Pay by the Drink

By Doug Bartholomew Print this article Print

With its Simple Storage Service and Elastic Compute Cloud, Amazon is blazing a trail to Web services and mixing it up with the likes of IBM and Sun — and maybe even Microsoft and Google. 

Pay by the Drink

If ever there was a business that needed shaking up, it’s the cozy world of enterprise computing. Every year, companies large and small spend billions of dollars on IT infrastructure and expert staffs to build and maintain complex systems. Software licensing, hardware integration, power and cooling, and staff training and salaries add up to a massive sum for an infrastructure that may or may not be used to its full capacity.

Then came the idea that companies could pay for computer processing “by the drink”—that is, pay for each transaction, minute of server power or megabyte of data stored. This approach, which is generally known as utility computing but also includes SaaS, lets companies use and pay for computing resources as needed, in the same way they use telephone and electric services.

The goal is to maximize the efficient use of computing resources and minimize user costs. Ideally, users can dial up or dial down usage in real time depending on operational demands. However, for several years, utility computing remained more of a concept than a reality, according to Forrester’s Staton.

What makes Amazon’s online computing services different from typical utility computing is that the company already has the infrastructure in place to provide these services.

“What Amazon is doing is cloud computing—they already have an infrastructure, with utility billing as a byproduct of that resource,” Staton says. He defines cloud computing as “a set of highly scalable, Internet-accessible infrastructure resources capable of hosting end-customer applications.”

In Amazon’s case, there is no doubt about the infrastructure being in place and ready for action: The company invested more than a dozen years and $2 billion assembling its network of servers and online resources for its e-commerce business. The infrastructure was designed with sufficient capacity to handle the most prodigious holiday traffic spikes.

This past holiday season, Amazon’s e-commerce site handled customer orders for a whopping 5.4 million items on Dec. 10th alone—more than 60 items per second. Its fulfillment network shipped 3.9 million units in a single day. Nintendo’s Wii game systems flew out the doors at an incredible clip—17 per second—when the coveted games were in stock.

Amazon’s e-commerce success hasn’t gone unnoticed on Wall Street. The company’s shares last year soared 135 percent, fractionally better than tech darling Apple’s and nearly three times the stock-value growth of search juggernaut Google.

Both revenue and profit spurted last year, with sales up 39 percent (from $10.7 billion in 2006 to $14.8 billion in 2007), and net income up 150 percent (from $190 million in 2006 to $476 million in 2007). Although its Web services foray has yet to be viewed as a major revenue contributor, Amazon’s computing-services revenues range from $46 million to $92 million, analysts estimate.

Unlike conventional software vendors that must build vast data centers to get into the SaaS business, Amazon is tapping its existing—and often underused—infrastructure. “Amazon has a lot of capacity that sits idle for a lot of the year,” AWS’ Selipsky says. It’s as if a thoroughbred racehorse, restricted to running in cheap claiming races for 50 weeks of the year, suddenly was spurred on to compete in the Kentucky Derby.

Amazon has long been hip to the idea of making a buck off its various e-commerce systems. Nearly one-third of Amazon’s revenue comes from third parties, such as merchants that use its various technologies. “This is a multibillion-dollar business for us,” Selipsky says.

This article was originally published on 2008-02-21
Doug Bartholomew is a career journalist who has covered information technology for more than 15 years. A former senior editor at IndustryWeek and InformationWeek, his freelance features have appeared in New York magazine and the Los Angeles Times Magazine. He has a B.S. in Journalism from Northwestern University.
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