look at their financials, they lease everything out. If they keep on growing like they're doing today, they'll win. If they get a hiccup, they're bankrupt. But that's the new world."

He said San Jose, Calif.-based Cisco, in contrast, is focused on teaming with partners to deliver new applications that will help customers become "more agile" and competitive in the Internet of Things market.

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"What I'm more worried about is, is the technology we deliver something that partners can resell and actually make money with and do it in a sustainable fashion?" said Paalvast.

Paalvast, a 17-year Cisco veteran, decried the "commodity-everything" IT environment. "It's all nice to talk about these technologies, but what I heard all today is just commoditizing everything. Then we won't make any money if that happens, but the partners will certainly also not make money," he said.

Paalvast's comments come as AWS is growing sales and operating income at a staggering rate.

Seattle-based AWS reported operating margins of 30 percent on a whopping 58 percent increase in sales to $2.88 billion for its second quarter that ended June 30.

AWS, which has a revenue run rate of nearly $12 billion, finished its most recent fiscal year with operating income of $1.86 billion on sales of $7.88 billion, compared with operating income of $660 million on sales of $4.46 billion in 2015.

Paalvast said AWS' business model is vastly different from the channel model that has catapulted Cisco to the No. 1 position in the networking and unified communications market, while also surging in other markets such as security.

"We actually have to show money and most [channel partners] actually need to turn a profit, and that's not what Amazon's business model is built on," said Paalvast. "If interest rates stay low, they might actually win the whole pot, but it's a model which is not open to everybody. And if the sentiment changes -- boom, it's gone."

Some Cisco partners say Paalvast's comments strike at the heart of why betting on AWS is a risky proposition.

"Instead of buying technology to sit in your data center or a co-location, you're buying Amazon's platform. It's a product and if interest rates change and they're leasing everything, their business model would be more susceptible to those interest rates," said Jamie Shepard, senior vice president for strategy and health care at Lumenate, a Dallas-based solution provider and top Cisco and EMC partner.

Shepard said AWS also lacks long-term fixed-priced contracts, which is what enterprises are seeking for cloud and IT services.

"Amazon doesn't have five-year contracts with customers because it’s a pay-as-you-go. So you can't lock in five-year pay-as-you-go [contracts] because if you never use those services, then Amazon loses," said Shepard. "It's a really tough model for them because most enterprises that want to invest more in a public cloud strategy, they want to sign longer-term contacts and they want a fixed cost no matter what happens in the marketplace."

But Jamie Begin, CEO of solution provider RightBrain Networks, an AWS partner based in Ann Arbor, Mich., disagrees, saying the only way AWS loses is if the global demand for computing power and data storage crashes.

"AWS' business plan isn't a bet on low interest rates, it's a bet that rapid technological innovation will continue to be the engine of the global economy," said Begin. "I'll take that bet."

During Amazon's second fiscal quarter earnings call, CFO Brian Olsavsky said customers will choose AWS for three reasons. "Functionality and [the] pace of innovation we bring to the table, our partner and customer ecosystem, and our experience," he said.

AWS declined to respond to CRN's request for comment on Paalvast's statements, but in a standard "risk factors" in its most recent 10-Q form, the company acknowledged the risk of significant "fluctuations" in its operating results and growth rate.

"Our revenue growth may not be sustainable, and our percentage growth rates may decrease," said the 10-Q risk factor. "Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth."

Phil Mogavero, vice president of Advanced Technology Group network solutions and regional chief technology officer at El Segundo, Calif.-based PCM, ranked No. 28 on the 2016 CRN Solution Provider 500 list, said AWS' isn't the safest cloud bet for customers.

"AWS has certainly created a remarkable growing cloud environment, enticing many customers to extend workloads to their environment. With that said, customers must be careful and have IT experts involved in these decisions to avoid vendor lock-in while ensuring proper bandwidth, security and redundancy," said Mogavero. "We're confident that a hybrid approach leveraging Cisco products and PCM data centers may often prove better.’

AWS has a market cap of $391.8 billion, more than twice that of Cisco at $146.6 billion.

Looking at stocks, Cisco started 2016 at $26.40 per share, which has since increased to around $30.10 as of Thursday at 9:30 a.m. Amazon's stock has witnessed remarkable growth this year -- beginning at $633.80 per share and reaching $829.20 as of Thursday morning.

For its recent fourth fiscal quarter, Cisco reported revenue of $12.64 billion, down from $12.84 billion compared with a year ago.

Cisco is currently in the midst of a major restructuring effort, which includes reorganizing its 25,000-member engineering team, which recently saw the departure of the company's cloud leader and Chief Technology Officer Zorawar Biri Singh. In August, the networking giant also revealed plans to cut 5,500 employees in an effort to invest in priority areas including IoT, security and cloud.

"What I like about Cisco is they're very much in tune with the business of IT. They're saying, 'We're Cisco with ACI, we understand connectivity, SDN, security, and this hybrid cloud approach,'" said Lumenate's Shepard. "Cisco is really guiding us and, regardless of competition and dominance, Cisco is a very strong brand and I'm expecting them to continue doing great things for us."