Amazon's new cloud chief takes over a company facing pressure to keep up with AI advancements.

• The departure of Adam Selipsky from Amazon Web Services, announced last week, coincides with increased competition in the cloud unit from companies offering artificial intelligence services.
• D.A. Davidson analyst Gil Luria stated on CNBC that Amazon was taken by surprise by the rapid growth of generative AI technology.
• In 2021, AWS appointed Selipsky as its head, following the succession of Jeff Bezos as Amazon's CEO, with Andy Jassy taking over as CEO.

During the annual shareholder meeting in May 2023, CEO Andy Jassy was questioned about the company's innovation in generative artificial intelligence. With OpenAI's ChatGPT gaining popularity and major tech companies rushing to release products in the chatbot and image generator market, the topic of innovation in this emerging field was highly relevant.

Jassy highlighted Amazon Web Services, which he helped launch 17 years ago and turned into the company's primary revenue source, as a potential AI product development platform under the leadership of Adam Selipsky.

"Jassy, who became CEO in 2021, stated that the generative AI field is still in its early stages, but has great potential. He added that Amazon is investing heavily in it and aims to be a leader in the industry."

Quickly, the days passed for Selipsky after taking over AWS when Jassy was promoted.

Last week, Amazon announced a major change in Jassy's leadership at AWS, with Selipsky, 57, stepping down and Matt Garman, 48, taking over as head of sales and marketing.

Despite Amazon's significant investment in generative AI through its partnership with OpenAI competitor Anthropic and the development of its own large language models (LLMs), the company is facing challenges in emerging as a leader in this field. In the developer community and among startups, Amazon is perceived as lagging behind its cloud rivals and falling behind OpenAI in the development of AI tools.

In 2023, AWS's growth rate slowed to 13%, a significant decrease from the previous year's 37% and 29%, indicating a shift towards more cautious spending on IT and cloud services by businesses. Amazon has undergone two rounds of layoffs at AWS since the previous year.

While AWS still leads in cloud infrastructure, Microsoft is rapidly closing the gap. AWS' market share decreased to 31% in the first quarter of this year from 32% three years ago, while Microsoft Azure increased to 25% from 19% in 2021. Additionally, Google has also gained market share, accounting for 10% of the market, up from 7% in early 2021.

Microsoft has attributed its recent growth to the increasing demand for AI tools.

D.A. Davidson analyst Gil Luria stated on CNBC that Amazon was taken by surprise by the rapid growth of generative AI technology.

Luria stated that Selipsky's departure resulted in Microsoft Azure outpacing their competition, which should not have happened, and ultimately there was a cost for that.

Luria recommends buying Amazon shares because Garman's selection for the top job suggests that Jassy and Bezos believe he is the best candidate to help Amazon close the lead and potentially establish a lead of their own.

'Next generation of leadership'

An unnamed source close to Amazon described Garman as a "wartime" leader and said that changes were necessary to become more aggressive in AI, according to CNBC.

Jassy and Selipsky had agreed years ago, during their discussion of the role, that Selipsky would likely take on the position for a few years and focus on preparing the next generation of leadership.

AWS spokesperson Casey McGee stated to CNBC that Selipsky is departing from the cloud division on a positive note.

"AWS has experienced significant growth, innovation, and profitability over the past three years, with our numbers showing that we have produced more absolute dollar growth quarter-over-quarter this year than any other cloud provider. Additionally, AWS is leading in security and reliability, as well as the "overall breadth and depth of our services," McGee stated."

The Amazon annual shareholder meeting, held virtually on Wednesday, was held at a critical juncture. It occurred shortly after Selipsky's departure and was eclipsed by AI-centric events at leading tech companies.

This week, Microsoft unveiled new computers equipped with advanced chips for running AI features in Windows.

In a Q&A session on Wednesday, Jassy was questioned about Amazon's generative AI initiatives. He stated that the company is experiencing significant growth in this area, with AWS generating billions of dollars annually based on revenue.

Amazon, which owns Alexa, has been a popular consumer offering long before the latest chatbots hit the market.

Jassy stated that if someone doesn't believe in the existence of a broad personal assistant, they are burying their head in the sand. He added that the company is developing a "more extensive" AI model to power Alexa. Previously, Amazon has stated its intention to use generative AI to make Alexa more conversational. On Tuesday, CNBC reported that Amazon plans to charge a subscription fee for the more powerful version.

