How to Turn Cloud Computing Into Big Business—A Peek Inside Amazon Web Services

3/5/09Follow @gthuang

On Tuesday night, I attended an intriguing event in the Washington Technology Industry Association’s cloud computing series, on “Scaling Into the Cloud with Amazon Web Services.” It was held at Amazon’s Beacon Hill headquarters in Seattle, in a room with gorgeous, sweeping views of the downtown skyline. The talks, given by Amazon and two prominent local startups—Bellevue-based Smartsheet and Seattle-based Picnik—provided an inside look at Amazon’s cloud computing business, how it works, and how its customers are using it to help run their own companies. (Xconomy has reported on some other local startups’ experiences with Amazon’s Web services here.)

Adam Selipsky, a vice president of Amazon Web Services (AWS), began by giving an overview of the company’s strategy and thinking about cloud computing. Selipsky joined Amazon in 2005 (previously he was a vice president at Seattle-based RealNetworks and a Harvard University alum), and he oversees many aspects of the business, including developer support, product strategy, and product management. “We found ourselves in the middle of a new industry,” he said. “About a year and a half ago, the term ‘cloud computing’ emerged around us…I’ve come to know, love, and adopt ‘cloud computing.’”

As a pioneer in the field, Amazon had been experimenting with Web services since 2002. Selipsky described the cloud computing concept as “individual components that talk to each other at the edges, but have hard shells.” So when you go to a webpage to buy a Harry Potter book, say, what you’re seeing is the result of 200-300 online components coming together to render that page. To make its retail sites super-reliable, Selipsky said, Amazon spent years “building modular, loosely-coupled infrastructure” to handle things like spikes in demand and quiet periods.

It was only natural that Amazon, once it figured out how to do it, would sell its service to developers and IT professionals. “Amazon is fundamentally a technology company,” Selipsky said, “not a bookseller, not a retailer.” As he explained, developers want an Internet service—whether it’s for hosting their website, backing up files, or processing queries and orders—that is reliable, scalable, fast, easy to use, and cheap. Instead of investing upfront in hardware, servers, and coordinating a large team, developers can use Amazon Web Services to gain access to storage and computing via the Internet cloud. “Our core tenet was, we wanted to level the playing field and make our pricing accessible to anyone,” Selipsky said. “Every time we get cost improvements, we lower our prices. And pass those savings on to customers.” (He didn’t give specifics to back this up, but Amazon charges on the order of 10 cents per hour of computing per server.)

Amazon Web Services started out in 2006 with a data-storage service, called S3. It then progressed to doing computing and processing with its Elastic Compute Cloud (EC2). Now it provides companies access to online database, content delivery, and secure payment services—as well as outsourcing of tasks through what it calls Mechanical Turk. That service uses the skills of people worldwide who sign up to complete small tasks (like classifying photos) for small payments.

And the business has taken off. Although Web services represented less than 3 percent of Amazon’s total revenue as of 2008, the bandwidth (number of bits per unit time) consumed by its Web services division has surpassed the demand from its better-known retail websites as of 2007. Selipsky added that Amazon Web Services has tripled its customer base in less than three years—climbing from 160,000 customers in the first quarter of 2006 to 490,000 by the end of 2008. Its biggest customers include The New York Times, ESPN, pharmaceutical giant Eli Lilly, and WordPress, the open source publishing service.

Selipsky’s goal is to turn cloud computing into a much bigger business for Amazon. In order to do that, he says his team is focused on key issues like security, scalability, and performance (things like speed and reliability). “AWS eliminates the heavy lifting, so you have more time to focus on your business,” he says. One important growth area: big companies have started to use the service more in the past year. “That’s been really interesting to see,” Selipsky says. (That would seem to be a key to becoming a major profit center for Amazon—but big companies are also a harder sell, especially on issues like security.)

But mainly it has been startups and smaller companies that have been more aggressive in taking advantage of Amazon’s cloud computing service. Todd Fasullo, director of operations at Smartsheet (and formerly of Onyx Software), spoke about his company’s experience using Amazon Web Services to handle image rendering, file storage, and outsourcing of tasks. Smartsheet was founded in 2005 and makes collaborative software for project management. “There’s no sales negotiation, and no long-term contracts,” he said. “We really love the model.” Fasullo noted that the cost of using Amazon’s S3 cloud storage was only one-twentieth of what it would have cost to use Smartsheet’s hosting provider.

Mike Harrington, the co-founder of online photo-editing service Picnik (previously he co-founded Valve Software), echoed the sentiment. “We’re pretty conscious of where we spend our money and how we grow. [AWS] helps us smooth out the curves as we grow,” he said. Picnik is bootstrapped and has 16 employees. Founded in late 2005, the company rolled out one of the original Facebook applications—and that has led to major challenges in dealing with spikes and lulls in traffic. Harrington says Picnik is now getting 9 million unique visitors (and 30 million visits) monthly, and its daily peak traffic is seven times its daily low.

“It’s been a great tool to help solve problems,” Harrington says of Amazon’s cloud computing services. “EC2 and S3 have been a security blanket. Without it, I’m not exactly sure what we would have done.”

Stay tuned for WTIA’s next cloud computing event, which will be at Google Seattle (in Fremont) on March 30. It will be interesting to watch how Amazon’s competitors in cloud computing—not just Google, but Microsoft, VMware, and others—adapt their technologies and business models to capture some of the fast-growing developer market, as well as go after bigger companies’ IT needs.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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