Amazon Web Services: Rise of the utility cloud

Just how big is the Amazon Web Services cloud, and what kind of hold does it have over the modern developer-led web? ZDNet investigates
Written by Jack Clark, Contributor

Amazon launched its cloud in 2006 and since then it has come to dominate the industry.

Its APIs are a de facto standard, almost any popular start-up you care to name has used its services, and enterprises are piling into its low-cost infrastructure-as-a-service technology for anything from basic storage to advanced data analytics. With its scale, it is gaining a lead over its competitors that may be hard for them to surmount.

Most start-ups use Amazon Webs Services's (AWS) technology to help them grow in the face of huge demand, like Netflix, Pinterest, or OMGPOP, the creators of mobile app sensation Draw Something. And major enterprises use it as well, from the European Space Agency to Samsung and Unilever. Even companies that operate their own clouds and develop their own technologies use some of its services, like IBM, or gaming company CCP, creators of Eve Online.

AWS doesn't disclose the precise number of businesses that access its technologies, but Werner Vogels, Amazon's chief technology officer, said on 9 May that "hundreds of thousands of businesses in over 190 countries" were using it.

Its cloud is classified as "infrastructure-as-a-service". You can rent virtualised servers, storage, and a slew of additional services, such as databases, search and analysis engines, from the company. Since launching its mainstay compute and storage technologies EC2 and S3 in 2006, Amazon has added more and more services to the AWS cloud every year — 82 in 2011 alone — while constantly lowering prices. There have been 19 price cuts across storage and compute so far.


Amazon does not directly disclose the money it earns from Amazon Web Services, instead it puts it in a category named "Other", which totalled $1.59bn (£1.03bn) in 2011. "Other" includes "non-retail activities, such as AWS, miscellaneous marketing and promotional activities, co-branded credit card agreements, and other seller sites", according to Amazon.

Having talked to a variety of analysts and industry veterans, ZDNet UK understands that AWS comprises at the bare minimum 50 percent of the revenue in Other, and probably much more.

Amazon basically invented the business it has now. It did not cannibalise the business from other hosting providers.
– Carl Brooks, Tier 1

When Amazon launched the first major components of its cloud in 2006 — S3 storage and EC2 compute — "Other" revenue brought in $284m. Over the next years earnings spiked, with the 2011 earnings of $1.59bn representing a compound annual growth rate of 33.2 percent over the period.

Amazon has a sizeable share of the market. The total size of Amazon's field, "systems infrastructure", was $4.23bn in 2011, according to Gartner. If we halve the "Other" revenue, that still comes out at over $700m — at least 20 percent of the market.

"Amazon basically invented the business it has now. It did not cannibalise the business from other hosting providers," Carl Brooks, an infrastructure and cloud computing analyst at Tier 1 Research, says. "A great deal of the revenue that comes into it now is new. Within this [IaaS] niche, yes, they have no competition, especially when you account [for] their scale."

The retail mentality

What separates Amazon from other technology companies is that it comes from a retail background and is applying retail economics to cloud computing. These include price cuts; lowest-common-denominator services; only developing technologies when it can see definite demand; and forever identifying new potential consumers of its services and targeting them with technologies to make the transition to its cloud easier (such as its Virtual Private Cloud for enterprises or the Amazon Storage Gateway).

AWS Marketplace

Amazon applies its retail skills to its cloud, and recently launched the AWS Marketplace.

Because Amazon has built a constellation of services atop its cloud, and fostered the creation of a third-party ecosystem of Amazon-enabled applications via the recently launched AWS marketplace, when businesses look at the cloud there are few other options that are on a par with Amazon.

Instead, businesses are faced with a choice: go for a cheaper service from companies like VPS.net or UK2 and lose access to the ecosystem of additional services on the AWS cloud, or go to a high-level platform-as-a-service offered by Google or Microsoft and have to write in prescribed languages to a proprietary platform that sits on hidden infrastructure.

Lack of competition

"Everybody wants to come up with that silver bullet to go beat Amazon," Steven Tuck, general manager of the Joyent Cloud, says.