In 2005, Garman began working at Amazon as an intern and was later hired full-time as an early product manager in AWS, where he focused on the EC2 core computing service. He progressed to the position of senior vice president in 2020, overseeing sales, marketing, and global services.

In 2021, after Jassy was named CEO of Amazon, many speculated that Garman would be named CEO of AWS. However, Amazon chose Selipsky, who had previously spent 11 years at Amazon but was running Tableau Software at the time.

Rough patch

The economy shifted against AWS, causing inflation to rapidly increase and forcing businesses into capital preservation mode. By mid-2022, Amazon informed investors that it was "prepared to help customers optimize their costs" due to the economic challenges it was facing. AWS recognized that it was taking a short-term revenue hit to maintain customer relationships over the long term.

In November 2022, OpenAI, backed by Microsoft, released a chatbot that quickly gained popularity. Months later, Microsoft invested billions more in OpenAI and became its exclusive cloud partner, giving Amazon's chief cloud rival a new competitive edge.

In the past year, Jassy has frequently discussed Amazon's potential in generative AI, including its ability to provide automated services to advertisers and sellers and to run complex models and workloads through AWS.

The company has bragged about the achievements of AWS's Trainium and Inferentia chips, which Anthropic has utilized to develop and train its models, a task typically accomplished on graphics processing units.

Jassy stated on the company's first-quarter earnings call in April that it was unlikely that any of them had witnessed a technological possibility like generative AI in a long time, possibly since the cloud or the internet.

But realizing that opportunity is proving to be a major hurdle.

Amazon-backed Anthropic's LLM is now available alongside AWS's own and those from third parties, after months of development.

An AWS employee who used Amazon's Q chatbot for businesses last year found it underwhelming because the chatbot's responses were not particularly relevant or valuable. The employee requested anonymity as they were not authorized to discuss the matter.

Amazon's Q chatbot has gained popularity among various clients, including Accenture, Toyota, GoDaddy, and GitLab. Bedrock, a platform that enables users to access AI models from Amazon and other providers, now boasts tens of thousands of customers and partners, according to the company.

Before leaving, Selipsky made changes to the Q team. He appointed Dilip Kumar, an Amazon executive who helped develop and launch its cashierless checkout technology, to lead the "Amazon Q Business set of services." Kumar will report to Swami Sivasubramanian, vice president of AI and data at AWS.

An AWS employee, who requested anonymity to discuss confidential matters, stated that the company has restricted the usage of certain AI services, including SageMaker and QuickSight, for internal work purposes, citing security concerns. Dogfooding, a common practice in software companies, allows employees to test products and services for errors and make enhancements.

AWS stated that all applications accessible to employees undergo a security review, but it maintained that it does not limit staff's utilization of Amazon's AI tools.

Wall Street remains optimistic about Amazon, which recently reported better-than-expected first-quarter results and a more than 200% increase in operating income. AWS sales also saw a modest acceleration, rising by 17% last month.

This year, Amazon shares have increased by 21%, surpassing the 12% increase in the Nasdaq, and following a 81% rise in 2023. The stock reached a new record earlier this month.

Garman, a senior investment analyst at Laffer Tengler Investments, which owns shares of Amazon, has been viewed as a successor to the leadership transition at AWS, according to Jamie Meyers, a senior investment analyst at Laffer Tengler Investments.

According to Meyers, AWS has consistently prioritized growth investment, a strategy he predicts will remain unchanged under Garman's leadership.

Garman is viewed internally as a highly technical individual and is well respected among engineers. When Jassy appointed Garman to lead the AWS sales organization in 2020, he was looking for a technical leader who had a deep understanding of the product and its inner workings. Garman's appointment was widely seen internally as a step toward preparing him to eventually lead AWS.

Jassy highlighted Garman's expertise in both product and demand generation aspects of AWS in his memo to staff last week, stating that he possesses an unusually strong set of skills and experiences for his new role.

"Jassy expressed excitement about Matt and his exceptional AWS leadership team shaping our future, stating, "It's still early days in AWS.""

— CNBC's Jordan Novet and Kate Rooney contributed to this report.

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