Amazon's cloud computing has revolutionized American small business, but can Amazon beat rising competitors?

How to start and grow companies.
Nov. 24 2010 12:43 PM

Ahead in the Cloud

Amazon's cloud computing has revolutionized American small business, but can Amazon beat rising competitors?

Cloud. Click image to expand.
Cloud computing is ideal for many small businesses

As Amazon holds it weeklong Black Friday sale, it's easy to forget that the gigantic retailer has cultivated a virtual computing ecosystem that has fundamentally changed American business, particularly small business. Since it launched in 2006, Amazon Web Services has operated from a very basic premise: Leverage the company's massive investment in infrastructure by offering online computing power—known as "the cloud"—on the cheap. All a founder needs to get a business up and running on Amazon is a credit card and a dream.

The strategy has been lucrative. AWS takes in an estimated $650 million in revenue and has a 60 percent share of the small-business market for cloud computing. Without the Amazon cloud, many new businesses that have little cash to expend might not exist. It also has launched a cottage industry of startups that serve entities mystified by cloud computing, a market now estimated at anywhere from $11 billion to $58 billion. As more and more businesses turn to online computing infrastructure, platforms, and applications, and as companies such as IBM, Microsoft, Verizon, Cisco, Oracle, and others enter the space to serve larger, more complex organizations, will Amazon's strategy of offering bare-bones computing mostly to young and small businesses endure?

AWS is hardly coasting. Like Google, Amazon constantly releases new products to see which ones stick. In recent weeks, it has made some noteworthy announcements. Often criticized unfairly over security and compliance concerns, it received certification for a global security standard that sets out requirements for handling sensitive information. It also released a product that is insanely fast at doing mathematical computations. These moves follow the recent establishment of a free trial for businesses that want to start on the cloud. And AWS recently landed Netflix as a client.

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One of AWS's strengths is that it hasn't sought to offer a premium service. It's a do-it-yourself product, and many developers adore it for that very reason. Avoiding users who need technical handholding, AWS has built volume at a very low operating margin. The company is steadfast in its defense of a public cloud and maintains that a private cloud is a "false cloud."

But the AWS strategy also has its weakness. It leaves room for competitors to swoop in and offer different kinds of cloud services. If Amazon wants to maintain its market share, it is going to have to continue attracting not only small companies, but also large ones such as Netflix with bigger and more complicated workloads. That might prove difficult. In a report released last week, the Yankee Group, a technology research and consulting firm, found that 65 percent of entities with 250 employees or more favored tech integrators, outsourcers, hardware/software vendors such as Cisco, or communications service providers like telecoms. Only about 18 percent favored Amazon, which might reflect the rift over public versus private cloud computing and the fact that many companies ultimately want to own their hardware and create their own clouds.

Verizon, known for its relationship with small businesses, could position itself as an aggregator of cloud services for companies already using the telecom for their communications needs. And Amazon's bare-bones offerings might not hold sway with certain small-business owners. Companies with a lot of sensitive information might shy away from a public cloud like Amazon's, if Amazon doesn't change the perception that their data are not safe.

Ultimately, it all depends on a company's needs. "If they have strong technical expertise, then they can go to whoever they want. They don't need the migration and integration that a larger company needs. They just need cheaper infrastructure," said George Hamilton, principal analyst at the Yankee Group. "But for companies that don't have the development expertise, they may look at other firms for business process support." This is why there are many startups competing to offer cloud services to businesses, such as Cloudkick, Heroku, and Rightscale, among others. And where do these startups actually provide many of their services? On Amazon's cloud.

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Jill Priluck wrote “The Little-Guy Economy” column for Slate. Most recently, she was a Reuters Opinion contributor. Her work also has appeared the New York Times Magazine, Time, Fortune, the New Republic, n+1, and elsewhere.