For many companies, beating Amazon means going after a different part of the cloud computing market. No one seems to want, or think, there's any point in competing with them directly.

Oracle has described it as being "a race to the bottom" in terms of price and instead opted to develop a secure cloud targeted at enterprises.

Meanwhile, Google and Microsoft have decided to climb up the stack and develop "platform-as-a-service" offerings like Google App Engine and Windows Azure, which see them take on much more of the management duties of the cloud, but as a consequence they cannot offer services that are as broad as Amazon's.

The only company that seems to be attempting direct competition is HP, via the OpenStack-based HP Cloud, but it is too early to tell whether this is a serious threat: the OpenStack technology is young and the cloud only went into public beta on 10 May.

"Where [Amazon] stand in terms of being an infrastructure provider is in about four years they've gone from essentially not being in this business to being one of the larger hosting providers in the world," Brooks says.

The advantages of scale

Because its cloud is so big, Amazon is able to monitor the types of jobs being run on it and launch products in response to customer demand. Amazon's scale gives it a natural research and development advantage over its competitors.

"Amazon... can look at the ecosystem and see what's really being used by application developers," Dave McCrory, a researcher who has coined the term "Data Gravity" to use when analysing clouds, says. "They're large enough to be able to leverage that."

I would like to see other [cloud] providers, but once you start with a provider like Amazon, it's a wedding.
– Asaf Yarkoni, CloudAlly

By way of example, he pointed to Amazon's creation of the simple workflow service in response to start-ups developing technology and selling it to AWS customers. McCrory also cited the example of how, a few years ago, Amazon noticed that open-source data analysis engine Hadoop was being run a lot, so it created its own version of the technology: Elastic MapReduce.

The creation of this ecosystem has two benefits to the company. It gives it more services on which to make money, and it can bind companies more tightly into its system.

"I would like to see other [cloud] providers, but once you start with a provider like Amazon, it's a wedding," Asaf Yarkoni, chief architect of CloudAlly, a company that backs up Google Apps, Salesforce and even some AWS services onto the S3 storage cloud, says. "You don't really separate later on, if you've built all your services on top of it."

Here to stay

The internet favours scale, and Amazon is one of the largest clouds out there. As we've seen for Google with web search, Facebook for social networking or the Amazon site for e-retailing, being the dominant player in a market grants you advantages that your competitors can struggle to deal with.

In the cloud, the scale of the operation gives the operator a number of benefits — lower pricing for basic equipment, greater geographical reach, and a constant source of free research and development from seeing the types of applications and services users are building on it.

The kind of advantages Amazon enjoys from its scale are hard to quantify, but recent partnerships, technology developments and offerings by third-party companies give an idea: when Eucalyptus was looking for a way to assure its private cloud software could compete with open-source variants like OpenStack, it tied itself to Amazon, so that enterprises keen on the cloud could work with Eucalyptus on premise and be assured they could transition up.

Similarly, because of Amazon's size it can attract customers that would otherwise have misgivings about the cloud. Netflix's cloud architect, Adrian Cockcroft, said his company opted for Amazon because scale wouldn't be a problem. (In 2011 Netflix accounted for nearly 30 percent of all download internet traffic in the US.)

Furthermore, as more and more data and applications come to AWS, it becomes in the interest of new and established companies to connect with it: Red Hat chose to build its platform-as-a-service on top of Amazon's infrastructure, while the open-source OpenStack scheme has worked hard to make sure its APIs are compatible with AWS's systems. Even competitor HP has implemented AWS API compatibility. Moreover, developers help cement its dominance, by writing open-source tools for running AWS offline to cut bandwidth costs.

When taken together, Amazon's scale, ecosystem of companies, set of overlapping strategies targeting everyone from lone developers up to the world's largest enterprises, seem to indicate it truly is what Cockcroft terms "the iPhone of the cloud" — a huge platform with market dominance, whose competitors are still scratching their heads about how to take it on.

READ NEXT: In pictures: The rise of AWS

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