What do you do once you become the top bookseller and web-startup hoster? You shoot for the enterprise market!

That seemed to be the sentiment of Amazon’s Cloud for the Enterprise event which the company held in Sofitel Los Angeles last week. The pitch boiled down to:

• Amazon’s datacenters are the most reliable, secure, and cost-effective option you can find,
• Amazon Virtual Private Cloud (VPC) lets you securely connect an isolated subnet of Amazon Web Services (AWS) to your intranet,
• If you are already virtualizing your applications, why not then run them in AWS and not spend money and efforts on whatever datacenter expansion you might need on your end?

Why this makes sense?

Amazon went a long way to make their datacenters more reliable and secure, they have the technology for network connectivity, and they do get significant economies of scale. The latter is not just words. Amazon’s CTO – Werner Vogels – showed pie chart of the cost structure for their datacenters.

They have almost eliminated labor among the significant cost factors – which is great considering that labor is one of the top (if not the top) elements of typical on-premise IT environments.

However, they went further than that. In their current cost structure server hardware is by far the number one cost absorbing more than 50% of what they have to spend. This made them work hard on improving the utilization of these resources. What they did is sell these compute resources as a combination of:

• Reserved instances (when customers commit to resources for a long period of time to get 50%-70% discounts),
• On-demand instances (normal hourly pay as you go model), and
• Spot instances (when the remaining resources get automatically auctioned among bidders in a name-your-own-price scheme)

This means that they can get server utilization close to 100% – which is incredible considering that typical numbers in the industry are probably within 10-30% range.

Considering all this, why bother buying a new server when Amazon can deliver a potentially better service (with additional availability options, global datacenters and so on) at a lower rate?

What is in it for Amazon?

This also seems to be a natural adjacent market for Amazon (the IaaS company – not the online retailer). If they already successfully host web startups and are the most well-known compute platform for tasks such video transcoding or text recognition – why not use that same expertise and infrastructure to sell it to enterprises?

Enterprise IT is a huge market with great margins, and as corporate CIOs are looking for ways to use the cloud to cut costs and/or become more agile – Amazon has the brand recognition to be their number one choice.

This seems to be a high priority effort for the company considering that they have their CTO attending and delivering his keynote at events like the one in LA. And it should be if Amazon does not want to be squeezed between enterprise vendors like Microsoft and VMware getting the higher margin enterprise cloud segment, while initiatives like OpenStack commoditizing lower end cloud compute services.

With so many vendors going after them, Amazon needs to keep moving fast to stay relevant.

Are we there yet?

With all that being said, today Amazon’s pitch remains a great story rather than reality for both technology, business and perception issues.

Technological challenges include inability for IT today to easily (or better automatically) move workloads between their on-premise datacenters and Amazon’s cloud. Even the virtual machine images Amazon is using are not compatible with the VMware and Hyper-V hypervisors enterprises have.

Obviously most of the existing IT management and monitoring tools that companies are using are not yet Amazon aware either – meaning that administrators cannot just get Amazon added to what they have already but instead would have to learn new ways and find new tools.

From business perspective, Amazon is just not an enterprise vendor yet. Corporations have contracts with Microsoft, IBM and others – Amazon is brand new to these customers.

Perception-wise, Amazon needs to find early adopters of that enterprise IT scenario to showcase at events like this. The 4 customers presenting at the event in LA were using AWS to:

1. Offload computation tasks,
2. Do image processing,
3. Host web sites, and
4. Host their SaaS electronic medical records application in the cloud.

Needless to say, these are not the scenarios Amazon was trying to pitch.

Summary

With the enterprises starting to evaluate their cloud options, the fight for the cloud for the enterprise is only going to become hotter. It is going to be interesting to see if Amazon finds a way to “descend” from the public cloud to the on-premise and hybrid scenarios with smart partnering and acquisition strategy, or traditional enterprise and virtualization players add public cloud to their solution sets and squeeze Amazon out.

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