Amazon’s Bigger, Faster, Better Superhighway to the Cloud

Last month I wrote an article for the E-Commerce Times called “Amazon Spreads its Wings.” In it, I talked about the many ventures that Amazon has embarked on, including its rewriting of the rules of publishing and retail sales.

I also discussed how Amazon was smart enough to realize that it could do something “extra” with its massive computer power, mainly renting it out to companies of all sizes so that they would have this enormous cloud at their disposal. Today, Amazon has thousands of companies renting its massive cloud infrastructure.

Amazon Web Services

The division that Amazon established through which to rent its excess computer capabilities is called Amazon Web Services. I’m not sure at what point Amazon came to realize that the giant computer capabilities that it created for its book, retail sales and other services could be put to better use, but Amazon probably took major competitors like Microsoft and Google by surprise with the intensity and ubiquity of its e-highway.

Just consider how many startups have the need of somewhat deep computer services. Starting a company is a rather onerous task — I’ve started a few — without considering the capital that a startup must invest in computers and servers. But now companies around the world merely have to rent computer and server time from Amazon at a considerably cheaper price than what they would have to pay for entire installations.

It seems to me that Google and Microsoft have a great deal of catching up to do if they want to compete with the digital behemoth that Amazon has created.

Need for More Storage and Servers

I don’t think that anyone would doubt that, as the usages of technology grow, we are going to need greater and greater storage and server capabilities. In my opinion, the present day pioneer in this effort is Amazon.

Amazon has a giant head start over Google and Microsoft. Only last June did Google fully implement a service to compete with Amazon Web Services. Microsoft announced its Windows Azure platform in October of 2008. A.W.S., on the other hand, was started in 2006. This gives Amazon a two-year jump over Microsoft and a considerable head start over Google.

There’s probably plenty of room in the field, considering how many new companies are formed worldwide each year. Still, it must be comfortable to have a head start over the competition.

Amazon Web Services

A.W.S.’ website provides an overview of its services with the following statement: “Amazon Web Services offers a complete set of infrastructure and application services that enable you to run virtually everything in the cloud: from enterprise applications and big data projects to social games and mobile apps. AWS enables you to eliminate the need for costly hardware and the administrative pain that goes along with it. AWS can reduce costs and improve cash flow, whether you are starting out or operating on a large scale. One of the key benefits of cloud computing is the opportunity to replace up-front capital infrastructure expenses with low variable costs that scale with your business.”

The last sentence of the above quote is very meaningful to finance and accounting people. It talks about replacing fixed expenses with variable expenses. Fixed expenses are the costs that happen no matter what your revenue volume is. Some people say that they start to run as soon as you put the key in the door regardless of what your sales happen to be.

Variable expenses, on the other hand, change with output. If your revenue (output) is relatively low, your variable expenses will be comparably low. If, however, your volume starts to skyrocket, your variable expense will also rise in proportion to the revenue rise. This is not a bad thing because there are usually ample funds available from revenue to meet your variable expenses.

Variable expenses are almost never a burden for this reason. In fact, one would hope that sales go through the roof because only a fraction of sales revenue is used to meet variable expenses. On the other hand, your fixed expenses occur even before you open your door. Amazon, is therefore wise to point this fact out.

Amazon stresses this fact on it’s A.W.S. website when it invites you to “Create an AWS website for free, pay only for what you use.” That little statement nicely stresses, when it talks about paying only for what you use, the fact that Amazon is “selling” variable costs and not fixed costs. The burden is therefore greatly reduced for your company and its budget.

An Information Highway to the Future

Amazon, along with its competitors, is creating a massive worldwide computer infrastructure — highway — that is already stretched across the world and will only become more substantive and flexible to meet the world’s massive computer needs.

There are, of course, questions of privacy that some companies might be concerned with. I’m quite sure, however, that these questions have already been adequately addressed. There are also questions about what would happen if America’s enemies start using — renting — this massive cloud for destructive purposes. I’ll have to leave that answer to our national security experts.

Presently we have well over 100 U.S. government agencies using A.W.S. The government, I have no doubt, is therefore completely aware of the wonderful and powerful capabilities that Amazon has created with it’s A.W.S. It is also aware that the sprawling computer giant that Amazon has created is extensively used on a worldwide basis and its use will only expand in the future.

That future is here to stay — and so is the E-Highway.

Good luck!

Theodore F. di Stefano

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected]. Follow Theodore F. di Stefano on Twitter.

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