Amazon takes aim at big guns in cloud war

Online retailer's Web services arm unveils low-margin, high-volume game plan

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Amazon takes aim at big guns in cloud war Amazon means to apply its winning low-margin, high-volume revenue model to the global cloud computing sector.
By  Stephen McBride Published  November 29, 2012

Amazon.com Inc is set to take on the world’s tech titans as its six-year-old cloud computing arm gears up for a campaign that it believes will snatch big corporate customers from under the noses of the industry’s big guns, Reuters reported.

Amazon Web Services (AWS) had its first conference in Las Vegas, Nevada, and in front of 6,000 attendees, laid out its market offering. AWS chief Andy Jassy was heavily critical of the profit margins enjoyed by the cloud units of companies such as HP, Oracle and IBM and unveiled a data warehousing solution called Redshift that he claimed would slash costs to a tenth of what those companies were charging.

"The old world of technology has a pricing model which is to charge as much as customers can pay. Customers are tired of it," Jassy said, noting that the typical charge is $19,000 to $25,000 per terabyte of storage per year for data warehouse storage solutions.

Redshift, due for launch in early 2013, is to cost $1,000 per terabyte per year for companies that take out long-term contracts, but other terms will cost a little more, Jassy said, adding that he saw the potential for AWS to become Amazon’s largest revenue stream, even outperforming its traditional online retail division.

Shares of data warehouse solution provider Teradata Corp dropped 3.7% to $59.27 yesterday and analysts believe concern about competition from AWS to be responsible for the slide.

"A new competitor is entering the space with significantly lower price points," said Derrick Wood, an analyst at Susquehanna Financial Group. "That's the essence of the concern."

Evercore analyst Ken Sena expects AWS revenue to jump 45% a year, from approximately $2bn this year to $20bn in 2018. Amazon’s cloud division was an early adopter of the new computing model and has enjoyed rapid growth because of scalable, relatively useable, cheap services.

The global cloud story has shown adoption mainly by penny-pinching organisations such as start-ups and small businesses, with enterprises only taking the migration leap with non-critical systems, but Jassy expects the landscape to fold in more enterprises in the near future.

"We expect enterprises to migrate their applications to AWS," he added. "The question isn't if anymore, it's how fast it's going to move and which ones will move first."

AWS already counts companies such as Netflix, Royal Dutch Shell, Samsung and InterContinental Hotels Group among its customers, along with more than 300 government agencies and over 1,500 academic organisations, Jassy said.

"It's increasingly less accurate to say only small companies use AWS," said Bernard Golden, vice president, Enterprise Solutions for enStratus Networks, a cloud management software company.

Jassy cited comments from Oracle, IBM and HP executives that referred to the high-margin nature of their cloud businesses. Amazon has conquered the online retail market with a low-margin, high-volume business model and Jassy now aims to apply the same approach to cloud computing.

"The economics of what we're doing are extremely disruptive for old-guard technology companies," Jassy said.

"These are companies that have lived on 60 to 80% margins for years. The vast majority of businesses will be moving to the cloud in the next 10 years. We think it's a high-volume, low-margin business."

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