CL OUD COMPU TING

PREPARED BY:

Abid Imam
Karan Jaiswal
Mikael Thakur

SCHULICH SCHOOL OF BUSINESS -YORK UNIVERSITY

4700 Keele Street, Toronto, Ontario, M3J 1P3
Masters of Business Program
1.0 AMAZON.COM
1.1 Amazon Today

Amazon today has evolved from the world's largest e-commerce company to a
technology firm, shifting its function from a technology consumer to a technology
provider. Through acquisitions and technology spending funded by meteoric market
capitalization, the company has rapidly captured market share in various sectors.

Amazon’s technical and business innovations and its commitment to serve

consumers have earned it the reputation of being a market leader. The current
strategy of Amazon is to develop and capture a substantial market of business-to-
consumer electronic commerce. Amazon is recognized as the most innovative
enterprise in B2C e-commerce and the companies name has become synonymous
with e-tailing. It has proved itself to be technically very innovative - there is no
doubting the online retailer’s ability to try out new ideas. Every few weeks a new
feature appears on its website and every few quarters they announce the launch of
a product that compliments their e-initiatives. Branding is a powerful and revenue-
generating asset for Amazon. The company currently has two brands— one with
consumers for its low prices and one in the business world for technology expertise,
its core competency, which it capitalizes on to support its consumer-facing brand.
Amazon has invested millions of dollars in building up their core competencies,
much of which went into IT. Now what Amazon is doing is leasing their core
competency to other companies that capitalize mutual co-branding in terms of
revenue growth for both parties.

1.1 Management

Amazon is obsessed with finding innovative ways to satisfy its customers –

regardless of what the competition is doing. Jeff Bezos has infused the firm with a
sense of urgency and chaotic fluxi.

The company has also ensured that every executive officer is tied to the company’s
success by making stock-based compensation a large part of their overall
compensation. This compensation model thus ensures long-term shareholder value.

Amazon’s CEO is also strongly tied to the company’s success as he currently owns
24% of outstanding shares. Furthermore, he has requested to be compensated a
modest salary that hovers between $81,000 and $150,000 USDii. The fact that a
few of his subordinates make more in terms of dollar compensation speaks volumes
of the way the firm is structured – that is, a meritocracy.

The challenges facing the company is that since 1997 it is not able to convince the
investment community that it is able to generate profits in the long run. Amazon
has made a bet on becoming a provider of technology services generally known as
cloud computing. The following document provides investors a succinct analysis of
Amazon’s cloud computing offering and recommendations if they should pursue
investing in the company.

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2.0 CLOUD COMPUTING

Cloud computing is a technology bound to disrupt not only the business models of
existing software giants such as Microsoft but also disrupt the IT industry as a
whole. The concept refers to the virtualization of the datacenter such that server
machines are not thought of individually, but as a computing commodity in a
greater pool of servers acting as one. Cloud computing, unlike traditional
computing, is free from the confines of desktop-based hardware and software. Bare
bones computer terminals run and store programs from a third-party server
connected to the Web, (almost) eliminating the chance data loss through a
computer crash.

In cloud computing, the provider builds a virtualized infrastructure and you get to
install and run your applications on it for a pay-as-you-go price that is directly
proportional to the resources your applications use. The provider automatically
scales your implementation up and down according to the resources you need at
any given time. The main distinction from managed hosting is that some of the
choices are made by the provider rather than the customer. They choose how to do
the scaling and load balancing, for example, rather than allowing you to specify how
it’s done. But you still take responsibility for higher-level application infrastructure
such as performance tuning, user provisioning and access rights, framing APIs, and
so on. Cloud computing opportunities are limitless as its scalability means wonders
for a companies IT bottom line.

2.1TYPES OF CLOUD COMPUTING

There are 3 types of cloud computing technology

arenas: 1) Applications, 2) Platforms, and 3)
Infrastructure. Applications are what almost
everyone has already used in the form of
electronic mail, wiki’s search, etc. Platforms are
the newest entry where an application platform
is offered to developers in the cloud. Developers
write their application to a more or less open Figure 1: Cloud Computing Types and
specification and then upload their code into the Company Associations
cloud where the application is run magically
somewhere, typically being able to scale up automatically as usage for the
application grows. The service being sold is the machinery that funnels requests to
an application and makes the application “tick”. Finally there is the infrastructure –
the actual hardware required to store data. This is the most powerful type of cloud
in that virtually any application and any configuration that is fit for the internet can
be mapped to this type of service. Distinction between platform and infrastructure
providers is currently vague – which is probably due to product development and
migration into other types of cloud offerings by firms. Figure 1 illustrates various

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cloud types and companies associated to each. Note that only Google shares
Amazon’s interests in both PaaS and IaaS (see Section 2.2).

