Amazon at Your Service

Thousands of businesses from around the world outsource their e-mail management chores to Inc., a Blacksburg, Va., company that deals with everything from maintaining mail programs to filtering spam and squishing viruses for clients. runs its own operations on a couple of hundred servers at data centers in Virginia and Texas owned by Rackspace Managed Hosting, based in San Antonio, Texas. But when needed to add short-term storage capacity and build more redundancy into its backup of primary data earlier this year, it turned to another vendor: Inc.

Amazon’s new Simple Storage Service, or S3, has lived up to its name, says Bill Boebel,’s cofounder and chief technology officer, even though the numerous small files typical of e-mail create inefficiencies that conventional backup systems don’t handle very well, and is sending S3 more than a terabyte of data each week. “Amazon let us move faster than anything else out there,” says Boebel. Working with a traditional hoster might have meant writing a custom application to accept the e-mail data, but Amazon required only a relatively simple interface to communicate with its new customer. “They provided back-end storage that we could build on top of,” adds Boebel.

To host the development effort required to build the new storage interface, used another recently introduced Amazon service, a pay-per-usage computing environment called the Elastic Compute Cloud, or EC2, and the company continues to use EC2 for computing tasks related to storage backup. Says chief executive Pat Matthews, “We love Rackspace; they are our biggest strategic partner. But Amazon met our needs for this job, and we cut our data backup costs 75 percent overnight.” S3 costs 15 cents per gigabyte of storage per month; Amazon’s posted prices for EC2 start at ten cents per hour.

Quicker, easier and cheaper—that’s the message Amazon wants companies to hear about its new offerings as it challenges the hosting industry’s long-dominant pricing and service models. The e-commerce pioneer is renting out the muscular infrastructure it has developed to power its own business over the last eleven years (sales for the third quarter of 2006: $2.3 billion), in order to provide storage, computing and other services to all comers.

If the strategy pays off, Amazon will have realized a dream cherished by many CIOs: taking its own internal technology to market as a commercial product. The direct financial return to Amazon in the near term is likely to be minimal, as CEO Jeff Bezos told BusinessWeek in November. But there is value in running the company’s data centers and related businesses at levels closer to full capacity, and in positioning Amazon as a leading provider of Internet services to other companies.

“Amazon is a technology company,” says Adam Selipsky, vice president of product management and developer relations for Amazon Web Services, the unit of the Seattle retailer that is responsible for the new offerings. “We built up this platform, this series of technologies. Now we are allowing other companies to run inside Amazon data centers, so we can fully pass along the economies enabled by our platform, whether to one-man developers or large corporations.”

Amazon’s services go beyond the bounds of traditional hosting and what is sometimes called utility computing, says Selipsky, because of the wealth of engineering and experience the company brings to its customers. Need storage capacity, or a few dozen servers to test a new application or power your business? Just access Amazon via the Internet and pay as you go. No contracts, no guesswork on capacity, no renegotiation to accommodate more or less usage than planned. This is hardware as a service, with all kinds of expertise baked in.

“It’s not just about a whole bunch of capacity,” says Selipsky. “We are giving customers the ability to work at Web scale”—that is, to handle large amounts of online data from diverse sources in a near-real-time environment. Says Selipsky: “We have been doing this a long time, so you don’t have to make the same mistakes we did. is one of the true Web-scale applications out there, and it is non-trivial to build something like that.” Even if a company has the capital and engineering to create such a platform itself, he says, dealing with multiple versions of software, legacy hardware and so on, make it a complicated and daunting task. “We take out the complexity, you pay as you go, and that turns out to be very appealing,” adds Selipsky.

It is an approach that will change the hosting business, says Daniel Golding, a vice president with Tier 1 Research, a Minneapolis-based firm that covers technology, Internet and telecom companies. “The long-term contracts that have defined the industry are dinosaurs,” he says. “Hardware as a service is the way of the future. Managed hosting vendors will bill on usage, or customers will pay to guarantee a certain amount of computing capacity. This whole idea—the fast-food approach—is going to spread throughout the industry.”

But Amazon may not end up being the big beneficiary of the trend it is helping to launch. Golding doubts that enterprise customers will be comfortable dealing with a retailer that lacks experience serving large business customers to host their core applications and information (large corporations, including Microsoft Corp. and Xerox Corp., have been early customers of Amazon’s services). S3’s streamlined storage could make it attractive, he says, “at least until there’s more competition using the pay-by-the-drink model.” Golding expects that more established players, such as IBM Corp. and Savvis Inc., will eventually enter the market, directly or as hosts to smaller service providers.

“When the big hosters divest the idea of locking up revenue with long-term commits, the shift is inevitable,” Golding says. “The larger story is what this means for the industry, not what it means for Amazon. Frankly, I’m not even sure they should be doing this from the point of view of their own business.” Wall Street, already nervous about Amazon’s thin margins and high price-to-earnings multiple, did not reward the company for its move; shares are down about 20 percent from the start of 2006, and almost half the sell-side analysts following the company have neutral to negative outlooks on the stock.

Laurie McCabe, an analyst with AMI Partners Inc., agrees that hosting companies will have to pay attention to the Amazon model. “The bottom line is that a lot of the bigger names have given lip service to on-demand service, but the pricing has not been quite so utility-like,” she says. “They will have to keep close tabs on this.” While Amazon may end up as something of a niche player, providing computing power for software developers and startups, she says, “there’s a lot of money in that kind of development.” And, she adds, Amazon’s expertise in offline services like fulfillment may give it some competitive advantages against more traditional hosting vendors, who lack that kind of business-process experience.

But Amazon has bigger plans for its services. So far, says Selipsky, demand for services is varied, and stronger than expected. “The sheer variety of what people are doing is surprising,” he says. “We’re building these things very horizontally, so they are broadly applicable.” At least some early customers believe the services will succeed in a big way. “Amazon specializes in high-volume, low-margin businesses,” says Barney Pell, founder and CEO of San Francisco-based Powerset Inc., a much-buzzed-about new search-engine company that uses both EC2 and S3. “They’ve been very responsive to our needs, and I think they will win over a lot of people.”

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