Is Amazon Losing Its Edge? What the AWS Outage Means for the Cloud Wars

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2:09I'm Ed Elson. It is October 21st. Let's check in on yesterday's market vitals. The major indices all climbed more than 1%, with the S &P logging its best two-day gain since June. Apple rallied 4 % to its first record of the year following a strong iPhone 17 sales report. Meanwhile, treasury yields declined and finally gold hit its 49th record close of the year. Okay, what else is happening? Amazon Web Services, the backbone of the internet, suffered a major outage that took hundreds of services offline across the globe. The disruption logged more than 6.5 million outage incidents and over 8 million user reports within hours.

2:51What looked like a routine technical issue quickly became a worldwide event. More than 1 ,000 company websites went dark, from Hulu to McDonald's to Snapchat to WhatsApp. Even banks like Barclays and Lloyd's couldn't connect to their own systems. Even the platform that we use to record this podcast was affected. So it was a red flag for Amazon, but also a red flag for the internet at large, which has revealed itself as extremely reliant on AWS. AWS now accounts for one third of the global cloud market. It alone generates more than$107 billion a year. As a reminder, what actually is AWS? It is essentially the infrastructure for everything we do on the internet.

3:36It's how companies host apps and process payments and store their data. So when AWS stops, it's similar to the power going out. Everything stops. And that is exactly what we saw yesterday morning. One small error in one region, in this case, Virginia, which cascaded through millions of systems around the globe. So to help us make sense of this outage and what it tells us about Amazon and its place in our global economy, we are speaking with Mark Mahaney, head of internet research at Evercore. Mark, great to see you again. Good to see you, Ed. So this AWS outage that is kind of affecting all of us, certainly affecting us up here at Prof G, let's just start with your initial reactions.

4:23Any top-line thoughts when this happened yesterday? Well, one, yes, it is impacting all of us. This show had to switch formats, I guess, and then my collegiate son called me to tell me that he wasn't able to finish an exam this morning or something because at... God forbid. Yes. So it really has impacted so many things. I think we were having... And then here at Evercore, we were having problems getting our research notes out. So yes, it's had a dramatic impact. I guess what it tells you is just how crucial AWS is to the internet. So I guess that's one take. And then secondly, this is a pretty big black eye for AWS.

5:01Now they've had outages before. It was about a year and a half ago, almost a year and a half ago in June of 24. I think they had a seven-hour blackout. So they've had these problems before. I'm not sure actually whether this was a mistake execution error on their part or whether they were something malicious that went on. I think it's more the first than the latter, but we won't know. We don't know and probably won't know for a little bit. So, yeah, it's in a time when AWS, the backdrop on all this is that AWS is a very significant percentage of the value for Amazon. Right. Amazon as a stock has underperformed for some time because of the belief that AWS has been slow to embrace AI, that they've been a shared donor to companies like Azure and maybe Google Cloud and maybe Oracle.

5:47This doesn't help. This doesn't help Amazon and it doesn't help the narrative on the stock. But, you know, for now, it looks like investors are willing to shrug it off. I hope it doesn't speak about broader issues at Amazon, though. Yeah, it was quite interesting to see the stock's reaction because, you know, we've seen pretty significant stock declines on kind of small news for Amazon this year. And then on this news, you'd think it would be pretty negative. And then the stock goes up, not dramatically. But I wonder if perhaps investors are maybe realizing how important this is. Maybe this brought to light how much everyone needs AWS.

6:24Just want to get your reactions to perhaps that view. You may be right, Ed. I'll take a different point of view. I just think it's that the company has had outages before and they've been able to come back. And so I think that's the market expectation. But it does seem like this is dragging on. My guess is that if it turns out that this is a 12, 24-hour partial outage, I would think you'd see a stock reaction tomorrow if it's not clearly, I don't know, handled, completed, whatever, taken care of sometime this evening. or tonight, you know, East Coast time, I would think you would see a bleeding into the stock then.

7:01As an internet analyst, is this the kind of thing that is a legitimate bearish signal for Amazon? Is this the kind of thing where you see this and you think actually, you know, cloud, one of the most important sectors of the stock market at large at this point, is this the kind of thing where you think maybe we need to diversify, maybe we need to look at other cloud providers? What does this mean for Amazon long-term? Well, it will depend on the duration of the outage and the partial outage. But, you know, the extent that this, you know, continues, it'll cast real. I mean, AWS has been didn't invent actually the cloud industry.

