Amazon Cloud CEO Matt Jarman inherits a business at a crossroads with regard to artificial intelligence

In May 2023, Amazon An attendee asked CEO Andy Jassy at the annual shareholder meeting how the company is innovating in generative AI. OpenAI's ChatGPT has exploded, and the major tech companies have all been rushing to roll out products to compete in the emerging world of chatbots and image generators.

Jassy responded to the question by promoting Amazon Web Services, the cloud unit he helped launch 17 years ago, eventually turning it into the company's main profit engine. Under Adam Selipski's leadership, AWS was developing its own AI products and had the ability to provide critical infrastructure to other companies developing AI services, Jassy said.

“It's very early days in generative AI,” said Jassy, ​​who succeeded Jeff Bezos as CEO in 2021. “It's very high potential, and we're investing a lot in it and expect to be a leader.”

For Selipski, who took over AWS when Jassy was promoted, the days are quickly slowing down.

In the most significant change during Jassy's tenure at the helm of the company, Amazon announced last week that Selipski, 57, will exit AWS and will be succeeded by Matt Jarman, 48, a veteran AWS executive who most recently led sales and marketing.

The problem for Selipski, and the challenge for Jarman, is that Amazon has yet to emerge as a leader in generative AI despite pouring billions of dollars behind OpenAI competitor Anthropic and rolling out its own large language models, or LLMs. In the world of developers and among startups, the company is battling the perception that it is lagging behind its cloud competitors Microsoft And GoogleIn addition to OpenAI's lag in developing artificial intelligence tools.

After years of rapid expansion, growth at AWS slowed to 13% in 2023, down from 37% in 2021 and 29% in 2022, reflecting more conservative spending by companies on IT and cloud services. Amazon has been downsizing across the board, including at least two rounds of layoffs at AWS since last year.

AWS remains a leader in cloud infrastructure, but Microsoft is quickly closing the gap. AWS's market share fell to 31% in the first quarter of this year from 32% three years ago, while Microsoft Azure jumped to 25% of the market from 19% in 2021, according to Canalys. Google also holds a 10% share of the market, up from 7% in early 2021.

In the past few quarters, Microsoft has pointed to growing demand for AI tools as a catalyst for its momentum.

Jill Loria, an analyst at DA Davidson, told CNBC that Amazon has been “stuck” by the AI ​​boom.

“It allowed Microsoft Azure to get around them, which wasn't supposed to happen, and ultimately there was a price to pay for that,” Luria said, referring to Selipski's departure.

Jarman's choice for the top job “suggests that Mr. Jassy and perhaps Mr. Bezos believe he is the person most likely to help Amazon close out the lead and perhaps create a lead of their own,” said Luria, who recommends buying Amazon stock.

A source close to Amazon, who requested anonymity because he was not authorized to talk about the matter, described Jarman to CNBC as a “wartime” leader and said change was necessary to become more aggressive in artificial intelligence.

Jassy said in a memo to staff announcing the move that he and Selipski agreed years ago, when they were discussing the role, that Selipski “would likely do this for a few years, and that one of the things he would focus on during that time was helping prepare the next generation of leadership.” ”

Casey McGee, an AWS spokesperson, told CNBC in a statement that Selipsky will leave the cloud division in a “strong position.”

“AWS’s growth, innovation and profitability over the past three years speaks for itself, with AWS having achieved more absolute dollar growth on a quarterly basis in our numbers so far this year than any other cloud provider,” McGee said. AWS is an industry leader in security and reliability as well as the “comprehensive breadth and depth of our services,” he said.

Amazon's annual shareholder meeting, which took place virtually Wednesday, has arrived at a fraught time. It was held just days after Selipski's departure, and was overshadowed by AI-focused events at major tech companies.

Last week, OpenAI introduced GPT-4o, a faster model with improved text, video, and audio capabilities. Google followed suit the next day at its developer conference, where it rolled out the company's lighter, more efficient AI models. This week, Microsoft announced new computers equipped with advanced chips designed to run artificial intelligence features in the Windows operating system.

During a question-and-answer session on Wednesday, Jassy was asked twice about the status of Amazon's generative AI efforts. He said the company is “seeing a lot of momentum” in generative AI within AWS as it is now a multi-billion-dollar company based on annual revenue.

He reminded shareholders that Amazon owns Alexa, which was a popular consumer offering long before the latest chat software hit the market.

“If you don't think there's going to be a really broad personal assistant, have your head in the sand,” Jassy said, adding that the company is building a “more expansive” AI model to power Alexa. Amazon previously said it intends to use generative AI to make Alexa more conversational. CNBC reported on Wednesday that Amazon plans to charge a subscription fee for the more powerful version.

