November 16, 2006 4:00 AM PST

Amazon: Utility computing power broker

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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, 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 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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