2.2 DISRUPTIVE NATURE OF CLOUD COMPUTING

The profusion of cheap storage, software that can run a single massive application
across thousands of low-cost servers, and near-ubiquitous internet access across
North America has created a virtual supercomputer that is accessible anywhere.
For enterprises, the technology shift to cloud computing provides the benefits of a
data center without the cost and hassle of maintaining one – thus disrupting the
datacenter-warehousing business as well as certain IT professions. Alternative
delivery models such as software as a service (SaaS), will change the way software
and services are delivered, diminishing the importance of the traditional monolithic
desktop-installed applications, which could seriously disrupt the shrink-wrapped
software business (Microsoft et al) Cloud
Computing is also widely expected to change the Figure 2: AWS Technology
Lifecycle Positioning
shape of the OS market and associated revenue because both enterprises and end
users increasingly require more on-demand type infrastructure services rather than
on-premises, self-owned or commodity-type solutions. Longer term, Gartner
Research predicts that with the help of virtualization, companies will be better able
to manage their resources, eventually requiring fewer software licenses; and that
pre-deployed applications in virtual machines could replace the OS as an
infrastructure while dramatically changing software distribution methods and
resolving OS compatibility issuesiii.

2.3AMAZON’S CLOUD OFFERING

After building a massive cloud for its own, internal applications, Amazon realized
others could benefit while increasing ROI on their datacenters. In 2006, Amazon
launched its Amazon Web Services (AWS) by providing their infrastructure and
platform as a service. Their current position in the marketplace is that of a market
leader, thriving in a ‘blue ocean’ primarily due to first mover advantage. However
the industry is bound to become competitive – especially through niche providers.
For functional specifications on AWS and pricing structure please see Appendix A.

2.4 STRATEGIC TECHNOLOGY ASSETS

At a high-level, Amazon Web Services (AWS) specific to cloud computing are

composed of five strategic technology assets: Elastic Computing (EC2), Amazon
Simple Storage (S3), Simple Database (SimpleDB), Simple Queue Service (SQS), and

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DevPay. For a brief description of each Strategic Technology Assets (STA), please
refer to Appendix B.

Each STA sits on a specific spot on the technology life cycle. Figure 2 illustrates each
STA in the lifecycle Interestingly, for such a
disruptive technology, only the EC2 component
qualifies as pacing. EC2 development hardly
poses a significant financial risk to the firm and
the potential success is certainly much more
clear than what is often characterized by
emerging technologies .

SimpleDB and SQS are key technologies as they both strongly influence competitive
advantage today: SimpleDB was the first cloud computing offering for structured
data storage allowing firms to migrate their company data to AWS and further
promoting network effects due to the exponential growth of data as applications use
existing data to create more (see Appendix E – Figure 2). SQS is a unique offering in
that it allow partial migration of web applications as Greenfieldiv development may
not currently be an option for many clients due to cost and time constraints.
Currently no other cloud provider offers a communications bridge such as SQS.

DevPay is also a key technology as it facilitates payments made to developers –

promoting AWS adoption through ease of use. It certainly offers and supports a
point of differentiation as it leverages Amazon’s reliable and robust payment
receivable system.

S3 is a base technology in that it is necessary to survive. S3 provides a means of

online storage of virtual images used by EC2 instances, but alone does not offer any
means of differentiation than other online storage solutions – which is extremely
common.

Based on the above analysis EC2 is the technology to bet on, as all other STAs are
only relevant within its context. The certainty of it changing the basis of
competition is solidifying as ambiguity surrounding cloud computing lessens and is
worth looking at for a serious bet. Putting the STA’s together into what is known as
AWS the following technology-based evaluation categorizes AWS’s benefits:

Scalability: Grow and your deployment rapidly, as required, without huge capital
costs or operational time.

Flexibility: Add and remove resources on-the-fly to cope with peaks in requirements.
Only pay for what you need.

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Reliability: Take advantage of a massive computing platform, without having to build
and buy one’s own. Improve organization’s infrastructure SLA’s by using a highly
redundant and resilient platform that has no single points of failure.

Fast Setup: React to decisions or requirements quickly and deploy complex

architectures rapidly.

3.0 INDUSTRY ANALYSIS

An industry analysis of Amazon’s AWS offering denotes a favorable outlook on the

firm’s current position. Quoting Merill Lynch research, cloud computing is seen as a
“$160 billion addressable market opportunity”v. However this definition includes
SaaS providers as well and thus should be taken as an optimistic upper limit for now
within the context of PaaS, IaaS and Amazon.

Marked by weak substitutes, weak buyer power and high barriers to entry, AWS and
other PaaS providers are positioned for sustained business growth and customer
lock-in. However moderate supplier power poses a threat that can be mitigated by
sourcing their datacenters from multiple providers.

Substitutes. Current substitutes to cloud computing or PaaS are the current pre-
packaged, shrink-wrapped software and hardware offerings. Although most
consumers are used to the purchase of software and hardware, AWS’s business
model and the pay-as-you-use billing system will eventually win-out due to the
price-performance gains of the paradigm. Threat of Substitutes: Moderate (current),
Low (future)

Buyer Power. AWS’s proprietary coding requirements successfully creates a high

switching cost for developers (buyers), meaning that in order for them to migrate
their code out of AWS, they’ll have to re-develop from the ground up. Since
Amazon’s core business is not dependant on AWS, buyer bargaining power is also
quite low, regardless of their size. Buyer Power: Low

Threat of New Entrants. Because the market is new, there will be many new
entrants in the cloud-computing sphere. Relative to AWS, most will be niche players
as they will tend not to control the resources necessary to overcome the barrier to
entry required to become a leader (i.e.: revenue, R&D, brand image, etc.).
However, there are a few of potential entrants that already possess many of the
attributes required to become a leader in cloud computing, and all that stands in
their way is the decision to invest.

