AWS Business Environment: Macroeconomic Analysis for 2024

Module Number: BMP4003

Module Name: Business Environment

Year/Trimester: 2023-24/ Semester 2/ January 2024 Cohort

Module Tutor/s: Hussan Jakaria / Edidiong Emmanuel Sidney/ Anesa Isufi/ Sunny Akpabot/ Umair Shafi Choksy/ Emmanuel Oghosanine/ Mohammad Rashid Khan/ Mahnaaz Siddiqui/ Shyam Sharma

Assessment Number	1
Assessment Type (and weighting)	Individual Written Report - 100%
Assessment Name	Economic Concepts and Models
Assessment Submission Date	29 September 2024 at 23:59
Student Name:
Student ID:

Introduction

AWS is a technology service that allows businesses to use cloud computing from data centers around the world with over 200 services. AWS started in 2006 and is helping Amazon’s business model and has been providing high growth and profit every year. AWS will remain the market leader for cloud computing in the year 2024 and is helping millions of active customers ranging from fast-growing start-ups to large enterprises and even government agencies.

The current economic environment has challenges and solutions for AWS as the global economy is going down with high rates, increased interest rates, and slow economic growth in many countries. This financial problem is putting pressure on corporations to decrease expenses for IT and attitudes towards cloud service expenses, which affect the AWS demand, On the other hand, there is an increase in digitalization of businesses and industries along with their need for efficient and cheap sources of IT solutions that makes it better continue to help AWS.

This will help identify various microeconomic and macroeconomic forces that affect AWS’s business activities and strategic management policies in this tough economic context.

Macroeconomics Analysis

Another factor affecting the cloud computing market in which Amazon produces its services is that the demand and supply of services are changing due to many factors.

Demand Factors:

• Digital Transformation: The shift of business processes to the cloud is a major factor in the need to use AWS services. In the economic situation, a lot of organizations see cloud transfers as the best solution in the long run.

• Cost Efficiency: When an economic disturbance is seen, organizations want a way to reduce their expenses. it helps the organization to move from buying all the resources to taking them on lease.

• Innovation and New Technologies: The increase in the use of artificial intelligence, machine learning, and IoT increases the need for more resources for cloud computing (Brodie and Oniell, 2022).

Figure 1 AWS Services

(Jaxel, 2022)

Supply Factors

• Data Center Capacity: Amazon Web Services keeps investing in the expansion of new capacity, and the company is ready to fulfill the needs of customers.

• Competition: The pressure from competitors like Microsoft Azure and Google Cloud Platform affects AWS’s supply and this results in having more capacity and new services.

• Skilled Labor: This is a major issue for AWS since the presence of well-trained IT personnel plays a major role in the company’s performance to create, sustain, and grow its services.

These demand and supply factors explain the market for cloud services. Cloud services are in great demand although their growth rate may be slower due to the effects of the economic crisis which is present worldwide. This changing demand means that it will be important for AWS to be able to scale up or down according to the needs of the market to maintain its position as a market leader (Ferrua, 2023).

Elasticity

It is necessary to know the factors of demand for AWS services that are related to price elasticity since it helps to know how revenues vary as per the change in the overall economy.

1. Price Elasticity of Demand: The price elasticity of demand for AWS services is generally inelastic in the short term but becomes more elastic in the long term:

• Short-term Inelasticity: Through new economic geography theory, AWS creates a high barrier of switching costs once the businesses move there making demand relatively inelastic. It is unlikely that customers will abandon any company in mass immediately after an increase in prices.

• Long-term Elasticity: As other firms offer similar services and the opportunity to switch increases, the demand becomes more sensitive. While price rises may force customers to look for other providers.

2. Income Elasticity of Demand: Cloud services from AWS are normally good but with some differences:

• For established businesses: Rather non-elastic, or in the range of inelastic price coefficient of less than one, from 0.5 to 0.8. Unlike other economic activities, there may be fluctuations made to spend on the cloud but core services are mostly critical.

• For startups and growing businesses: To be more income elastic, the coefficient. It is for these companies where the use of cloud increases when funding is available, and back down where the usage decreases when funding is short.

3. Cross-Price Elasticity: AWS services show positive cross-price elasticity with on-premise IT solutions:

• The more expensive on-premise infrastructure gets because of electricity tax, and hardware costs, the more AWS services will be required.

• The cross-price elasticity of demand for AWS related to its main rivals.

• Estimated Cross-Price Elasticity with competitors: 0.4 to 0.7

These elasticities are important to AWS in terms of establishing some of its prices over the economic cycles. Competitive pressures, however, require that AWS careful on large-scale changes to its prices in the short term because, although the demand is relatively inelastic in the short term, large-scale changes may cause users to switch to the competition (Ngo et al, 2022).

