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Amazon's newer business model

There's little question that more and more storage and computing will move out into the cloud over time. The question--well, one of them anyway--is where the economic scale points lie.

A couple of weeks back, announced an expansion of its Elastic Compute Cloud (EC2) service. The still-in-beta EC2 is a twist on the much-discussed, if rarely seen in the wild, compute utility whereby customers rent computing by virtual machine (VM)-hour; Amazon's EC2 infrastructure is based on a Xen hypervisor structure rather than running directly on physical hardware.

One implication of Amazon using VMs is that they can easily offer a variety of different VM sizes up to the size of the physical hardware. That was the most recent change announced. In addition to the default "Small Instance," users can now get "Large Instances" or "Extra Large Instances." These might be useful if, for example, you need to pair a heavyweight database instance with some lightweight Web services.

Another implication is that VM images, called Amazon Machine Images (AMI) in this case, can be archived and transported. This is analogous to VMware's virtual appliances. Amazon itself hasn't done much to jump-start an image marketplace at this point as VMware has. However, it does provide a mechanism for customers to post and publicly share AMIs and sees the opportunity for people to offer paid AMIs over time.

I bring this up because Emre Sokullo over at Read/Write Web has a post and table that does a great job of crystallizing why getting into Web services is such a big deal for Amazon. In short, Amazon's revenue is comparable to Google's. The difference is that, while Google is operating at a 29 percent profit margin, Amazon is under 2 percent. Which is probably about the best one can hope for with a big "mail order" retail operation.

Some may be wondering why Amazon is de-focusing and entering into something that is far from its DNA as an e-commerce service. To respond to that question, take a look at the table below, which compares some financial data of Internet bigcos:

Company Net Profit Margin (%) 2006 Annual Revenue ($M) Market Capitalization ($B)
Google 29.02 10,604.92 210
eBay 18.86 5,969.74 50
Yahoo 9.96 6,425.68 45
Amazon 1.77 10,711.00 37

I tend to use "Web services" to describe Amazon's offering, in part because Amazon also has a variety of pricing and other e-commerce products that fit more squarely into the "services" camp. However, another way to describe it is Hardware as a Service (HaaS), a term that seems to have been coined by Ed Byrne in 2006. Terminology aside, I agree with Ed that:

I think it will evolve into a H+SaaS [Hardware + Software as a Service] model where bundled solutions will be offered rather than just empty-shell machines. There's a business opportunity here for software companies to package and license their applications in the H+SaaS model, and charge on a per-user/per-domain basis.

We're already seeing this to a degree with Amazon's complementary S3 Storage as a Service model. For example, Jungle Disk offers data backup using Amazon's S3 as the backend.

To my mind, there's little question that more and more storage and computing will move out into the cloud over time. The question--well, one of them anyway--is where the economic scale points lie. In other words, will most software vendors find that it makes sense for them to deliver their own software as a service on their own hardware (i.e., the model), or will they effectively subcontract out the datacenter infrastructure stuff to the likes of Amazon?

The answer to that particular question has broad implications for datacenter and system design. An IT world in which we have a small number of mega-datacenters (as Sun's Greg Papadopoulos has postulated) would be strikingly different from a world in which more software is delivered over the network but from a much larger number of sites more similar in scale to today.