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I actually think that amazon is sitting on an absolutely huge cash cow right now with ec2. They have a very large and growing customer base, and they are in a

by lsc 16y ago

I actually think that amazon is sitting on an absolutely huge cash cow right now with ec2. They have a very large and growing customer base, and they are in a situation where they can slowly increase prices over the next few years without anyone noticing or minding. By "raise prices" I mean, of course, lower them slower than their costs drop. that's just how it's done in this industry; nobody actually increases prices. I went to a talk the other night by netflix; they were talking about how they moved all their stuff into the ec2 cloud. Now, first, this is costing them a huge premium over owning hardware, even as is. Now, just think, if amazon decreases prices slower than their costs fall (which will fall approximately with moore's law) think how much work it is for netflix to move off of ec2. "But," you say "Power isn't getting any cheaper!" which is completely true, of course, but the amount of compute power I get for a watt of electricity is dropping approximately in line with Moore's law, so as a provider, you can pretty much bank on your ongoing costs decreasing dramatically every hardware refresh. Amazon is in an excellent place right now. I don't know that it justifies a 67 P/E ratio, but depending on just how big ec2 is, and how many other large corporations start outsourcing to them, it very well may be worth more than that.

evgen 16y ago
The problem with this and all other claims here regarding cloud computing being the future growth zone for Amazon is that they are far from the only company out there that provides or is capable of providing these services, and the switching costs are absurdly low for Amazon's customers. Right now they may have the largest piece of this particular pie, but there is no particular reason to believe that as the pie grows they will maintain their market share or margins; we could all easily come up with a list of companies that could jump in and drive Amazon's margins or market share down in the cloud computing space. Now, just think, if amazon decreases prices slower than their costs fall (which will fall approximately with moore's law) think how much work it is for netflix to move off of ec2. It takes almost no work at all. If some bean counter at Netflix tells their board next year that they the current cost/benefit ratio for EC2 now makes no sense it would take Netflix less than a month to move to another cloud provider and less than six months to move everything in-house again. There is no switching cost and with more providers entering the space you are already seeing early arbitragers get into the game. This is going to exert strong downward pricing pressure on all vendors in this space. They are selling what is effectively a commodity, and there is no way they are going to maintain their margins for much longer. If AWS and a bet on a future of fat profits from the cloud is what punters are using to justify this P/E they are making a costly mistake.
- lsc 16y ago
  It takes almost no work at all. If some bean counter at Netflix tells their board next year that they the current cost/benefit ratio for EC2 now makes no sense it would take Netflix less than a month to move to another cloud provider and less than six months to move everything in-house again. if this were true, netflix would have never moved to the cloud in the first place, because like I said, even right now, at scale that is ridiculously small compared to neflix, it's pretty easy to beat amazon on price. Now, first, I mostly agree with your assessment, if we limit the field to smaller companies where the people who own it are still involved with running it, and where people in positions of power have experience running cheap data centers. But, I think the rules are different for "the enterprise." many of the large enterprises I've worked for ended up paying many times over what a company with more data center experience on the board (or in the beancounters) would would pay for compute infrastructure. You've seen the enterprise sales process... the whole system is set up to extract as much money as possible from the enterprise in question. I saw one company that was paying a thousand bucks a month for mid-spec servers to a well-known infrastructure outsourcing company; servers that would cost me close to $2000 total capital cost, and then $100/month in power/bandwidth. According to this company's bean counters, paying that huge premium was actually cheaper for the company than buying and hosting in-house. As for moving from amazon to another outsourced infrastructure provider... well, the problem is one of sales. Amazon is the only company in it's space that I know (with the exception of rackspace, maybe?) that has the credibility to be used by the enterprise without sending a sales guy over. This is incredibly valuable.

by lsc 16y ago

evgen 16y ago

The problem with this and all other claims here regarding cloud computing being the future growth zone for Amazon is that they are far from the only company out there that provides or is capable of providing these services, and the switching costs are absurdly low for Amazon's customers. Right now they may have the largest piece of this particular pie, but there is no particular reason to believe that as the pie grows they will maintain their market share or margins; we could all easily come up with a list of companies that could jump in and drive Amazon's margins or market share down in the cloud computing space. Now, just think, if amazon decreases prices slower than their costs fall (which will fall approximately with moore's law) think how much work it is for netflix to move off of ec2. It takes almost no work at all. If some bean counter at Netflix tells their board next year that they the current cost/benefit ratio for EC2 now makes no sense it would take Netflix less than a month to move to another cloud provider and less than six months to move everything in-house again. There is no switching cost and with more providers entering the space you are already seeing early arbitragers get into the game. This is going to exert strong downward pricing pressure on all vendors in this space. They are selling what is effectively a commodity, and there is no way they are going to maintain their margins for much longer. If AWS and a bet on a future of fat profits from the cloud is what punters are using to justify this P/E they are making a costly mistake.

lsc 16y ago
It takes almost no work at all. If some bean counter at Netflix tells their board next year that they the current cost/benefit ratio for EC2 now makes no sense it would take Netflix less than a month to move to another cloud provider and less than six months to move everything in-house again. if this were true, netflix would have never moved to the cloud in the first place, because like I said, even right now, at scale that is ridiculously small compared to neflix, it's pretty easy to beat amazon on price. Now, first, I mostly agree with your assessment, if we limit the field to smaller companies where the people who own it are still involved with running it, and where people in positions of power have experience running cheap data centers. But, I think the rules are different for "the enterprise." many of the large enterprises I've worked for ended up paying many times over what a company with more data center experience on the board (or in the beancounters) would would pay for compute infrastructure. You've seen the enterprise sales process... the whole system is set up to extract as much money as possible from the enterprise in question. I saw one company that was paying a thousand bucks a month for mid-spec servers to a well-known infrastructure outsourcing company; servers that would cost me close to $2000 total capital cost, and then $100/month in power/bandwidth. According to this company's bean counters, paying that huge premium was actually cheaper for the company than buying and hosting in-house. As for moving from amazon to another outsourced infrastructure provider... well, the problem is one of sales. Amazon is the only company in it's space that I know (with the exception of rackspace, maybe?) that has the credibility to be used by the enterprise without sending a sales guy over. This is incredibly valuable.