Quentin Hardy 02.11.08, 12:00 AM ET
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On the Run
Stagpanic
Experience
Suspended Animation
Complete Contents
Why buy computers when you can rent them from Amazon, EMC or Yahoo? Has Jeff Bezos got a bargain for you.
Like everyone else, the executives at gossipy real estate Web site Zillow have been anxiously watching housing prices collapse. Hoping to spice up its offerings to a discouraged consumer, Zillow recently recalculated the values on 67 million homes over a 12-year period, a database of figures that took up 4 terabytes of memory. The company figured it would need six months and millions of dollars to make it happen. Instead, Zillow ran the job over the Internet, on 500 computer servers rented from Amazon.com. It took only three weeks and cost less than $50,000.
"This is a computer-development playground," says Spencer Rascoff, chief financial officer of 165-employee Zillow.
The next revolution in high tech is taking place inside the "cloud" of the Internet. Small outfits looking to do lots of computing in a hurry are not buying hardware anymore; they're renting from established players that already operate vast networks of cheap computers. Time-sharing, a concept from the dawn of the computing age, is back with a vengeance.
Amazon launched its service in March 2006 by renting basic data storage and has since gone into services like computing and databases. Storage-hardware giant EMC (nyse: EMC - news - people ) in October paid $75 million for the consumer online storage service Mozy, which it plans to expand into an industrial-strength business, possibly cannibalizing its own hardware sales. In March Microsoft (nasdaq: MSFT - news - people ) is expected to offer its own version of cloud computing, likely aimed at big businesses. Yahoo (nasdaq: YHOO - news - people ) will move into the business later in the year. Google (nasdaq: GOOG - news - people ) has shown no interest in leasing out its vast infrastructure, but it is challenging Microsoft with a suite of online applications akin to Office.
The spreading of the cloud darkens the outlook for traditional hardware makers such as Dell (nasdaq: DELL - news - people ), Hewlett-Packard (nyse: HPQ - news - people ) and Sun Microsystems (nasdaq: SUNW - news - people ), which have already been buffeted by fears of a U.S. recession.
Amazon Web Services has already won over customers such as the New York Times, Red Hat (nasdaq: RHT - news - people ) and SanDisk (nasdaq: SNDK - news - people ). Consultancies are also springing up, selling companies on ways to use Amazon for things like online backup systems and database clusters to speed a Web site's performance. The pitch is that if the downturn hits, hiring Amazon is something a department can do with spare cash and no authorization.
Amazon charges 15 cents for a gigabyte of storage and 10 cents an hour for a server, services that customers say are up to 90% cheaper than rental alternatives from computer-hosting companies like Equinix (nasdaq: EQIX - news - people ) and Rackspace.
More than saving on hardware purchases, companies like relieving their tech staffs of maintenance chores. Ooyala is an online video company that offers thousands of hours of high-definition video through Amazon Web Services. At Ooyala's usage levels, Chief Technical Officer Sean Knapp says, it might be cheaper to buy servers, but "this accelerates the speed of innovation."
It almost certainly accelerates Amazon's historically rocky profitability. The company divulges almost nothing about its costs or margins but is said to run its Web Services business on huge networks of computers costing as little as $300 each. Ten cents an hour adds up to $876 a year in revenue (assuming nonstop usage). If hardware lasts two years and if, let's say, electricity and other overhead cost as much as the hardware, Amazon would have a gross margin of 45%, better than what it gets on books.
In the last two months of 2007 the number of items stored at Amazon Web Services grew 40%, to 14 billion units. (Units vary in size from a couple of bytes to 5 gigabytes, and Amazon keeps the totals secret.) That's a faster growth rate than in the April-October period. Amazon's s3 storage service now handles 30,000 requests to its database per second. "We feel really good about our prospects, both for size and margins," says Adam Selipsky, vice president at Amazon Web Services. They expect over the next several years the operation will become a major business alongside its retail business. "We were always a tech company: First we applied it to retail, now to this."
Manufacturers like ibm and Sun are struggling to move to the new model. Sun already offers an online rental system and expects to keep selling hardware. "We've got to be the infrastructure," says Greg Papadopoulos, Sun's chief technical officer. If you can't beat them, arm them.
