Dec 07, 2012 (08:12 AM EST)
Why Amazon's Cloud Business Is Like Kindle Sales

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10 Cloud Computing Pioneers
10 Cloud Computing Pioneers
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Amazon Web Services (AWS) had a coming out party of sorts when it staged its first partner and customer event, dubbed Re: Invent, and held in Las Vegas Nov. 27-29. The most revealing moments came when Amazon CTO Werner Vogels took the stage Nov. 29 to pitch questions at CEO Jeff Bezos.

In creating its infrastructure-as-a-service (IaaS) unit in 2002, Amazon did something both risky and bold. It concluded it had a new type of infrastructure behind its retail operation and further services could be created on it. Better yet, it could create a new service on an infrastructure optimized to work with end users. There were no cloud users back then. There were hosted service providers and managed service providers and colocation facilities. But letting people commission and control infrastructure on an hourly basis, paying as they go with a credit card, was unique.

Vogels started his conversation with Bezos by pointing out that the last time they shared a stage was at the announcement of Amazon's second-generation tablet, the Kindle Fire. This was a soft pitch, of course. Bezos picked up the cue and drew an analogy between the $159 Kindle and IaaS.

"One of the unusual things we do in the Kindle device business is we sell our hardware at near breakeven. We make money when people use the device, not when they buy the device ... If I buy the device and put it in my desk drawer and never use it, then Amazon doesn't deserve to make any money," said Bezos.

[ Want to know how Amazon drives down computing service prices? See Amazon Web Services Slashes Storage Prices. ]

Amazon Web Services uses the same principles, Bezos continued, closing the loop. "It's a pay-as-you-go service. We are not incented to get people to overbuy hardware and operate at low utilization rates," he said, taking a shot at traditional hardware businesses.

Furthermore, such an approach is a good discipline for any business because it will stay tuned to what customers actually need, not what they can produce. "Our point of view is if we can arrange things in such a way that our interests are aligned with our customers', then in the long term that will work out really well for customers and it will work out for Amazon," Bezos added.

In the same vein, he threw in a plug for how Amazon's tablet business is different from Apple's: "Likewise, it causes us to have the right kinds of behavior. If we're not making money when people buy the device, then we don't need people to be on the upgrade treadmill. We have people using 5-year old Kindle Ones and we're perfectly happy with that.

I find this analogy strained but still revealing of the core of AWS. Selling a hardware device is different from providing a cloud service, although the analogy works somewhat when the hardware device becomes a platform for the same vendor to sell services. That part's OK. The main point of these comments is that Amazon is not making money until its customers decide what has value to them in the form of an Amazon service. That's a major differentiator between Amazon and HP, Dell or IBM. And the fact that it sells hardware at breakeven is a major differentiator between Amazon and Apple. Point established.

Next, Vogels solicited Bezos to address the notion of staying focused on essential business services. "I'm always amazed that you talk about the notion of flywheels," he prompted.

To Bezos, a business must be built around building out long-term services, not chasing short-term profits with short-lived devices. "I frequently get the question, 'What's going to change in the next 10 years?' I almost never get the question, 'What's not going to change in the next 10 years?' I submit that second question is the more important of the two -- because you can build a business strategy around the things that are stable over time. We know the customers want low prices. We know that's going to be true 10 years from now. I can't imagine a customer coming up to me and saying, "I just love Amazon. I just wish the prices were a little higher. I just wish delivery would take a little longer." Invest in those things today (that will) pay dividends 20 years from now."

Bezos again closed the loop to show how this core Amazon ideal is part of AWS. "At AWS, the big ideas are also pretty straightforward. It's impossible for me to imagine 10 years from now someone would tell me, 'I love AWS but I just wish you were a little less reliable. I love AWS but I wish you would raise prices ... I wish you would innovate and improve APIs at a slower rate.'

"The big ideas in business are often very obvious but it's very hard to maintain a firm grasp of the obvious. But if you can do that, if you can continue to spin up those flywheels, and put energy into those things, like we do with AWS, over time, you build a better and better service for your customers," he said.

Concentrating on core competencies is not a new idea, but what Bezos said next sets up what must be the tension between and its AWS business unit. If you are setting up a new business, you can't be sure where you'll find the next "flywheel." Having gotten a new style of retail going online, had a chance to generalize upon it and move beyond retail into specific services based on the lessons learned.