Institutions with large datacenters and good brand recognition can successfully
follow a me-too/follower approach by delivering the same offerings as existing
leaders or succeed in leapfrogging them by analyzing gaps in their offerings. Yahoo
claims to be attempting the latter strategyvi although based on the firm’s slow entry
into the market, it will probably achieve marginal success unless it targets different

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market segments – segments unaffected by the switching costs associated with
adopting GAE or AWS.

Brand equity is expected to play a big role in the adoption cloud computing
providers. Google currently significantly outpaces Amazon in this area: According
to BrandFinance.com, Google’s brand ranks 15 across all global brands with a brand
equity of approximately $24.5 Bn USD, while Amazon ranks 159th, with a brand
equity of approximately $5.5 Bn USDvii. Once IBM is added into the mix, there is
simply very little probability that a new entrant can come in as a non-niche PaaS.

Figure 3 Cloud Computing Competitive

Economies of scale and initial capital requirements
PaaS - IaaS Positioning. L = Leader; F
(i.e. datacenters) also create huge barriers to entry. = Follower; N = Niche; R =
Rationalizer

Threat of new entrants: Low

Supplier Power: Amazon is unfortunately

dependant on few providers; but in the same
time it is likely to be one of the larger customers
for datacenter items. More importantly many
server suppliers can forward integrate, meaning
that they can create datacenters of their own
and with added effort, integrate their servers
into a cloud computing offering. Hewlett-Packard
(HP) comes to mind while other server
manufacturers such as IBM and Sun have
already entered.

Supplier Power: Moderate

Rivalry: In term of relative price performance of substitutes, cloud computing

providers are at an advantage. Major players currently have little to no significant
overlap in their offerings (see Figure 3 for competitive positioning and Appendix F
for competitive space occupied).

Figure 1 Cloud Computing Competitive PaaS - IaaS

Google is considered as Amazon’s Positioning. L = Leader; F = Follower; N = Niche; R
closes threat to competitive = Rationalizer
leadership even though their current offerings are non-overlapping. Google is a
leader in SaaS, but they are competitively close to Amazon because they’re seen as
an imminent threat if they decide to convert their vast datacenters to a IaaS
offering while providing a rich suite of SaaS products. In fact, as of April 2008
Google has released to the media, their intentions of opening up their datacenters
to the publicviii.

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4.0 STRATEGY

4.1 Innovation Strategy

Existing modes of behaviour are very powerful. Despite its lead market share,
Amazon continues to maintain its entrepreneurial spirit by encouraging internal
seedling ventures and nurturing them by removing the usual hurdle ratesix. This
may be due to the company’s short history and the fact that it is still headed by its
founder.

It is also important to mention that the

firm also leverages its size and buying
power by engaging in a number of
acquisitions. The nature of these
acquisitions is not to internalize new ideas
that result in new, Amazon-branded and
modified products, but to increase market
diversification and growth. Thus Amazon’s innovation strategy is primarily a factor
of internal ideas and funding.

With shorter market cycles – especially in high-technology, acquisitions are essential

to drive innovation. The lack of incorporation of external ideas is thus seen as a
threat to Amazon’s ability to maintain its relevance and to essentially ‘keep up’ (see
Appendix C to view a comparison between Amazon’s and Google’s Innovation
Strategy).

Google on the other hand has been able to churn out products from both internal
and external ideas. Where Amazon’s acquisitions and strategic alliances allow the
firm to increase market share by delivering the same types of products, Googles
endeavors to deliver new product that innovatively aggregate data.

Figure 4 AWS Business

Strategy

At a high-level, Amazon straddles two generic business strategies: product

differentiator and low cost provider. The two tactics underline more specific
strategies of being first-to-
market in order to gain critical mass through network effects and finally to become
a standard in terms of a PaaS provider (Figure 4).

The First-to-Market and Low-Cost provider strategies promote early adoption of the
AWS platform. Proprietary software module calls are used for AWS and this
promotes buyer lock-in (switching costs) once adopted. As more and more
developers adopt and port applications onto EC2, the more interoperable
applications become across other services and applications – not to mention the

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lowering of usage cost through economies of scale. This is how AWS can potentially
become a standard as network effects achieve critical mass of members.

There is a risk, however, of becoming ‘stuck’ between strategies as very few firms
can simultaneously and successfully engage in multiple Porter-strategies. Whether
Amazon will be successful in the juggling act remains to be seen, although the firm
has already demonstrated results through the consistent lowering of usage costs
and growth in member increase (see Appendix D).

