What Amazon’s $7.5 billion investment means for NZ’s cloud computing market

Peter Griffin

Peter Griffin

It’s a rare event to see a multinational tech company announce a multibillion-dollar investment in New Zealand.

But that’s exactly what happened yesterday with Amazon Web Services (AWS) outlining its plan to spend $7.5 billion over 15 years here, starting with the building of data centres in Auckland.

It follows Microsoft’s announcement last year that it would also build data centres in Auckland, meaning the world’s two largest public cloud providers now have enough confidence in the local market to sink serious dollars into major infrastructure that will be used for decades to come.

So what exactly is AWS hoping to achieve and what will it mean for the local cloud and data centre market? Umbrellar Connect was at yesterday’s AWS announcement – here’s a breakdown of what we know. 

What is the $7.5 billion being spent on?

That’s a good question and it wasn’t answered in full detail yesterday. Here’s how AWS’s New Zealand Country Manager, Tim Dacombe-Bird, describes it.

“The $7.5 billion dollars will be spent on [capital expenditure] for the datacenter builds. Also, the specialised hardware that will be going into those facilities. There’s a component of optics for the facilities and utilities, there’ll be purchase of goods locally through the data centre supply chain, and also be spent on salaries and wages for the jobs that are created,” he said.

AWS talked about the investment creating 1,000 jobs over 15 years. But it is unclear exactly how many of them will be AWS employees. Running data centres is not a labour-intensive activity, but a scaling up of business will likely see AWS staff numbers in sales, marketing and administration increase too. AWS currently has around 100 employees locally.

What exactly is AWS building here?

AWS will create the AWS Asia Pacific (Auckland) Region, which will consist of “three Availability Zones (AZs)”. These will be operated from data centres that are built in the Auckland region at separate geographical premises to ensure customers have redundancy and business continuity if service from one of the data centres is disrupted. AWS hasn’t said exactly in the Auckland region where they will be located, but wants them to be operational in 2024.

AWS has 81 other Availability Zones across 25 geographic regions around the world. The AWS Asia Pacific (Auckland) Region will be owned directly by an AWS entity based in New Zealand. AWS has operated in New Zealand since 2014 and previously, New Zealand customers had their applications and data hosted in other AWS regions – notably Australia.

But AWS also has two Amazon Cloudfront edge locations and AWS Outposts currently in Auckland. These form a content delivery network (CDN) that speeds up delivery of data, videos and applications between customers, AWS data centres and other locations.

AWS has also bought capacity on the Hawaiki cable linking New Zealand to Australia and the United States. 

What does this mean for our economy?

Our Productivity Commission and numerous research groups have pointed out that accelerated uptake of cloud computing services and the automation and artificial intelligence tools they accommodate, could boost our lagging productivity.

AWS did its own economic impact study on the investment and estimates it will create 1,000 new jobs and impact New Zealand’s gross domestic product (GDP) to the tune of $10.8 billion over the next 15 years. Amazon didn’t release its economic modelling, so it’s hard to know where those benefits accrue. But a Boston Consulting Group study in 2019 showed the significant economic impact of spending on public cloud infrastructure in the Asia Pacific region.

It is estimated that if public cloud spending continued at a compound annual growth rate of 25%, it would contribute US$450 billion across Australia, India, Indonesia, Japan, Singapore, and South Korea alone, between 2019 and 2023.

“This impact, which includes the direct impact on the industry users of public cloud as well as second-order effects driven by business growth across the supply chain of industry users and increased consumer spending, is comparable to the annual GDP impact of many of the region’s large traditional industry sectors,” BCG noted.

The estimated economic impact included the production of around 425,000 jobs. So it is fair to say that AWS isn’t unreasonable in suggesting its investment will help grow the national economy. 

What services will AWS be offering?

“At launch, we will have core functionality for a region,” said Tim Dacombe-Bird.

“And [that] core functionality will be built on over time.”

AWS claims to have 200 services available on its platform, ranging across analytics, compute, database, Internet of Things (IoT), machine learning, mobile services, storage. It is unclear how many of those 200 services will be available from launch. A factor will be what local support AWS is able to offer for them, but the core functionality Dacombe-Bird seems to be expanding by the day as companies embrace data analytics and IoT networks.

Will this mean lower cloud computing prices?

You would hope so and simple supply and demand, suggests that the huge increase in capacity available with AWS and Microsoft building data centres, will see strong price competition on computing and storage capacity, as well as those value-added services that sit in the cloud.

What will Amazon charge for locally-delivered AWS services?

“That hasn’t been finalised for New Zealand yet,” Dacombe-Bird said.  

“But this pricing philosophy allows us to continually put downward pressure on pricing for our customers which has seen us reduced prices over 70 times in our history,” he pointed out.

