In its second-largest acquisition, Amazon buys the company for $970 million.
As it strives for web services market share, Amazon also helps its own operations.
Along with dominating online retailing, Amazon.com Inc., No. 1 in the Internet Retailer Top 500 Guide and the Internet Retailer Top 400 Europe, wants to become the biggest dog in remotely hosted web services, industry analysts say.
Often called cloud-based services, they enable online retailers and other companies to store data and run web sites and applications on servers maintained by other organizations. Long-term growth in its web services offering would not only produce more revenue for Amazon but also boost the cloud-based technical support for its own direct retail operations.
Amazon recently said it is cutting its prices for web services from 10% to 42% in several areas: Amazon Compute Cloud, better known as Amazon EC2, for pay-as-you-go cloud computing capacity; Amazon Relational Database Service, or RDS, for setting up and operating databases for such areas as sales and inventory records; and Amazon ElasiCache, which lets retailers or other users cache data, such as product images, for faster download by web site visitors. Seven retailers in the Internet Retailer Top 500 Guide and two retailers in the Second 500 Guide use Amazon to host their e-retail sites. Amazon also counts a number of vendors who provide services to e-retailers as Amazon Web Services clients.
With the price reductions, Amazon hopes to prevent companies from turning to similar services from such competitors as IBM Corp., Google Inc. and Rackspace, says Brian Walker, a vice president and e-commerce technology analyst at Forrester Research Inc. IBM, for example, offers Smart Business Storage Cloud for data storage and its Computing on Demand for cloud-based computing services. Google Inc.’s offerings include Google AppEngine for building and hosting cloud-based web applications. And Rackspace offers Cloud Drive for data storage, Cloud Sites for hosting web sites and web applications, and Cloud Servers for accessing web servers. “Amazon continues to drive commoditization of its cloud computing offerings,” Walker says. “The primary goal of these price reductions is to deflect market entries from competitors.”
A recent report by investment bank Macquarie Capital says it’s difficult to directly compare Amazon’s web services prices with those of its competitors because of the many variables involved in deploying and pricing web services. Nonetheless, “we believe that Amazon is widely thought to be the overall low-cost provider for most web services that it offers,” Macquarie said in the report.
Walker adds that Amazon is in a unique position among web services providers in that it also widely uses its own web services infrastructure to run its own online operations. This takes pressure off of Amazon to produce high profit margins from its web services business, he says. “As it was originally conceived, Amazon Web Services was never expected to drive profit,” he says.
But even that may change, according to Macquarie. Although it’s not clear how much profit Amazon Web Services generates now, long term it has the potential to provide higher profit margins than Amazon’s direct retail business “and, therefore, should benefit overall Amazon margins as it continues to grow faster than Amazon’s retail business,” Macquarie said in its report.
Walker will speak at the Internet Retailer Conference & Exhibition 2012 in June in a session titled “Leveraging a commerce platform in the era of the anywhere, anytime, any device consumer.”
In another IRCE 2012 session, Kevin Diamond, chief technology officer, HauteLook, and Lelah Manz, chief strategist for commerce, Akamai Technologies Inc., will speak in a session entitled “My web site is down! Why the Internet doesn’t always work and what this means for your business.”