April 1, 2012, 12:00 AM

The top dog in online retailing forges ahead in cloud services

To better compete against the likes of IBM and Google in the business of selling Internet-hosted technology services to retailers, Amazon.com is cutting its fees. Amazon is in a unique position as a provider of web services in that it also uses them to run its own retail operations.

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The big are always looking for new ways to get bigger, and in Amazon.com Inc.'s case one way is through offering remotely hosted web services to other retailers.

Often called cloud-based services, they enable online retailers and other companies to store their ever-increasing volumes of 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, the world's largest retailer by web sales, but also boost the cloud-based technical support for its own direct retail operations.

To better compete in the market, 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 ElastiCache, which lets retailers or other users cache data, such as product images, for faster download by web site visitors.

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 its Smart Business Storage Cloud for data storage and its Computing on Demand for cloud-based computing services. Google'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."

Walker says 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 investment bank Macquarie Capital. 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 a recent report.

It makes one wonder just how big Amazon could get.


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