Figure 2 AWS Parameters

(Gaur, 2020)

Macroeconomic Factors and Their Influence

Like any business that is operating today amid the continuously changing environment in cloud computing, AWS faces many macroeconomic factors that affect its operation, establishment of strategies, and effectiveness. This section contains five key macroeconomic factors: inflation, interest rates, exchange rates, technology changes, and public policies, and evaluates more than one facet that influences AWS's strategy and market standings.

Inflation

Inflation, a persistent increase in the general price level of an economy over time, presents both challenges and opportunities for AWS:

1. Operational Costs: Usually, cases of higher inflation put pressure on AWS to increase its overall operational costs. This is in the form of higher electrical energy costs used to power data centers and other electronics, higher costs of hardware and equipment, and increased wages.

2. Pricing Strategy: In this inflationary era, AWS is facing the problem of changing its pricing policy Although it is possible to increase the prices of certain products to conserve the profit margins, that decision might lead to a loss of certain customers due to increased charges in a competitive market.

3. Customer Behavior: Inflation can indirectly affect AWS’s customers to change their cloud usage patterns. Certain clients may require the management of Cloud costs, resulting in better usage but less frequency of AWS services.

Interest Rates

Interest rates, often used as a monetary policy tool by central banks, can have effects on AWS's financial strategies and market dynamics:

1. Cost of Capital: Hooks itself with the basic source of financing or cost of borrowing: Interest rates that are directly relevant to AWS. Although Amazon as a company possesses healthy cash reserves, AWS being a capital equipment-intensive business, where investment in data centers continues to be a major expenditure, implies that higher interest rates may lead to the cost of financing such projects.

2. Customer Investment Patterns: Interest rates on the other hand have an impact on the larger investor environment of the overall economy and thereby impact AWS indirectly. Higher rate might lead some businesses to decrease their investment

3. Competitive Landscape: Changing interest rates can change the competitive nature of the cloud industry. Other smaller cloud players could struggle due to higher financing costs at a high interest rate which means AWS Gains Market position (da Feng, 2024).

Exchange Rates

As a global player in the cloud computing market, AWS is exposed to exchange rate fluctuation:

1. Revenue Translation: Fluctuations in exchange rates can greatly affect the company’s reported amount of revenues and earnings in a way that the foreign currency is translated to the US dollar.

2. Competitive Pricing: It is noted that changes in currency can impact the company’s pricing influence in particular markets. It also means that where AWS has pegged its prices in local currencies to the US dollar, a stronger greenback may force the company to make changes that can alter demand or the profit margin.

3. Cost Structure: This is because exchange rates are used to determine the global cost base for AWS. Many of its costs are in US dollars, but due to the floatation of currency, the local expenses, wages, energy, real estate, etc., in the international markets may fluctuate (Correa-Jimenez et al, 2024).

Technological Changes

The pace of technological advancement is the most important macroeconomic factor for AWS, the nature of its business:

1. Innovation Imperative: To maintain its market position, AWS has to be innovative. This makes it necessary that there must be investment in research and development in the long run.

2. New Market Opportunities: New technologies such as artificial intelligence, quantum computing, and edge computing are creating new service opportunities for AWS.

3. Operational Efficiency: technological advancements are helping AWS to improve its operational efficiency. Advancements in areas like energy efficiency, cooling systems, and server design can help with cost pressure and improve profit margins.

Government policies

Government policies in various domains can impact AWS’s operations and strategic decisions:

1. Data regulation: Due to policies from the General Data Protection Regulation (GDPR) in Europe to data localization laws in Russia and China, AWS can store and process customer data in different ways.

2. Antitrust Concerns: While AWS has been gaining its market share in the cloud sector, it faces the growing regulation issue regarding market dominance. AWS could face some number of antitrust actions that would decrease its future growth or require it to change its business practices.

3. Cybersecurity Requirements: Security standards imposed by the government can enhance AWS operational costs, but it can also generate opportunities for new security service offerings. To meet both the evolving demands of regulatory regulations and customer preferences, AWS must invest more in its security measures (Haucap, 2022).

Figure 3 AWS Financial Management

((Dubey et al., 2022)

Impact of UK Current Growth Rate

The current economic growth rate of the United Kingdom has a large impact on Amazon Web Services (AWS) operations and the strategies they pursue in the country. While hopes for moderate economic growth in 2024 mean that the UK gradually overcomes previous obstacles, it faces global challenges and inflation. This economic context has several implications for AWS:

Effects on Disposable Income

1. B2B Demand:

• Sustaining a low to moderate growth keeps the overall business expenditure strictly foreseen, which can slow down cloud adoption rates.

• With cost efficiency becoming even more critical, shifts from on-premises to cloud alternative solutions could become faster, which would be good for AWS.

2. B2C Services:

• The reduction in consumer spending on unnecessary digital services could indirectly set back demand for AWS infrastructure.

