Amazon: Utility computing power broker

Not content with being a powerful online commerce company, Amazon is intent on reinventing itself around Web services.

Utility computing--the notion of paying for Internet-delivered computing services by the drink--has enlisted an unexpected adherent: online retailer Amazon.com.

The likes of hardware makers IBM, Sun Microsystems and Hewlett-Packard have preached the benefits of utility computing for years. During that time, Amazon has been quietly putting the idea into practice. Its Amazon Web Services business essentially opens up the online store's computing guts to outsiders, giving software developers access to its retail services, such as fulfillment and commerce, as well as to computer processing and data storage.

So rather than buy and run an e-commerce package or a server farm, programmers can tap into Amazon's infrastructure over the Internet and pay for it based on usage, much like they do with electricity or other utilities.

"One of the things that stands out about Amazon is our willingness to plant these seeds and grow these trees and spend some time doing it," Amazon CEO Jeff Bezos said. "We think we understand what Web-scale computing will need, and we'll be well-positioned in a high-volume, low-margin business."

Started in 2002, Amazon Web Services now has about 200,000 developer customers, and the company is actively investing in it, with an eye toward a long-term payback. Its goal: to establish a separate line of business that builds off of Amazon's technical expertise and mimics the economic model of its retail business.

Amazon's game plan became clearer over the past year, as it expanded its roster of Web services and top executives hit the road to "evangelize" the business.

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Video: Amazon.com CEO talks Web services
Bezos describes the e-commerce giant's hopes for offering computing and retail services to developers.

Many see the retail giant as competing with traditional computing vendors and, potentially, with large-scale Web providers such as Google, eBay and Yahoo.

"Most of the big tech vendors--including IBM, HP and Sun--offer basic computing infrastructure as a pay-as-you go utility. But I think at the moment, they're being outmaneuvered by Amazon Web Services," said Nicholas Carr, a business writer whose book "Does IT Matter?" argues for the rapid adoption of outsourced utility computing services.

Unlike Amazon, traditional technology vendors typically view utility computing as an adjunct to an existing corporate IT business, rather than a standalone line of business, he noted.

"Amazon is coming at it fresh, without any baggage. As a result, it's been able to target the current sweet spot for utility computing--startups and smaller companies that have Web-based businesses and need highly scalable systems," Carr said.

A natural extension?
As ambitious as Amazon's vision is, some financial analysts have voiced concern over the amount of the company's technology investment, $2 billion to date, part of which is spent to run and develop Amazon Web Services.

Bezos responds that he's just thinking ahead. Amazon Web Services is like previous forays into new areas, such as its international expansion or its move to sell products other than books and music. Between three and seven years passed before these showed "meaningful financial results," he said.

The first Web services released by Amazon gave developers access to the data generated on its retail site through an application programming interface (API). A Web site developer could, for example, pull book price information from Amazon and eBay and present it to shoppers.

In the past several months, however, the company has fired up two generic computing services that do not have an explicit tie to its retail site. These services directly tap into the idea of utility computing.

Amazon Elastic Compute Cloud (EC2), launched as a beta in August, allows outsiders to rent Amazon's servers per hour of running time.

Its Simple Storage Service (S3), released in March, is the same idea for data storage. Other Amazon Web Services enable developers to write applications that use the company's huge distribution centers for order fulfillment or that use Amazon's setup to reliably send messages between computers.

Its Mechanical Turk automates the process of finding outsourcers to handle small jobs, such as sorting through invoices to spot problems that computers have trouble finding.

The introduction of the latest computing services, although still in beta, caused a buzz among developers, particularly those at smaller Web companies. The pay-as-you-go scheme can obviate the need to purchase computing gear, hire people and deal with bandwidth providers.

SmugMug, for example, will save $500,000 a year by using Amazon S3 and, potentially, a million dollars next year, said the photo-sharing site's CEO and chief geek Don MacAskill. Other users include Second Life creator Linden Labs, which uses Amazon Web Services to offset the spike in traffic it gets when users download regular software updates for the virtual world.

Jeff Bezos
Credit: Amazon
CEO Jeff Bezos says Web services will
be a "financially meaningful business."

On the surface, Amazon--best known for its consumer services--is an unlikely provider of basic computing services, such as servers by the hour or reliable messaging.

But Bezos argues that Amazon is a natural in the emerging utility computing world. It has been honing its skills in large-scale technology operations for 11 years, and it has invested billions of dollars in its setup. Why not offer that infrastructure to others while it's idle?

"To run this application called Amazon.com, you can see (that) the kinds of things that we are exposing today, like Elastic Compute Cloud and Simple Storage Service and Mechanical Turk, are the kinds of things we needed to invent and build to be able to run our own business with a really good cost structure," he said.

In effect, what Amazon is doing is taking its capital expenditure on technology infrastructure and offering it on a variable basis to outsiders, Bezos said during a talk at the Web 2.0 Summit last week.

Building the ecosystem
RedMonk analyst Stephen O'Grady said the Amazon Web Services initiative is a bit unexpected but makes sense, on consideration. After all, a company that operates massive data centers should be able to get a better deal on hardware purchases than an individual or a tiny start-up.

"What this comes down to is really economies of scale," O'Grady said. "This is just the hardware equivalent of software as a service."

The price of software has been brought down heavily by open source and hosted application services, he noted. But hardware prices haven't seen the same "disruptive influences," he said.

"If you sit down and do the math, in many cases it will be cheaper to get hardware from somebody who can buy hardware a lot cheaper than you can," O'Grady said.

O'Grady has dabbled with Amazon Simple Storage Service and has received monthly bills for tiny sums like 17 cents--hardly worth the trouble and cost of sending out a bill.

"I've always thought that high-volume, low-margin businesses are more defensible."
--Jeff Bezos, Amazon CEO

But Amazon's Bezos is OK with that, at least for now. What's more important, he says, is nourishing the "ecosystem" of third-party developers--something that all vendors, from Salesforce.com to IBM, understand is vitally important.

With a healthy partner network, large computing-platform vendors can supplement their lineups and generate revenue. Each time a developer uses Amazon Web Services, for example, Amazon charges for those services or it generates more traffic to its retail site.

"We're not going to make money off somebody who we are billing 17 cents a month--that's very clear," Bezos said. "But what's happening is that person is becoming educated about our offerings, they're understanding them, (and) they're telling other people."

Ultimately, Amazon wants to build up a massive partner network of tens of thousands of third-party outfits, ranging from corporations to developers and even hobbyists. "I've always thought that high-volume, low-margin businesses are more defensible," Bezos said.

Keeping services cheap and easy to consume in small increments encourages these Amazon partners to experiment with utility computing-like services such as EC2 and S3, which represent a new way of doing things, Bezos added.

Developers, particularly at start-up companies, tend to be technology consumers who are the first to try new things--which is one reason that Amazon is catering to them with its Web services.

That Web start-up clientele is particularly active right now, but that could change rapidly, as people saw in the dot-com bust.

Conversely, if Amazon saw a huge spike in Web services business, that demand could tax its computing infrastructure, which also underpins its Web site, Carr noted.

"Amazon's business seems to be highly dependent on the health of the Web start-up sector," Carr said. "If that sector should falter, it wouldn't be pretty."

Bezos says over time, a whole industry will form around hosted Web services, with Amazon as a viable supplier.

"I believe this is a big deal," he said. "I think a lot of companies over time will be involved in this, because great industries are usually not built by a single company."

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