I don't agree. Though I think its great and technologically the next step forward this will never be a high margin business and will quickly turn into a race to the bottom as the switching costs are zero.
If you look at what they're doing, they've gone from offering raw storage and computers by the hour to offering DNA analysis as a service. They will keep building more sophisticated offerings. They're not racing to the bottom, they're racing to the top.
dna analysis is a niche, this is a service which by its nature is very easy to commoditize. To be useful it has to be invisible, and to be invisible it must have zero switch cost
DNA analysis is a niche, and they chose it because it is a commonly executed algorithm with a Hadoop implementation lying around. The point is that by including it they are showing that they will be offering more and more such algorithms for execution as implementations become available. First it was just machines, now they're running specific software and specific jobs on that software for you. The stack just keeps getting taller and nobody else's stack comes close. The more advanced the service you run, the more they are charging.
Amazon is winning by building more and more sophisticated services on top of their infrastructure to sell more and more use of the basic services.
I hate to sound repetitive, but everything about it is a race to the top, not the bottom.
Every single technology they've built on here is open: 'PC hardware', Xen, Linux, Java, Hadoop, HTML, SOAP, Javascript, Web Services. The unique components are their grid technology and interface and that they have wrapped it all as a reliable, easy to use and all around great product. Thats why Amazon is so incredibly smart: they maximumize use of open source to create unique and valuable offerings that solve fundamental pain. Last week doing hadoop computes was a pain in the ass. This week its not. Value.
This is the most amazing thing going, Amazon is leading the market and continuously innovating, and you don't buy it because of 'switching costs.' Tell me the truth: do you have or are you studying for your MBA?
thats my point, its all based on an open stack. so while innovative and important (i no longer use my regular host) its reproducible. In fact there are already several players converging on this space (slicehost et al, appengine).
Long term this business is analogous to the hosting business: low margin and commoditized. is it a market? yes. Is it a big market? no. Why? because there is no lock-in.
If you can't understand this consider the scenario where 5 or 10 years from now Amazon is providing the infrastructure for 20% of the web, taking in 20% margins above the cost to operate the data centers and making a hefty profit.
What stops Microsoft or Google or any other player for that matter from getting in on the action by undercutting them in price?
If you look at any (amazon scale) money maker online there is some sort of lock-in involved which is central to their business. Most often its a network effect of some kind. Go ahead, go down the list of the top 10 web companies and take a look yourself.
Just because something is technologically cool does not mean its going to make enough money to be significant to amazon's bottom line.
Also don't insult people if you can't grasp what they are saying.
Bezos doesn't disagree. "I'd be surprised if no one else does this," he says, pausing for effect. "It's a really good idea!" And there may be an ace up his sleeve. Any economist will tell you that a commodity business -- storing and processing data, for instance -- is a mug's game, with prices that plunge inevitably toward the cost of production (in the case of bits, pretty close to zero). That's music to Bezos' ears. "Commodity businesses don't scare us," he says. "We're experts at them. We've never had 35 or 40 percent margins like most tech companies."
What is Google's lock in? Anyone is free to write a better search engine and buy a bunch of hardware to throw at the problem. The switching cost is typing a different URL to search, or configuring your browser search box to use that engine.
The "write a better search engine" part is not easy, and Google's algorithms are proprietary, but their success is not really a network effect, is it?
Also, saying Amazon is providing "infrastructure" implies they are going to deliver their current product then stop. But they can continue to build higher levels on top of what they already have. Maybe next will be algorithms baked into Hadoop, so you can throw your data at it without writing any of your own code. They can keep building up like this indefinitely. If Microsoft had released the first version of Windows and stopped, it would have become a commodity eventually (even with network effects).
Sorry, I hate to be that guy and keep arguing, but I'll just say google does not fit here at all because:
1. there are huge up-front costs and a lot of IP to building a competing search engine (not the case here)
2. google is a consumer company where brand and user behavior are important (not the case here).
3. most importantly, they make their money with an ad network which has network effects and where they charge enormous margins
you'll notice in all the discussions between yhoo/msft the most important thing for both companies is their ownership share of the search ad network. this is key to the bottom line and long term relevance and its why you see proposals along the lines of we'll give you a bunch of money and a guarantee of a portion of revenues in exchange for ownership of your network
The point on rising above infrastructure only applies if they begin adding some sort of ip or secret sauce. Then they can get network effects if they have people building on a platform that is not easy to replicate, but we've seen nothing like that. Hadoop is not that.
Obviously, failing to look ahead is a mistake. But it is also a mistake to project too far ahead. Remember Keynes' famous aphorism: "In the long run, we are all dead."
You're thinking in equilibrium terms. Yes, it's easy to imagine that one day this business will reach a low-margin equilibrium. Though that doesn't guarantee it will happen in our lifetimes. (An example of a factor that mitigates against it: Monopolies. Get a monopoly, and you can keep margins artificially high.) And just because something will eventually be commoditized doesn't mean it will never be a high margin business. Margins can be quite high at the beginning. And, if you stay out of the business because you're afraid of what will happen in ten years, you miss out on all that money that's on the table now. Just imagine if Microsoft had been unwilling to release Windows 95 because it was obvious that in ten years we'd all be trying to switch to Unix.
The electronic component industry knows all about this curve. Component manufacturers race to ramp up early production of a new part, because the part sells for higher margins when it is first to market. Within a year or two other manufacturers will clone your part, or invent alternatives, and your margins will drop to tiny levels. But by then you'll hopefully have ramped up something else. The business has worked that way for a long time.
In the case of this new Amazon service... I have never heard of Hadoop before. By releasing a turnkey service with big fanfare, Amazon will grow the market to include people like me. Because we have no clue what we're doing at first, they can charge us high margins for a standardized, widespread service with a relative wealth of documentation and buzz and (perhaps) some tech support. Eventually the market will stop growing, the customers will be educated and start hunting for bargains... and Amazon will move on to something else.
Amazon has my purchase history and preferences (about 10 years worth) as well as my trust and approval. Switching costs are not zero, in my case, at least.