Garman joined Amazon in 2005 as an intern, and was hired full-time the following year as an early product manager at AWS, where he worked on the core computing service called EC2. He worked his way up to senior vice president in 2020, overseeing global sales, marketing and services.

In 2021, after Amazon announced that Jassy would take over as CEO from Bezos, many people expected Jarman to be named CEO of AWS. Instead, Amazon chose Selipski, who previously spent 11 years at Amazon but was running Sales forces Tableau software at the time.

Shortly after the transition period, the economy turned against AWS. Inflation began to rise rapidly, leading to a steady rise in interest rates and forcing companies to conserve capital. By mid-2022, Amazon was telling investors that it was “ready to help customers optimize their costs” because of the economic challenges they were facing. AWS acknowledged that it took short-term revenue exposure to maintain long-term customer relationships.

Then came ChatGPT. Microsoft-backed OpenAI launched its chatbot in November 2022 and watched it go viral. Months later, Microsoft invested billions more in OpenAI and became its exclusive cloud partner, giving Amazon's main cloud competitor a new competitive advantage.

Over the past year, Jassy has spoken enthusiastically about Amazon's opportunities in generative AI, whether to provide automated services to advertisers and sellers or to provide the technology within AWS to power cutting-edge models and workloads.

The company also boasted the success of its AWS Trainium and Inferentia chips, which Anthropic uses to build and train its models, a process often performed on Nvidia Graphics processing units.

“I don't know if any of us have seen a possibility like this in technology in a really long time, certainly since the cloud, probably since the Internet,” Jassy said on the company's first-quarter earnings call in April. About generative artificial intelligence.

But realizing this opportunity is a major hurdle.

It took AWS months to come up with an AI model that could conflict with ChatGPT. The company now offers its own LLM degrees as well as those offered by third parties, including one from Anthropic, which Amazon has backed.

Last year, Amazon launched Q, a chatbot for businesses. One AWS employee who used Q told CNBC that he felt frustrated because the chatbot would respond to inquiries with information that wasn't particularly relevant or valuable. The employee requested that his identity not be revealed because he is not authorized to speak on this matter.

AWS said its Q chatbot is gaining traction among a range of customers including Accenture, Toyota, GoDaddy and GitLab. Bedrock, which gives users access to AI models from Amazon and others, now has tens of thousands of customers and partners, the company said.

In the week before his departure, Selipsky made some changes to the Q team. He hired Dilip Kumar, a longtime Amazon executive who helped develop and launch cashierless payment technology, to oversee the “Amazon Q Business suite of services,” according to a memo sent to Staff and seen by CNBC. Kumar will report to Swami Sivasubramanian, Vice President of AI and Data at AWS.

A former AWS employee, who asked to remain anonymous in order to speak about private matters, said the company limited the ability of some employees to use artificial intelligence services such as its software tool SageMaker and data visualization tool QuickSight to work internally, citing security reasons. This practice, known as beta implementation, is commonly used in software companies so that employees can test products and services for bugs and to help make improvements.

AWS said all apps available to employees undergo a security review, but denied it restricted employees' use of Amazon's AI tools.

Despite all the AI ​​challenges, Wall Street continues to rally around Amazon, which last month reported better-than-expected first-quarter results and a more than 200% increase in operating income. Sales at AWS rose 17%, a modest acceleration compared to the past few quarters.

Amazon shares have risen 21% this year, outpacing the Nasdaq's 12% gain, after jumping 81% in 2023. The stock hit a record high earlier this month.

Jamie Myers, chief investment analyst at Laffer Tengler Investments, which owns Amazon shares, said he views the leadership transition at AWS as a “natural progression,” adding that Jarman is “always viewed as a successor.”

“AWS has always been about investing in growth,” Myers said, a strategy he said is unlikely to change under Jarman.

Jarman is viewed internally as a highly technical person who is well respected among engineers. At the time Jassy selected Jarman to lead the AWS sales organization in 2020, he was looking for a technical leader and someone who “knew everything inside out,” another former AWS employee said. Jarman's appointment to the role was widely viewed internally as a step toward preparing him to lead AWS, the person added.

In his memo to employees last week, Jassy noted Jarman's background “on both the product and demand generation sides” at AWS, noting that he brings “an unusually strong set of skills and experience to his new role.”

“I'm excited to see Matt and his outstanding leadership team at AWS continue to innovate our future,” Jassy said. “It's still early days at AWS.”

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

Correction: CNBC reported on Wednesday that Amazon plans to charge a subscription fee for a more powerful version of Alexa. An earlier version made a mistake back in the day.