What will it mean for local data centre operators?

The big local data centre operators in New Zealand are bullish, at least publicly, about AWS and Microsoft building data centres here. Datacom’s Managing Director, Justin Gray, said it would mean “more choice and faster access to world-class cloud computing services” for its New Zealand customers.

Spark Chief Executive, Jolie Hodson, said the investment was “an important enabler of the support we provide to New Zealand businesses”. Both companies are large AWS partners, selling their public cloud services and adding value through providing managed services, consulting and application development. 

But they are also big infrastructure players in their own right. Spark’s 2020 investor presentation for its IT business put its cloud business at $225 million in the 2020 full year, giving it an estimated 31% of the local cloud market. 

As more New Zealand businesses move to public cloud and co-location in local data centres, Spark sees it having an impact on its existing business, but one it plans to counter by supporting the move to the cloud.

“There will be pricing pressure across (infrastructure as a service) IaaS and co-location, but this will be offset by opportunities for continued revenue growth across this portfolio as the majority of New Zealand businesses are yet to transition to the cloud, with only 25-30% having currently moved.”

How Spark’s IT revenue breaks down.

Datacom likely has a similar strategy. It’s not necessarily a given that migrating to public cloud platforms will be cost-effective for the majority of New Zealand businesses. Co-location can be quite cost-effective and some applications and legacy technology will require a hybrid cloud approach well into the future.

Smaller specialist operators like Catalyst Cloud, which favours open source technologies, will continue to enjoy a loyal customer following. But the success of local players, in general, will depend on their ability to adapt to accommodating and adding value to the public cloud platforms. 

How much power will these data centres use?

That’s unclear, but AWS was careful to point out that it will be “running its business in an environmentally friendly way and has committed to reach net-zero carbon across all business operations by 2040, 10 years ahead of the Paris Agreement goals”.

AWS has signed up to The Climate Pledge, committing to power Amazon’s global infrastructure with 100% renewable energy by 2030. It claims to be on track to meet that milestone by 2025. Our high proportion of renewable energy usage in New Zealand shouldn’t pose major barriers to AWS in meeting its clean power targets. There are also energy efficiencies to be had when businesses switch off their on-premises infrastructure in favour of a move to the public cloud.

Says AWS, “A recent Asia-Pacific (APAC) report by 451 Research found that on average, organisations moving their business applications from on-premises data centres to cloud infrastructure in APAC can expect to reduce their energy use—and associated carbon footprint—by 78%. Organisations that move compute workloads to the AWS Cloud can benefit from the net effect of Amazon’s sustainability efforts to reduce their carbon footprint.”

What customers does AWS already have?

A large number of them, across a diverse range of sectors and industries. They include: Air NZ, ANZ Bank, Bank of New Zealand (BNZ), Contact Energy, Education Perfect, Halter, New Zealand Department of Conservation, Lancom, New Zealand Ministry of Health, New Zealand Ministry of Justice, Orion Health, Sharesies, The Clinician, TVNZ, UneeQ, University of Auckland, Vodafone and Xero.

A major customer is Auckland-based electricity and gas distributor Vector. Vector’s Chief Executive, Simon MacKenzie, said yesterday that his company had a “strategic alliance” with AWS to build what he calls a new energy platform.

“[With] the strategic alliance, we have around 60 People with 10 new hires on the way. These people are evenly split between Vector and AWS, working together across Auckland, Seattle and Atlanta,” he said.

“It is to build an Internet of Things and analytics solution for the energy industry, the first in Australia, in New Zealand. Given the rise of renewables, electric vehicles and higher consumer expectations for affordable, sustainable energy, the new energy platform will unlock the power of data, using the latest cloud technologies to make smarter customer-centric decisions,” he added.

Will AWS pay more tax with a bigger local footprint?

You would hope so! AWS reported sales from its New Zealand division of $35.9 million in 2020, and declared a loss of $2.6 million. It paid $630,000 in tax. But that’s unlikely to reflect the scale of AWS’s business in New Zealand. 

As the ABC has reported, AWS is one of the big tech companies that use payments to related parties in lower tax jurisdictions to lower its local tax burden. Essentially, AWS users are paying a portion of their fees to an offshore Amazon company. 

As AWS business grows here, its revenue and tax paid should increase. But less clear is whether the presence of local infrastructure will require it to report more of its revenue locally. The bigger picture tax situation could be affected by the OECD’s plans for a global tax agreement that could see a minimum tax rate being imposed on multinationals in the countries where they operate.

Peter Griffin

Peter Griffin

Peter Griffin has been a journalist for over 20 years, covering the latest trends in technology and science for leading NZ media. He has also founded Science Media Centre and established Australasia's largest science blogging platform, Sciblogs.co.nz.

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