They didn't have anything internal that had suitable features or quality to sell to the public so they built AWS using the knowledge they'd acquired from building those internal tools. I don't think that's out of the spirit of "sell your byproducts".

Also, in response to pg's post below, Amazon has increased its usage of AWS substantially in the last few years. The main website primarily runs on AWS, many individual services have been migrating to AWS, and S3 is heavily used internally for static storage. It wouldn't surprise me if Amazon was running 100% on AWS within the next few years. Or, you know, so I hear from rumors... <_<