Amazon Brings Price-Cutter Mentality To AWS

Having lowered prices for storage, Amazon hints that similar cuts could come to other areas of its cloud services.

Charles Babcock, Editor at Large, Cloud

February 22, 2012

5 Min Read is a unique company that has built a huge online retail business through aggressive pricing. It started with hawking books below store prices. It is now suspected of selling its popular Kindle Fire tablet at cost or even below cost, in order to build a clientele for future digital content downloads. And it has kept prices low on many other fronts. Now Amazon may be bringing its low-cost attitude to cloud computing, as seen in its Feb. 6 decision to lower prices on S3 cloud storage.

A top Amazon cloud official, Adam Selipsky, VP of Amazon Web Services marketing, sales, and product management, recently hinted that the same attitude might be applied to AWS cloud pricing more broadly.

"We're highly predictable," said Selipsiky, during a recent interview in InformationWeek's San Francisco offices. "We take the cost savings we produce and pass them on to the customer." When Amazon lowered S3 prices, it didn't just apply the reduction to new subscriptions, but to existing subscribers as well.

This attitude is part of Amazon's DNA--and has earned the company periodic hits to its stock price. As Amazon announced fourth quarter results for 2011 at the end of January, revenue was up 35% for the quarter and 41% for the year, hitting annual revenue of $48.1 billion. But its stock price took a hit, as investors had expected more profit and more cash on hand.

CEO and Chairman Jeff Bezos insists on building his online retailing juggernaut for the long term, which investors define as about 12 months, while he measures it in 5 to 7 year periods, or even by the decade. Net income in 2011 was $177 million, or a 58% decrease over the previous year. This wasn't what investors wanted to hear as Amazon entered its 15th year as a public company.

[See how one company built its own private cloud infrastructure to lessen its dependence on Amazon. Read Inside Zynga’s Big Move To Private Cloud]

Amazon's profit margins are slim, 2.4%, as it pours money into building its business. It's hiring people to staff 17 planned or recently completed fulfillment centers, and its head count increased 67% in 2011 to 56,200 full and part time workers. "We are investing in many different areas. The majority of new employees go into operations and customer service in support of that growth," said CFO Tom Szkutak during the earnings call.

Oracle, by contrast, likes profit margins closer to 30% and even bricks and mortar Wal-Mart would be unhappy with anything lower than its current 6% margins.

A less visible area of investment, in both employees and capital expense, is Amazon Web Services. Cloud data centers dispensing Amazon's infrastructure as a service went unmentioned in the Jan. 31 earnings call, but Amazon added a South American service region in Sao Paulo, Brazil, in mid-December, and in Oregon in November. Amazon has never attached a precise definition to "service region," but it means roughly a large data center or complex of data centers in a named locale. The U.S. West service region, for example, consists of data centers in San Francisco and Oregon.

No price tag was discussed; but in the Amazon way of doing things, each region must offer more than one availability zone, which means either multiple data centers or large data centers with multiple sources of power and communications. Either way, I think the price tag starts north of $200 million.

As Amazon continues to build out expensive infrastructure, it hasn't raised prices. On the contrary, as storage prices continue to fall, AWS sought Feb. 6 to keep the argument alive that storage will cost less in the cloud and lowered prices by 11% to 13.5%. So I asked Selipsky during a visit to InformationWeek offices earlier this month whether other AWS cloud prices might be reduced. Selipsy has a reputation not as a technology wonk but as a tough-minded businessman, so his answer came as a bit of a surprise. Said Selipsky:

"Prices of all cloud services will go down over time. A lot of technology business is a good business with high margins. But that's not Amazon’s strategy. We've lowered prices 18 times over six years. Amazon's approach reflects its roots in the business of retail. We drive the scale of business and lower prices. That part of the strategy is continuous across the company," whether it's selling Robert Ludlum's Jason Bourne series or virtual servers and disk drives, he said. He wouldn't comment on which service might be next – DynamoDB? Elastic Block Store?

Amazon’s senior cloud evangelist Jeff Barr sounded a theme similar to Selipsky's in a Feb. 11 blog on Amazon's pricing versus on-premises operations. He concluded: "We continue to focus on lowering infrastructure costs and we're far from being done." We shall see how frequently and effectively AWS reduces prices beyond storage. Given the growing power of x86 processors, it must be about time for virtual servers to drop below the established $.085 per Linux server and $.12 per hour per Windows Server. Many parties moving into the cloud, including Netflix and Outback Steakhouse, are counting on Amazon to live up to its "predictable" inclinations. If Selipsky is correct, then it's inevitable that Amazon will make additional pricing cuts. Some other suppliers may even try to beat Amazon to the punch. If so, we’ll witness a gradual decrease in cloud prices, which would be great.

But cloud performance has proven somewhat unpredictable, as witnessed by the April freeze up of parts of Amazon’s U.S. East data center. Amazon might decide it can't cut costs quite as quickly as its predictable pattern of behavior would dictate, and still invest enough in its cloud performance.

Charles Babcock is an editor-at-large for InformationWeek.

About the Author(s)

Charles Babcock

Editor at Large, Cloud

Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive Week. He is a graduate of Syracuse University where he obtained a bachelor's degree in journalism. He joined the publication in 2003.

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