7:41I think that was actually Google. But, you know, for all intents and purposes, they have been the cloud poster child for, you know, good solid 15 years now. Maybe it's faded a little bit in the last two years. And to the extent that something like this happens, it just raises just more questions about the durability of AWS's leadership, not about the durability of cloud demand, storage and compute, but about the durability of AWS's leadership. Yeah, just look at the valuation. It's quite striking. It's kind of one of the big laggards in the Mag-7, trading at 17 times EBITDA. You've got Meta at 19, Apple at 27.

8:22And it seems that there is kind of sluggish sentiment, perhaps you could call it, around Amazon right now. Just wondering if you have any thoughts on why that is, perhaps aside from the outage. Why is Wall Street not so excited about Amazon when you compare it to the other Mach 7 stocks? I think the single biggest reason has to do with AWS and the AI narrative. I think the single biggest factor behind not all tech stocks, but a large number of them, is whether they are perceived correctly or incorrectly to be AI winners or AI losers. And it's very hard not to look at the AWS results of the last two years, dramatically slower growth than what Azure has been able to put together, Google Cloud's been able to do, and maybe even Oracle.

9:13It's very hard to look at that in a time when clearly AI cloud demands are growing triple digits year over year. Very hard to look at that and not think that Amazon kind of missed a little bit this transition. They were a little late, slow in terms of their product development. It doesn't mean they can't catch up, but it's hard to avoid that narrative. And I think that's been the single biggest overhang on the stock. Look, it's not the retail business. That's been growing kind of solid, you know, 10%. It's growing faster than online retail, so they continue to take share. It's not profitability in the retail segment.

9:48That's been gapping up the last two years. The ads business has been doing well for Amazon. It's up with that margin. So it's none of those factors. It's really been the big drag factor has been AWS. And AWS and Amazon need to prove that they can grow at least in line with the market again. And until they do that, I think this overhang is going to remain. You often talk about, I believe the term is dislocated high quality companies. Did I get that right? Yes, you did. Do you think that Amazon could be a contender? I mean, it's a high quality company for many of the reasons that we've discussed.

10:24Perhaps it is dislocated because of the AI narrative. Do you think that that could fit in the category or no? Yeah, I think so. I mean, we're also in a point where, you know, I do hunt for these DHQs. Sorry, you have to come up with an acronym. So dislocated high quality, you got to do it. And, you know, at the beginning of the year, I thought that was Uber. Great, that worked out. Then four or five months ago, that was our top pick. And then we made Google our top pick. All this is useless to you now because those are all picks in the past. But now what do we do? And we made Amazon our number one pick on the belief that it's not fully dislocated.

10:58But look, it's certainly underperformed. weakest performer. It's flat on the year, down slightly on a year in which the S &P 500 is up solid, you know, mid high teens. So yeah, it's been, it's somewhat dislocated. It's not trading at a trough multiple, but it's actually pretty close to one. So I put all that together. Yeah. I haven't been as aggressive at calling it DHQ. I mean, I thought Google when it was trading at 15 times earnings, I thought that was clearly DHQ. I wouldn't quite say that about Amazon, but it comes as close as any other stock I look at now to being a DHQ. So yeah. And what they need to do, the market may well be right.

11:32The market's view is that AI is causing Amazon to lose share in this cloud segment. And also, AI is leading companies to spend differently than they were before. Startups not leaning in, starting off with AWS and cloud storage and compute, but leading in with LLM tools. Like, it may be that there's just a shift in enterprise spend away from AWS's core competency. All of that feeds into this AI loss narrative. And the only way that Amazon is going to prove or disprove this is by showing material acceleration in the back half of the year. And probably, to me, the number on Wall Street is 20%. If AWS can show that they're exiting this year, 2025, with 20 % year-over-year growth, I think that narrative will change rapidly, just like it did with Google on a very different setup about four months ago.

12:26All right. Mark Mahaney, Head of Internet Research at Evercore. We really appreciate your time. Thanks, Mark. Thank you, Ed. After the break, an update on tariffs six months in. If you're enjoying the show, give Prof G Markets a follow.