• the increased popularity of cheap entertainment choices (such as streaming services) might increase the need for cloud infrastructure.

3. Start-up Ecosystem

• Careful venture capital investments could impose a slower growth rate on startups centered around cloud technology, which are essential AWS customers.

• Difficulties in the economy may motivate innovation and make way for new opportunities for AWS to support emerging startups.

Influence of Economic Policy

• Fiscal Policy: Government spending on digital infrastructure can cause a higher demand for cloud services.

• Monetary Policy: Interest rates set by the Bank of England impact the cost of borrowing for AWS and changes its customer’s expenditure on cloud solutions.

• Industrial Strategy: Sector-specific policies, for example, fintech and biotechnology create new opportunities for AWS specialized services (Naseer, 2023)

Implication of Globalization

• Cross-border Data Flows: Post-Brexit data sharing agreements affect AWS’s data center strategy and services in the UK.

• International Competition: AWS's business environment in the global market is also affected by the open competition from international players in the technology sector in the UK.

• Talent Pool: Failures and successes in International Talent Management policies impact AWS’s capacity to secure qualified workers for its United Kingdom business.

Government Intervention Method

In the case of the UK, different governmental intervention methods play a major role in shaping the business environment of AWS. All these interventions that have the purpose of directing economic development and supporting innovation directly influence AWS’s operations and its strategic actions.

Public Investment

The UK government's public investment initiative plays a crucial role in shaping the area for cloud services:

• Digital Infrastructure: Large capital expenditure in broadband and 5G technologies increases the addressed market of cloud solutions. The UK wants to achieve Gigabit broadband by 2030 which will increase the market for AWS, especially in previously unconnected data

• Research funding: Government-funded research in areas such as AI, quantum computing, and cybersecurity are new opportunities for AWS. The 1 billion euro AI sector deal could lead to the need to apply and build better Cloud computing solutions, where AWS can set up the ground to create and deliver new options.

Trade Policy

Post-Brexit trade policies influence AWS:

• Data transfer Agreement: AWS gets affected by cross-border data transfer and storage directly because of UK data adequacy agreements and other nations. These agreements are important for the functioning of AWS to serve multinational customers.

• Tech Sector Agreements: Any change in new trade agreements of the tech sector could create opportunities or challenges for AWS’s UK operations (Hwasser, 2022).

Tax Breaks

The UK government uses various incentives to increase investment and innovation:

• R&D Tax Credits: Increased tax credits for research and development may encourage AWS to perform more innovation activities in the country. AWS may benefit from the research proposals to be gained through the government-targeted R&D investment at 2.4% of the GDP by 2027.

• Capital Allowance: The new capital allowance rule allows the business to benefit from larger investment in the purchase of plant and machinery, including computer equipment would make the United Kingdom a better area for AWS expansion. The super-deduction scheme allows to reduce the tax burden by up to 25p for each £ 1 spent offered to give a boost to AWS capital-intensive operations.

Subsidies

Government subsidies can influence AWS’s operational decisions:

• Regional Development: The subsidies for investments in technology in particular regions in the UK, for instance, Northern Powerhouse, could make AWS change its positioning of new facilities or additional space to those places.

• Green Energy: Subsidies for renewable energy works well with AWS’s sustainability goals.  UK plans towards having net-zero emissions by 2050 and associated green energy incentives could also assist AWS in achieving its sustainability goals cheaply (Tran Nguyen, 2020).

Conclusion and Recommendation

The macro business environment has its threats and opportunities for AWS. It may be somewhat slowed down due to some economic factors in the short term but long-term adoption of cloud is growing at a fast pace. To give direction to this difficult time we recommend the following:

• Flexible pricing: create more flexible pricing options to help the clients control their costs in the current economic problem.

• Innovation Focus: they have to invest a significant amount in research and development to be in a position to maintain their market share and to search for other strategic business models.

• Sustainability Initiative: create more green data center plans to solve the problem of increasing energy expenses and customer demands on cloud solutions.

• Skills Development: Work with Government and educational institutions to develop cloud skills, so that more talented professionals would appear.

• Vertical Specialization: develop more industry-specific solutions to improve the relation with the major sectors of the UK economy.

By working on these macroeconomic challenges while investing in long-term cloud computing trends. AWS will be able to maintain its position and continue growing in the UK market.

References

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Correa-Jimenez, A., Davies, R. and Siddique, R. (2024) ‘Macroeconomic modelling: A review,’ http://economicsobservatory.com/Macroeconomic_Modelling_Review.pdf

da Feng, W. (2024) ‘AMAZON'S PATH TO GLOBALIZATION’, International Journal of Advanced Research in Islamic Studies and Education, 4(3), pp.18-32. https://jurnal.nun-g.com/index.php/arise/article/download/425/424

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