4.2 Creating Value: One-stop shop for web-based businesses

Amazon is creating value through the virtualization of business infrastructure. As

previously mentioned, a number of STA’s have been used to create what is known
as Amazon Web Services (AWS): EC2, SimpleDB, SQS, S3, and DevPay.

EC2 uses emerging technologies to provide the framework or platform to be

leveraged by all subsequent AWS offerings. It essentially adds value by providing a
link into Amazon’s computing capacity.

S3 uses basic technologies to provide an online storage space for users. Alone
there is very little value to be had (i.e.: “…just another online drive in which I can
store all my MP3s”), however once S3 is combined with EC2, synergies are created
allowing EC2 users to store their virtual environments.

DevPay is a window into Amazon’s trusted billing and account management

infrastructure. The online service is categorized as a key technology as it eases
developers’ burden of collecting payments for their applications built on AWS. This
thus promotes developer membership and the benefits to be gained by network
effects.

SQS is a key technology as it serves to integrate applications in and outside AWS.

One of the initial drawbacks with AWS was that it required “Greenfield”
development – meaning that it required applications to be re-developed. With SQS,
developers may incrementally develop add-ons to their existing, non-AWS
applications. This lowers the switching costs associated with adopting a new
technology and ultimately furthers AWS adoption.

4.3 Delivering Value (To Developers) - Do more development, waste less

time

According to Moore’s Model, Amazon is engaged in the “bowling alley” phase: It is

targeting developers by providing the tools to develop and integrate their
applications into low-cost, scalable infrastructure while removing activities
relegated to creating and maintaining hardware environments.

4.4 Capturing Value

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Amazon is setup to capture maximum value from its AWS offering in terms of
immediate profitability. Medium to long-term value capture is becoming more and
more certain as developers and companies increasingly start adopting AWS.

4.4.1 Immediate Profitability

Revenue capture is especially easy for Amazon as all transactions are online and
integrated into their existing payment system. EC2 adoption almost necessitates
branching off into AWS’s other products, therefore synergies created by AWS’s
products – especially for “Greenfield” applications furthers the firm’s revenue
generation.

4.4.2 Road to Standardization

AWS is setup to gain heavily through network effects (see Appendix E for a detailed
explanation). As more and more users signup, abandoning the platform becomes
costlier - as the low pricing due to economies of scale, the proprietary coding
standard and general migration costs nullify almost any business objectives to
switch providers (from Amazon). In fact, leading cloud services like Amazon may
resist a standard for fear of losing their proprietary lock on early customers. A more
standardized cloud computing market could also hurt cloud computing leaders by
removing competitive advantages and leveling the playing field, says Nick Carr,
blogger and author of the cloud computing-focused book, The Big Switch. "Right
now, Amazon and Google can compete based on their reliability or other factors,"
says Carr. "But the long-run danger for standard utility computing service is that it
becomes a commodity and your only way to compete is on price."

Therefore standardization may not be the best strategic path to follow.

4.4.3 Amazon’s Ecology

According to Ecology As A Strategy by Levien and Iansitix and within the broader
context of cloud computing stretching across Amazon.com’s corporate boundaries,
AWS fulfills the criteria of a keystone advantage player: connecting network
participants with one another, by making the products created by third parties more
efficient, and by providing a point of reference helping participants to new and
uncertain conditions.

Connecting Network Participants with One Another. Amazon is already adept at

doing this through its current e-commerce business by connecting buyers and
sellers whether they are businesses or individuals. AWS is simply an extension to
Amazon’s overall virtual marketplace offering – connecting buyers who are seeking
the use of particular online applications with application suppliers.

Increasing Efficiency of Third Party Product Creation. Asides of the learning curve
associated with AWS’s proprietary coding requirements, the AWS offering does save
significant time in regards to deployment (on-demand infrastructure) and in regards

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to costs (developers: no up-front infrastructure fee, usage-based-pay; buyers: no
license fee, online access versus shrink-wrapped media). The biggest underlying
win is the continued drop in infrastructure fees due to increasing network effects.

Providing a Point of Reference. Amazon’s strong brand commands a sense of trust

to those who are reticent about migrating their infrastructure to AWS and to those
who are skeptical of using applications as an online service. Amazon’s reliable
datacenter would also promote the adoption of business models that exploit the
benefits of cloud computing.

Finally, AWS also promotes the creation of niche players, such as consulting services
that facilitate the migration of infrastructure onto Amazon’s cloud. The numbers of
offshoot businesses are endless and strengthen the overall ecology by promoting
ecological robustness and productivity through the creation of inter-dependant
businesses and the efficiency of each dependant business due to the
aforementioned reasons, respectively. Some examples of newly created niche firms
are RightScale, Hyperic and Soasta, who not only depend on AWS availability but
also on its shortcomings (where their offerings bridge identified gaps in AWS).

