Amazon, built on retail, is investing in an AI future

Amazon plans to spend more than $100 billion on data centers over the next decade, an impressive investment even for a company known for its extravagance: The Seattle-based company is currently investing more in cloud computing and AI infrastructure than it does in its vast network of e-commerce warehouses.

Amazon Web Services, the division that manages Amazon's cloud business, has been opening data centers for years, but executives said investment is now surging to meet demand driven by the excitement around AI.

“We have to jump in and figure it out,” said John Felton, who became AWS's chief financial officer this year after spending most of his career working in Amazon's retail fulfillment business.

The company's financial commitment reflects the importance and high cost of AI. Felton said building AI today is similar to building large distribution networks a few years ago. “It's a little bit uncertain,” he said. AWS is expanding in Virginia, Ohio and other areas.

The company's total capital expenditures fell last year, mainly due to containment of fulfillment and transportation costs, but spending on infrastructure, primarily for AWS, surged. The increase represents a new era of expansion for Amazon, where investments in cutting-edge cloud equipment have become more important to its growth than the development of its retail warehouse network.

Amazon's data center capital expenditures, including leasing, accounted for 53% of its total capital expenditures last year, the highest in the past decade, according to market research firm Dell'Oro Group. Amazon expects its spending on AWS infrastructure to remain high this year, and has announced a number of AWS investments in recent months.

Amazon's cloud business has long been a driver of the company's revenue, but AI is expected to drive demand for cloud computing to new heights. Executives are aiming to capitalize on the AI ​​boom, which relies on cloud services because it requires huge amounts of computing resources. Amazon expects to make tens of billions of dollars from AI in the next few years.

“We're laser-focused right now on delivering that capacity,” said Kevin Miller, vice president of global data centers at AWS.

The change at Amazon represents a shift in the needs of a company that some experts see as lagging behind larger tech companies in AI, despite having one of the world's top cloud-computing businesses and years of experimentation with it. Amazon has said it is not lagging behind other companies in AI, and AWS' AI capabilities have been well received by customers.

Amazon has a long history of spending big to stay ahead: The company established its dominance in e-commerce and then spent years making huge capital investments in its delivery infrastructure to meet exploding demand during the COVID-19 pandemic.

The big investment helped Amazon become the fifth U.S. company to reach the $2 trillion market capitalization milestone last week. Its shares closed at $193.25 on Friday, giving the company a market capitalization of $2.11 trillion.

Amazon's growing focus on data centers is also reflected in the company's senior management, which increasingly includes people with ties to the cloud business, such as Andy Jassy, ​​who became Amazon's CEO in 2021 after more than two decades as chief executive of AWS.

“It's only natural that they would invest more in AWS and technology for those who have been left behind because that's what they grew and built,” said Keith Roy, CEO of e-commerce fulfillment company StandBast and a former Amazon vice president.

Mark Wolfrath, president of logistics consultancy MWPVL International, said Amazon plans to add at least 216 new data centers over the next few years. Amazon's retail capital spending won't grow much through 2025 because the company has excess capacity in that sector after overbuilding during the pandemic, Wolfrath said.

As demand for AI infrastructure grows, Amazon and other tech companies have struggled to get the parts, land and power needed to power data centers with supercomputers. Amazon and other big tech companies have sought nuclear power to meet their energy needs. The company's fulfillment buildings took years to complete and didn't require the same technical equipment as data centers.

Jassy has reoriented Amazon to focus on AI products across its various businesses, and he has said generative AI could be a key part of Amazon's next growth pillar, in addition to its online retail business, Amazon Prime and AWS.

In May, the company appointed Matt Gurman, a veteran executive with an engineering background, as the new AWS CEO to further leverage its AI efforts.

Amazon remains the largest online retailer in the United States, and its recent financial results show it is in a stronger position than ever. The company continues to invest in its retail division and open new fulfillment facilities. It has expanded its delivery capacity to get products to more Americans faster as it faces competition from new e-commerce entrants.

But now is also the time to invest in AI opportunities, Felton said.

“This is a really interesting time to be here and think about how we can think very differently about how cloud computing works and how we serve customers in a GenAI world,” he said, referring to generative artificial intelligence (GenAI).