This helps Amazon not only to attract more customers to this new product but also to build new infrastructure thus benefiting its core business. The unmatched economies of scale at Amazon offer huge cost effciencies through a combination of high-volume, low cost procurement thanks to bargaining power of buyer Amazon. In addition, constant technological innovations in design, operations and management of the data centers help Amazon reduce the prices of its AWS offerings. Because of cheaper service provision, there is a flood of new customers for AWS.
However, with the advent of new competitors like Google Cloud Engine, there is an increasing stress on Amazon pricing. But, given that any typical business needs both scalable computing and storage, AWS, which offers a complete basket of services is a preferred choice for customers. Furthermore, the investments on AWS improved Amazon’s core business by helping it introduce value-added services. In 2007, Amazon introduced cloud- based music service to sell MP3 songs and a web- music player.
Even though other competitors like Google announced a similar service, the music content available on Amazon was significantly cheaper and attracted more customers. Amazon Cloud Drive introduced almost simultaneously, runs on AWS (S3) service. The Kindle device sold by Amazon has a huge competitive advantage over Nook in the market thanks to up to 5GB of cloud- based free storage for storing books and personal documents. This also reduced the manufacturing cost of the device by getting rid of microSD card slot.
Amazon AppStore, that runs on AWS, built to sell Android apps is a popular value added service to the recently introduced Kindle Fire device. Often, the prices of these apps are way lesser than those of competitors like Google. Instant Video is another massively popular service which helped Amazon build a huge eco system of content like music, books, apps and video that is vital for the success of a tablet device in the current ever- changing market extremely crowded with numerous devices from various manufacturers.
Amazon has an advantage over competitors in this market because they were the first to market and so have had more experience and time to work out the kinks. Their 99% uptime guarantee for the S3 service is a testament to the fact that they have experienced issues in the past and have learned from them to the point of being able to offer guarantee to the users. Also, because designing and building such huge cloud infrastructures requires vast amount of resources, competitors need precious time to catch up.
In addition, Amazon itself is a very big customer for AWS. Hence, strengthening AWS is a natural choice for Amazon which is in its own business interest. For other players in the market, for example, RackSpace, a huge uncertainty exists in planning new initiatives and introducing new services on its cloud products. Also, AWS is a product evolved from Amazon’s existing infrastructure unlike some competitors’ alternatives which had to be built from scratch, in turn giving a huge lead time to Amazon in cloud computing.
Moreover, huge costs involved prohibit existing clients of AWS to switch to a new, yet cheaper, alternative. Furthermore, Amazon has learnt the imperatives and modalities of implementing and maintaining a network out of their business need and so as a consequence has better insight of flexibility some real world situations need. Thus I think though Amazon is giving up its competitive advantage of software competency by offering AWS services, it is in turn proving to be profitable to the Company in the long run.