Further synergies are created through other offerings such as mini-laptops that are
used primarily for internet access (i.e.: Asus' EEE PCs, HP mini-note, Apple Mac Air,
etc…). These laptops have very little hard drive space thus depending on SaaS
provider to access rich applications such as photo editing and word processing
tools. SaaS providers in turn will need PaaS and/or IaaS providers for their
applications to reside on – thus strengthening AWS's ecology.

4.4.4 Strategy Evaluation

Amazon’s AWS strategy is vetted against the following definition of technology

strategy: to maximize the contribution of technology and to acquire, sustain and
defend competitive advantage. The definition is broken down into components and
each component into criterions:

Maximize Contribution of Technology to Acquire Competitive Advantage

 Amazon has successfully used the first-(significant)-to-market strategy to acquire

an advantage over others players in the cloud computing arena by:

 Getting the initial pool of early adopters (developers, businesses)

interested in cloud computing.

 Getting a jump on network effects due to usage and cycle of data

processing and generation (see Appendix E).

 Through EC2, Amazon has maximized the contribution of its existing datacenter
resulting in a significant advantage over smaller players as datacenter size acts
as an effective hurdle or barrier to entry in providing a cloud computing service
with acceptable SLAs.

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Rating: Very Good

Maximize Contribution of Technology to Sustain Competitive Advantage

 Although Amazon’s management espouses constant innovation, actual R&D

expenditure to sales paints a different picture: According to Appendix D’s R&D
to Sales Ratio, Amazon spends about 5% - not bad but not great – especially
when compared to Google current investing about 14%.

 Consistent platform extensions such as S3, SimpleDB and others have added
value to Amazon’s AWS offerings through sustaining innovations that promote
overall strategy of network effects and reaching gorilla status.

 Proprietary API increases switching costs once AWS is adopted.

 Amazon has increased and sustained barriers to entry through economies of

scale.

Rating: Excellent

Maximize Contribution of Technology to Defend Competitive Advantage

 Amazon’s revenue is not cloud computing dependant, income from retail

businesses can be used to support/enhance/defend AWS.

˜ Amazon has and approved patent since 2004 for an online marketplace for the
consumption of third party web servicesxi. Its effectiveness remains to be seen.

• Exposure to heterogeneous rules regarding data ownership and security. For

example Amazon may lose out to China-based cloud computing offerings as data
is highly controlled in the Chinese market

Rating: Low-to-moderate

Overall, Amazon’s technology strategy is setup to acquire and sustain competitive

advantage. The ambiguity surrounding cloud computing definitions renders it
difficult to create effective patents. As time progresses and the ambiguity lessens,
a rush for patents is expected.

5.0BUSINESS STRATEGY FOR THE FUTURE

Amazon’s current growth strategy for its web services division is to increase market
penetration through platform extensions. For example, Amazon’s Simple DB service
allows the running of queries on structured data via applications on EC2 – thus
Simple DB is an extension to EC2 allowing current developers developing on EC2 an
enhanced coding environment. For Amazon to remain competitive as an
infrastructure provider it must adopt the current ‘green’ trend. As servers become
more numerous, powerful and densely packed, more energy is needed to keep the
data centres at room temperature. Often just as much power is needed for cooling

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as for computing. In order sustain a comparative advantage and pass down cost
savings to end-customers, servers will be located in remote areas where cost of
energy is substantially cheaper and the environment much cooler e.g. Iceland or
Siberia. Being LEED certified will also be a future trend and possibly a compliance
requirement.

Infrastructure is bound to become a commodity like electricity, with prices/rates

that will eventually decrease towards the cost of production as competition
increases. As Amazon has established a first mover advantage and is experienced in
the low margin retail industry, being a commodity-based business may actually be
beneficial.

Amazon may need to invest more in capital spending, especially on servers. Google
is said to operate a global network of about three dozen data centers with,
according to some estimates, more than one million servers. Microsoft is also
investing billions of dollars and adding up to 20,000 servers.

5.1 Future of the Segment

Industry consolidation is inevitable with cloud computing space dominated by those

companies who have invested in infrastructure early and/or acquired it. Technology
industry usually turns out to be a game of duopoly with two main players emerging.
Google and Amazon will be the likely industry leaders on the Internet with other
players relegated to the status of niche providers.

6.0ISSUES

AWS has unique attributes that require risk assessment in areas such as data
integrity, recovery and privacy, and an evaluation of legal issues in areas such as e-
discovery, regulatory compliance and auditing. There are drawbacks to keeping all
of one’s data in the cloud, of course, and one of the main ones is that one can be
cut off from it at crucial times- either because of no internet coverage/access or
because the cloud you're using is unavailable (crash). Currently Amazon does not
provide 100% uptime (rather a 99.999%) nor provides a service level agreement
(SLA) for its customers.

Also there is no cloud computing standard or security models and this is beneficial
for Amazon since most of the risk and blame, if something goes wrong, will fall
directly on the shoulders of IT(CIO’s etc.) and not on the cloud computing service
providers. A risk that Amazon AWS is exposed to will be legal ramifications of lost
data and downtime.

