Amazon Looks to Widen Lead in Cloud Computing

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Large Clients

Beyond small startups, Amazon counts larger organizations including Eli Lilly (LLY), Pfizer (PFE), NASA, Adobe Systems (ADBE), and Netflix (NFLX) as cloud computing customers. On Mar. 23, it released a software development kit so Java developers could more easily write applications that take advantage of its computing services. An Apr. 15 deal with NetSuite (N) lets customers of the online accounting software firm store their data on Amazon's computers.

Amazon.com has always thought big. Since its founding 15 years ago, the Seattle-based company has grown to an expected $33 billion in 2010 sales and has a market value of more than $62 billion. Along the way, there have been detours. Bezos has dabbled in search engines and tablet computers, and Amazon operates an online grocery that's limited to Seattle.

Many of the company's side projects haven't panned out. A six-year-old search engine, A9, hasn't captured Web users' attention, and searches on Amazon sites have less than 1% market share, according to ComScore (SCOR). The Kindle e-book reader is being challenged by Apple's iPad. And as consumers shift to downloadable books, music, and movies, Amazon's pack-and-ship retail model is feeling pressure. The company on Apr. 22 forecast second-quarter earnings that missed analysts' estimates.

Rivals Gather

Moreover, Amazon's competitors are ramping up their own cloud computing operations. Microsoft has attracted customers including 3M (MMM) and the Associated Press to Windows Azure, its software for building applications that run in Microsoft-operated data centers. Azure will also let developers write applications for Windows-powered smartphones, says Microsoft General Manager Doug Hauger. "It is now core to the work we're doing," he says.

IBM is also using cloud computing to try to become nimbler and more appealing to startups, which often eschew its pricey and complex software. On Mar. 16, it announced versions of its developer tools, middleware, and database software that programmers can access over the Web to build applications. They're designed to appeal to startups that often don't consider buying traditional business software. "If you don't have a cloud-based model for your software, then you just can't play with those companies," says Dave Mitchell, IBM's director of strategy and emerging business.

Other deep-pocketed tech companies are building cloud platforms as well. Google runs a cloud product called App Engine, and has shown a willingness to invest when it wants to branch into areas ancillary to search. VMware (VMW) is also marketing its data center software for companies that want to build computing "clouds" themselves. "This is going to be an extremely crowded market," says Scott Crenshaw, a vice-president at Linux vendor Red Hat (RHT). "It's going to expand before it contracts."

Amazon has several advantages over its competitors. Its cloud computing engineers haven't had to satisfy requirements of large customers, so they've been free to make decisions that emphasize new technology and low costs, says Marten Mickos, CEO of software company Eucalyptus Systems and a former executive at MySQL and Sun Microsystems.

Trending Amazon's Way

Adam Selipsky, a vice-president of product management and developer relations at Amazon, says the company learned how to run data centers inexpensively and at a large scale as a result of building its retail business. Many companies will pare back their data center operations in the next decade or two, turning the computing business into one of higher volumes and lower profit margins—a scenario where Amazon excels, Selipsky says. "We're four years into a trend that's probably decades long," he says. Already, Amazon Web Services consumes more computing power than the company's retail business.

For Amazon, expanding geographically and into the IT departments of larger customers will be key as it tries to make the cloud a plank of its growth. With larger rivals aiming to swipe some of Amazon's momentum in this frontier of business computing, Amazon will need to press every advantage it can.

Ricadela is technology editor for Bloomberg Businessweek.com in San Francisco.

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