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15:25We're back with Prof G Markets. It's been more than six months since tariffs were announced on Liberation Day. And since then, we've seen tariffs imposed on many U.S. allies, 35 % on Canada, 50 % on Brazil and India. Just 10 days ago, Trump threatened a 100 % tariff on all products from China, marking a dramatic escalation in US-China trade tensions. And last week, the latest round of tariffs targeting furniture, kitchen cabinets, and lumber took effect, which economists believe could raise home-building costs for many Americans. Markets are watching closely. Just yesterday, major indices climbed on signs that US-China tensions may be easing.

16:04either way, we thought that this would be a good time for a quick tariff update. What impact have these tariffs had so far? Who is really absorbing the cost and what is really going on? So here to explain that, we are speaking with Maurice Obstfeld, Professor of Economics Emeritus at Berkeley and Senior Fellow at the Peterson Institute for International Economics. He is also former Chief Economist at the IMF. Maurice, thank you for joining us on Prof. G. Markets. Thank you, Rhett. Happy to be here. So we are about six months into the tariffs. So we were thinking this is probably a good moment to get the update.

16:44What is the update on the tariffs? What have we learned so far? What have been the impacts? Give us your read. The administration's goals with these tariffs were, first of all, to reduce the trade deficit. Secondly, to bring back manufacturing jobs. Thirdly, and a more recent goal, was to raise revenue and help finance the tax cuts in the One Big Beautiful Bill Act. Critics of these predicted that they would be negative for employment and growth, would raise inflation, and would not fully accomplish the administration's goals. My assessment so far would be it's a mixed bag. There are a lot of other things going on in the economy that obscure the pure effects of tariffs alone.

17:37But on the whole, I would argue there's very little evidence that the goals are being met and some evidence of harm to the economy that is probably likely to grow. Just taking those examples that you gave there, impact on manufacturing and job growth, we've seen that. Impact on prices, we've seen that. In what sense is it a mixed bag? I mean, I was almost thinking you were going to say it's had been exactly what the critics thought. But in what sense are we seeing a mixed bag? How is it sort of perhaps been beneficial or at least in line with what Trump wanted? I don't think it's been beneficial at all.

18:24I think it's a mixed bag in terms of, you know, obvious evidence of the worst outcomes that economists predicted. uh i think you know all the costs are there and will become more evident over time but um you know other factors in the economy have obscured uh what's going on uh i i don't think that they can hide the damage for long so for example you know we're basically in the midst of an ai boom which is um lifting investment lifting stock market prices you know we're also benefiting from some legislation that was passed in the Biden administration that is operating with a lag, the CHIPS Act, the infrastructure bill, for example.

19:14So these things obscure the effects. And so you'll see, you know, people saying the economists were all wrong. They didn't know anything. But I think the negative effects are there. And you see it in the anecdotal evidence of businesses that are in real trouble because their input costs are higher. You see it in a labor market where hiring has slowed to a crawl. You see it in an inflation rate, which, while it hasn't spiked, has remained very stubborn. And if you look under the hood, as the Harvard Business School Prices Project has at, you know, disaggregated data, you do see prices of goods affected directly by tariffs or goods which are similar to those affected by tariffs rising.

20:02You know, a lot of the damage is hidden, but I think will come out soon. For example, we see a fair amount of revenue from tariffs coming into the government's coffers. You see that foreign exporters to the U.S. have not lowered their dollar prices. Somebody's paying for that. Partially it's consumers, but a lot of it is coming out of business profits and business margins. And that's going to lead businesses to raise prices not too far down the road. So the effects are definitely all bad, to my mind. And they're somewhat disguised by, you know, a very strong economy that Trump inherited, which, you know, had a lot of momentum and is being powered by this AI boom, some call it a bubble, you know, which may or may not pan out.

20:59Yeah, when I look at what sort of the other side or what MAGA would argue, I'm saying the other side, my position has been quite clear. I think these tariffs are a very bad idea. But the other side would say, look at the revenue that we've brought in. August and September,$63 billion in tariff revenue, i.e. America is raising money because of these tariffs. is there more to that story? What would be your response to that bragging point, let's call it? And yes, tell us more about the fiscal implications of all of this. Well, suppose instead of raising tariffs, we had simply let the 2017 Tax Cuts and Job Act expire, as they were said to do, then revenue would be coming in.

