On the Hook for Multi Million Dollar Web Hosting Tabs

Sun, 24th March 2019, 19:14

Initial public offerings (IPO) of companies venturing into the stock market can provide a great opportunity for outsiders to view the inner workings of many of today's new tech giants, providing insights to their corporate focus, and how they do business in general. Often buried within those IPO’s are revelations on the firm's web hosting expenses!

Pinterest’s recently filed IPO reveals it has signed a long-term contract with Amazon Web Services (AWS), requiring the social media giant to spend at least $750 million on Amazon Web Services by July 2023.  The contract, first signed in May 2017, had a balance of $441.1 million remaining as of December 31 last year to meet that minimum. That suggests Pinterest has spent approximately $308.9 million on Amazon's cloud in the last year and a half. Also noteworthy is that the May 2017 deal was an extension to a previous contract that Pinterest negotiated with Amazon:

"Cost of revenue for the year ended December 31, 2018 increased by $62.9 million compared to the year ended December 31, 2017. The increase was primarily due to higher absolute hosting costs due to user growth, which were partially offset by lower relative hosting costs due to the May 2017 amendment of our enterprise agreement with AWS," says the filing.

The filing also says that Pinterest paid $125 million to AWS in an initial commitment through June, 2018. Although Pinterest is not obligated to meet monthly cloud purchase minimums, the contract does stipulate full payment regardless of shortfall between actually usage and the $750 million mandated in the agreement.  There is also a termination clause allowing Pinterest to end its AWS deal early, provided it pays "liquidated damages" to Amazon. AWS hosts the majority of Pinterest's software and apps on its Cloud Hosting Service.

While the numbers at first seem staggering, it’s not uncommon for social media type startups to rely on public cloud-computing platforms, such as AWS and Azure. The platforms allow developers to rent minimal hosting capacity from the tech giants massive-scale data centers and add more computing capacity with the push of a button as demand increases.

Another company, ride hailing service Lyft, had buried within its IPO a contractual obligation to pay at least $300 million to Amazon Web Services (AWS) between January 2019 and December 2021.

Lyft committed to spending at least $80 million in each of the three years of the deal, with the stipulation that it will spend $300 million in aggregate overall. The S-1 filing said this figure was actually an addendum to an existing deal — in March 2018, Lyft agreed to pay AWS $150 million by June 2021. Then in January of this year the deal was again modified to its present terms. If Lyft's usage of Amazon's cloud doesn't hit or exceed that $300 million threshold, it'll have to pay the difference.  AWS hosts Lyft entire app and platform.

Then there is Snapchat. It’s parent company went public in 2017 and it was revealed that it was paying Google Cloud $400 million a year through 2022. Although the terms of Snap's agreement with Google allow Snapchat to use other cloud providers, it’s hard to imagine there is much appetite to do so. It's been rumored that the company recently recruited a inhouse data center specialist.

Proponents of public and hybrid clouds models claim that cloud computing allows companies to avoid or minimize up-front IT infrastructure costs, get their applications up and running faster, with improved manageability and less maintenance. It also enables IT teams to more rapidly adjust resources to meet fluctuating and unpredictable demand. Cloud providers typically use a "pay-as-you-go" model and are often billed as being cheaper than maintaining your own servers in a data center. Possibly so but often that's generally only true at small scales. At larger scales, the costs can quickly add up to be significant. Recently some large-scale web companies like Dropbox have actually moved from the public cloud back to their own servers. That however can also be a costly project that requires significant investment and commitment.

Moral of the story.. Well there isn’t one but for those of us with awesome web hosts to keep our sites humming along 24/7, it does kind of make us feel better and our web hosting cost seem trivial!