In order for Amazon.com to execute its business strategy (Moore’s bowling alley
strategy), it must enter new segments targeting big business. Challenges posed by
moving past the bowling-alley phase include:

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• Today, cloud data storage locations are ambiguous while The European Union
has strict limits on what citizen-data can be stored, where and for how long.

• Many compliance regulations require that data not be intermixed with other
data, such as on shared servers or databases.

• Industries such as banking and health require data to be stored in their home
country to be compliant with industry and regional specific regulations such as
Sarbanes Oxley and HIPAA.

• Patriot Act – USA’s radical Patriot Act has been around for several years, and
stories of servers being seized without justification almost as long.

6.1 SARBANES OXLEY

Companies benefit by using AWS by giving up some control over the data in
exchange for cost economies, however companies have a particular concern about
cloud computing, namely its impact on Sarbanes-Oxley (SOX) regulatory
requirements. The SOX act was enacted to prevent scandals from happening again.
The legislation establishes new or enhanced standards for all U.S. public company
boards, management, and public accounting firms. The SOX act holds signing
officers responsible for the fairness and completeness of their company's financial
statements. They are also held responsible for the state of the company's internal
controls, and must report any deficiencies. An internal control is a process designed
to reasonably assure that objectives can be met in the following categories:
financial reporting reliability, operational effectiveness and efficiency, and
compliance with applicable laws and regulations. Hosted archiving is perfect for
SOX compliance requirements. SOX is an onerous IT burden, and the right cloud
computing solution can solve the requirement.

Compliance has been one of the dominant themes in the post-Enron age of
corporate IT. SOX, while an issue is not going to be a real issue as long as Amazon
really wants to segment out to get into the enterprise market. Being a public
company, Amazon already has most of the SOX controls in place and can implement
appropriate separation in terms of data, encryption to pass any audit. To build a
trustworthy reputation among enterprise customers, Amazon will need to undergo
audits to obtain SAS 70-1 and SAS 70-2 certification, internal policy.

6.2 INTELLECTUAL PROPERTY

Intellectual property (IP) is a huge gap for Amazon. Relative to their e-commerce
competitors, Amazon has one of the fewest patents. However, this is likely to
change as the firm becomes a technology provider. Currently Amazon holds a
single patent in regards to AWS. The patent was established in 2005 for a web
services marketplacexii. There have been no cases of infringement to date, perhaps
indicating a poor patent coverage or out of court settlements/cross patent
agreements.

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7.0FINANCIAL SYNOPSIS

If the Internet is to be dominated by huge computing clouds, the performance and

profitability of the largest clouds is an important issue, and Amazon is likely to
provide the best early case study of how to monetize a huge utility computing
operation. Amazon has the first mover advantage, and their early investment in
research and development has started to pay off. Amazon AWS provided a profit of
$111 million in the first quarter of 2008, and if you take the growth of developers as
a metric, AWS will continue to drive profits for Amazon (see Figure 5). Even with
Google launching their cloud computing offering, Google App Engine, AWS will only
benefit from the future media frenzy behind that (since they'll both be mentioned in
tandem). In 10 years, Amazon’s Web services business is going to be sizeable. And
it’s not a stretch to predict that Amazon’s cloud computing effort will be the profit
margin savior of the company. Today, Amazon’s retailing business bankrolls these
fliers into cloud computing services. In a decade, Amazon’s cloud will subsidize the
retailing business. It will take some time before they have enough scale to have a
meaningful impact that becomes visible, given the
scale of our other businesses. So with a $10 billion
business, even though these businesses are doing
very well, it's going to take some number of years
before they become meaningful. This customer set
is developers. A lot of them are start-up companies.

8.0CONCLUSION
Figure 5: AWS Developer
Growth
WHAT TO BET, HOW MUCH TO BET, WHEN TO
BET

What to bet on: We recommend betting on the cloud computing industry,

specificially the IaaS players as this represents a paradigm shift in the IT industry.
The shift would affect companies in a number of sub-industries including software
companies, internet service providers and hardware manufacturers. Companies in
each of these industries will face significant change if cloud computing is to be the
next step for the industry. AWS is simply a single offering in the IaaS space we
recommend diversifying the major players (AWS, GAE) and smaller, promising niche
players such as 3Tera and Saleforce.com.

When to bet: Referring to Appendix H, it is clear that we have missed the upswing
period for an investment on AWS. The ideal time would have been 2 nd quarter 2006
when the stock was near its all time low and when the company officially launched
its AWS service. Since then the stock has appreciated and is now hovering near its
all time high. However, to be prudent we recommend to take a ‘hold’ position as a
IaaS storm is brewing above Amazon’s current blue ocean - which is bound to look
bloody.

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How much to bet: Investors are concerned with the present value of future cash
flows, and since the NPV on their web services asset is kept secret, we can make an
analysis based on year over year developer growth which is (See Figure 5). In terms
of investing in Amazon purely as a blue-chip cloud infrastructure play, we
recommend a diversified approach with a mix of 70:30 Amazon, Google play. Non-
blue chip investments should be balanced across the major niche players such as
3Tera and Akamai. If the company’s cloud computing strategy is not successful,
investors can fall back on Amazon’s successful retail business.