21:50And, you know, we could be crowing about that revenue coming in. But we wouldn't be because we might be saying, well, you know, people are paying higher taxes. That hurts their consumption. Higher taxes might slow the economy, right? No Republican would be crowing about that revenue. But why are tariffs any different? You know, basically, Americans are paying this money to the government. It's creating inefficiency on the production side. It is allowing companies to be less competitive under the tariff wall. It's hurting innovation. It's hurting exports. It's hurting the prices of intermediate inputs that firms rely on for investment.

22:38And essentially, the fiscal policy that the Trump administration pursued was to exchange this revenue for the tax cut revenue. Now, if you compare the two, the income tax cuts mostly benefit the rich. Tariffs mostly hurt those who are less well off. It's really not a fair trade in terms of how aggressive the tax system is. And so the revenue is nothing to brag about, and it's not going to be nearly enough to plug up the deficit hole that the one big beautiful bill has created. Tariffs are at most going to bring in an extra$200 billion a year. The numbers you cited of tariff revenue are tariff revenue including revenue from the tariffs that already existed prior to the Trump administration.

23:36So they're not the net increase in tariff revenue. That net increase of, let's say,$2 trillion over a 10-year horizon has to be put against the net decrease of about$4 trillion over a 10-year horizon that the One Big Beautiful Bill Act has caused relative to the January 2025 budget baseline. If I had to sort of simplify what you're describing here, all of these economic terms being thrown out, tariffs, income tax, but ultimately, I mean, what we're describing is taxes. And what you're saying is the tariffs have been a tax windfall that we are basically extracting from consumers, i.e. poorer Americans or at least middle class Americans.

24:26And the tax cuts that we're going to see in the Big Beautiful Bill, those are tax cuts that we're seeing among the rich predominantly. So it sounds like what we're describing here is basically a wealth transfer from middle-class and lower-income Americans to higher-income Americans. Is that correct? That's exactly right. The Trump administration is trying to move back, at least partially, to the kind of tax system we had in the 19th century and the early part of the 20th century, which was based largely on tariffs. The income tax had not even been instituted because it was not viewed as being consistent with the Constitution.

25:13We had a constitutional amendment that made it possible. And then we moved away from the tariff-based system. We lowered tariffs. It was very good for general prosperity. It was good for the distribution of income. And the reason we moved away from tariffs toward this income tax system was in part because the tariff-based system was so regressive. It's so penalized the relatively poor, and the income tax was viewed as much fairer and much more equitable. And this strategy that the Trump administration has is just turning the clock back more than 100 years. Final question. Do you think this is going to continue?

25:53Would you expect that prices will continue to rise? I think prices will continue to rise. I think we'll see more inflation down the road. I think we'll also see more business distress down the road, especially small businesses. I fear that these tariffs, because the government is going to become dependent on that revenue, will not be easily removed ever, even if the administration changes parties. Maurice Ovsfeld, really appreciate your time. Thank you for joining us. Pleasure, Ed. Thank you. That was Maurice Obstfeld, Professor of Economics Emeritus at Berkeley and Senior Fellow at the Peterson Institute for International Economics.

26:34Now, if you are following the administration on social media, well, you would probably get the idea that tariffs have been a win. And most recently, you would have probably heard about this$198 billion surplus that the U.S. registered in September. but many people are talking about it. It's a$118 billion increase from September of last year. And according to many officials, it is because of the tariffs, which sounds pretty good. As usual, however, we are missing some context, some important context, which tells us a very different story from the one we're being told. And that is$88 billion of that$198 billion.

27:19And that was actually counted from August because the 1st of September fell on a weekend. So it was really an accounting blip. And at the same time,$130 billion of that$198 billion was also a one-off savings number from this restructuring of our student loan portfolio, i.e. another accounting blip. So if you actually account for those two distortions, well, this month's surplus, which everyone keeps talking about, it would actually amount to a deficit of$20 billion. So not really a win. Now, having said that, we shouldn't just write off the tariffs and the revenue that the tariffs are generating.

27:58The tariffs have raised revenues, roughly$118 billion in fiscal year 2025, which again, some would say is actually a good thing. But I will once again remind you, as we just discussed from whom those tariff revenues are actually being raised. And it's you. It's the consumer. Because as we've said many times on the show, tariffs aren't really a tax on foreign nations. They are actually a tax on Americans. Because it's the importer that pays the tariff, i.e. the American company. And the American company can either cover the costs fully themselves, or they can pass the costs onto the consumer. And indeed, the data is telling us, just as we predicted, the costs are being passed onto the consumer, at least in part.