Pinterest has tied itself to Amazon Web Services. Is that really a good idea?

With its cheap cloud computing service, Amazon has undoubtedly helped software startups grow much faster than if they had to build the IT from scratch.

But Amazon Web Services (AWS) has also become a big liability, at least according to IPO documents two major unicorns recently filed with the Securities and Exchange Commission. In S-1 filings, both Lyft and Pinterest both cited AWS as a major risk to their businesses.

“We depend on Amazon Web Services for the vast majority of our compute, storage, data transfer and other services,” according to Pinterest’s S-1. “Any disruption of, degradation in or interference with our use of Amazon Web Services could negatively affect our operations and harm our business, revenue and financial results.”

“Our business relies on the availability of our services for Pinners and advertisers,” the filing continued. “If Pinners or advertisers are not able to access our service or platform or encounter difficulties in doing so, we may lose Pinners or advertisers. The level of service provided by AWS could affect the availability or speed of our services.”

You might think that this is all a formality. Perhaps Lyft and Pinterest are just being overly cautious. But here’s the issue: in March 2017, AWS suffered a major global outage, which caused many major websites to go offline. Apparently, an Amazon employee, who was trying to debug a billing program, mistakenly shut down a number of servers, producing a chain reaction.

That one employee could (inadvertently) cause so much damage must have particularly unnerved companies like Lyft and Pinterest, whose very business depends on AWS…you know, working.

In many ways, AWS has been a godsend to startups. The company provided cash strapped startups with a lot of cheap computing power, allowing them to validate their technology a lot faster and cheaper than what was previously possible. Today, in addition to Lyft and Pinterest, unicorns like Airbnb, NextDoor, and Slack use AWS.

AWS, and cloud computing in general, has profoundly impacted venture capital itself, according to a study by researchers from Harvard, MIT, and California Institute of Technology.

“The introduction of cloud computing services in the mid 2000s allowed Internet and web-based startups to avoid large initial capital expenditures and instead ‘rent’ hardware space and other services in small increments, scaling up as demand grew,” the authors wrote in an article published in Harvard Business Review.  “Cloud computing made the early ‘experiments’ for these firms significantly cheaper.”

AWS provided startups so much cost savings that these companies needed much less early stage venture financing to validate a technology. The study estimated initial funding for software firms fell 20 percent because of companies like AWS.

But AWS’ lower costs apparently come with a tradeoff. Placing your entire computing operations with a company that’s predominantly an online retailer, not a pure play IT player, carries risk, as AWS proved in 2017.

Take a closer look at Pinterest’s S-1 filing and something even more interesting emerges. According to the document, Pinterest struck a new agreement with AWS in May 2017, less than two months after the major outage.

“Under the agreement with AWS, as amended by an addendum entered into in May 2017, in return for negotiated concessions, we currently are required to maintain a substantial majority of our monthly usage of certain compute, storage, data transfer and other services on AWS.

This addendum is terminable only under certain conditions, including by either party following the other party’s material breach, which may be the result of circumstances that are beyond our control. A material breach of this addendum by uscould carry substantial penalties, including liquidated damages.”

Here’s how I read the passage: Because of the outage, Pinterest was able to secure more favorable terms, likely price discounts, from AWS. But in return, Pinterest becomes more closely bound to AWS. For Pinterest, any effort to end its contract with AWS or to reduce its dependence on it will carry steep financial consquences.

Pinterest is apparently taking a big risk here. Should AWS go down again, the company might have little choice but to remain with the service.

For better or worse, Pinterest has hitched its wagon to Amazon.

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