Instead of building ‘cute’ applications and ladling them out to the masses — the
Google and Microsoft model — Amazon is delivering silicon power to the people,
which is the real disruption. It’s clearly evident that Amazon is in a league of its
own in terms of infrastructure and its AWS unit was profitable as of the first quarter
2008, however Google has opened its cloud as of April 2008 and will eventually take
market share if not through acquisitions/in-house development then through the
strength of its brand. However, since Amazon is sustained by its complimentary
assets and its successful e-retail business, we recommend that an investment be
more heavily weighted on their company. We continue to believe that the transition
to "cloud computing" is a disruptive trend that will increasingly put legacy PC and
enterprise businesses like Microsoft (MSFT) and Oracle (ORCL) behind the eight ball.

8.0 Future Proposals for AWS

The following are some of the recommendations we suggest investors to bring up

during an Amazon annual meeting and/or open conference call regarding their cloud
computing offering:

1. Lower Structured Data Storage Costs

There are current inconsistencies in Amazon’s low-cost strategy. Structured data

storage is simply too pricey to appeal to storage-heavy implementations. If
Amazon is to benefit from network effects due to data growth (Appendix E –
Figure 2), it needs to remove the data cost barriers. In the end, the more data,
the higher the switching costs, the more likelihood of attaining a sustained big-
player status. A good analogy would be to exist in a blue ocean (blue ocean
strategy) among a handful of whales.

2. Spin off AWS unit

Amazon needs to clearly identify their AWS strategy instead of straddling

multiple ones for the sake of simplification and focus. It also needs to be mindful
of the brand image that is inherited from its e-commerce business – whether it is
a hindering or an enabling factor. As Amazon.com continues to grow as a
technology infrastructure provider, we predict that the e-commerce business will
diminish the AWS brand which is why we recommend spinning off and
rebranding AWS as a wholly owned subsidiary of Amazon.com.

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 3. Consolidate – M&A

In order to compete with technology giants who acquire to sustain growth (and
innovation), we recommend Amazon to follow suit. Amazon should acquire niche
players specifically in the cloud computing sphere as well as establishing data
centres internationally in order to increase robustness of their offering and
network topology.

APPENDIX

APPENDIX A: AMAZON’S AWS PRICING STRUCTURE

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Machine Utilization - $0.14 per Amazon SimpleDB Machine Hour consumed

Amazon SimpleDB measures the machine utilization of each request and charges
based on the amount of machine capacity used to complete the particular request
(QUERY, GET, PUT, etc.), normalized to the hourly capacity of a circa 2007 1.7 GHz
Xeon processor.

Data Transfer

$0.100 per GB - all data transfer in

$0.170 per GB - first 10 TB / month data transfer out
$0.130 per GB - next 40 TB / month data transfer out
$0.110 per GB - next 100 TB / month data transfer out
$0.100 per GB - data transfer out / month over 150 TB

Data transfer "in" and "out" refers to transfer into and out of Amazon SimpleDB.
Data transferred between Amazon SimpleDB and other Amazon Web Services is free
of charge (i.e., $0.00 per GB).

Structured Data Storage - $1.50 per GB-month

Amazon SimpleDB measures the size of your billable data by adding the raw byte
size of the data you upload + 45 bytes of overhead for each item, attribute name
and attribute-value pair. Amazon SimpleDB is designed to store relatively small
amounts of data and is optimized for fast data access and flexibility in how that
data is expressed. In order to minimize your costs across AWS services, large
objects or files should be stored in Amazon S3, while the pointers and the meta-data
associated with those files can be stored in Amazon SimpleDB. This will allow you
to quickly search for and access your files, while minimizing overall storage costs.
See below for detailed descriptions on calculating your own structured data storage
requirements and for a more detailed explanation of how storage in Amazon
SimpleDB and storage in Amazon S3 differ. Source: Amazon.com – AWS Service Offering

COST COMPARISON TABLE: AMAZON & GOOGLE

Cost/GB Cost/hour Cost/month Cost/ 1TB

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 ($) ($) ($) ($)
AMAZON
Instance
Standard Instances
Small 0.1 72
Large 0.4 288
Extra-Large 0.8 576
High CPU Instances
Medium 0.2 144
Large 0.8 576
Structured Storage 1.5 1500
Data Transfer
In-bound data 0.1 100
Out-bound data (<10TB) 0.17 170

GOOGLE
CPU Core Hour 0.12 86.4
Storage 0.18 180
Data Transfer
In-bound data 0.11 110
Out-bound data 0.13 130

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APPENDIX B: AMAZON’S AWS STA DESCRIPTION

Amazon Elastic Compute Cloud (EC2). Web Service that provides resizable compute
capacity in the cloud. Scalability is achieved within minutes both, by the user and
the application.

Amazon Simple Storage Service (S3). Storage for the internet, that can be used to
store and retrieve any amount of data, at any time, from anywhere on the web.

Amazon SimpleDB . A web service for running queries on structured data and works
hand-in-hand with EC2 and S3 in order to store, process and query data sets.
Mitigates large-scale, upfront database investments.

Amazon DevPay. Online billing and account management service that makes it easy
for developers to get paid for applications they build on AWS. Unlike the first three
offerings, DevPay is not an infrastructure service, but strongly supports their
adoption by developers.
APPENDIX C: AMAZON’S INNOVATION STRATEGY

APPENDIX D: AWS DEVELOPER GROWTH

2006 Q1 Developers 160,000

2008 Q1 Developers 330,000
Current growth rate since launch: 51.5%

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APPENDIX E: NETWORK EFFECTS

Figure 1: Network Effects due to User-sign up

Essentially as the number of AWS users increase, usage costs go down due to
economies of scale. As prices go down, the willing to pay increases as the new
price-point appeals to a broader audience. And finally once the willingness to pay
hurdle rate has been satisfied, more users sign up.

Figure 2: Network Effects due to data

The above figure is more relevant to data-heavy users such as large market
research firms.
APPENDIX F: PAAS, IAAS ANALYSIS

Segment Description Key Player

Platform as a Many of the companies that started • Google (GOOG) - Apps Engine
service (PaaS) out providing on demand application
services have developed platform
services as well. The platform • Amazon.com (AMZN) - EC2
segment of cloud computing refers to
products that are used to deploy • Microsoft (MSFT) - Windows Live
applications. Platforms serve as an
interface for users to access
applications provided by partners or • Salesforce.com (CRM) - Force.com
in some cases the customers.
• NetSuite (N) - Suiteflex

• Mosso - Mosso, a division of

Rackspace

Infrastructure The final segment in cloud • Google (GOOG) - Managed hosting,

as a service computing, known as infrastructure,
development environment
(IaaS) is very much the backbone of the
entire concept. Infrastructure
vendors provide the physical storage • International Business Machines (IBM)
space and processing capabilities - Managed hosting
that allow for the all the services
described above. The products in this • Terremark Worldwide (TMRK) -
segment are slightly more varied Managed hosting
than those in the other areas of cloud
computing but include ones such as
managed hosting, and development
• Amazon.com (AMZN) - Cloud storage
environments (such as Google gears)
that allow users to build applications.
Cloud storage, such as Amazon's S3,
is also considered to be part of the
infrastructure segment

APPENDIX G: AMAZON (AMZN) HISTORICAL PERFORMANCE

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APPENDIX H: CLOUD COMPUTING INDUSTRY OVERVIEW

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REFERENCES

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Spann, S. E-Commerce – Amazon – Corporate Culture. September 2004. Website: http://wiki.media-
culture.org.au/index.php/Amazon_-_Corporate_Culture, accessed July 9, 2008

ii
Amazon 2007 Proxy

iii
Plummer C.D. et al. Gartner's Top Predictions for IT Organizations and Users, 2008 and Beyond: Going Green and Self-
Healing. Gartner Research. January 2008.

iv
Greenfold development is when you have to recode the application from the ground up due to a lack of portability.

v
‘Hamilton, D., ‘Cloud computing’ seen as next wave for technology investors. June 4, 2008 Financial Post. Website:
http://www.financialpost.com/money/story.html?id=562877. Accessed July 15, 2008.

vi
Farber, D. Yahoo Looking to Unleash Its Cloud Computing Infrastructure. June 26, 2008. Website:
http://news.cnet.com/8301-10784_3-9978409-7.html?hhTest=1. Accessed July 10, 2008

vii
Brand Finance 250, The Annual Report on the World’s Most Valuable Brands. January 2007. Website:
www.brandfinance.com

viii
Google unlocks its data centers. April 08, 2008. Website:
http://www.roughtype.com/archives/2008/04/google_unlocks.php. Accessed July 15, 2008

ix
Amazon 2008 Proxy

x
Iansiti R. and Levien R. Strategy as Ecology. March 2004, Harvard Business Review.

xi
Online Business Toolkit, Accessed July 12 http://news.zdnet.co.uk/internet/0,1000000097,39211251,00.htm

xii
Kawamoto D., July 29, 2005. Amazon Web services marketplace patent published. Website:
http://news.zdnet.co.uk/internet/0,1000000097,39211251,00.htm

Understanding the Cloud Computing/SaaS/PaaS markets: a Map of the Players in the Industry, Accessed July 1st:
http://dev2dev.bea.com/blog/plaird/archive/2008/05/understanding_t.html

Amazon Web Services, Accessed on June 15th

http://www.amazon.com/SimpleDB-AWS-Service-Pricing/b?ie=UTF8&node=342335011

Data excerpted from:

DataMonitor: Business Information Center, Amazon.com Inc. June 2007. Website: www.datamonitor.com. Accessed June
2nd, 2008

DataMonitor: Business Information Center, Google Inc. June 2007. Website: www.datamonitor.com. Accessed July 7th, 2008

James Hamilton Blog, perspectives : Accessed July 2nd

http://perspectives.mvdirona.com/2008/05/21/CloudComputingGrowthRate.aspx