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Amazon Expands Into Data Center Market

Critics thought it was over the top when Amazon.com Inc. expanded from books into music in 1998. When the Web retailer let competitors start selling things alongside its own inventory in 2000, they said Amazon had gone nuts.

In both cases, Amazon proved them wrong. Media sales now total in the billions each quarter, and third-party merchandise, more profitable for Amazon than its own wares, makes up nearly a third of everything sold through the site.

Now, Amazon is making an even greater stretch -- selling storage, computing power and other behind-the-scenes data center services.

The venture, which Amazon expects will grow into a significant business segment, could help keep the company strong if retailers get hit by an economic downturn. More broadly, Amazon Web Services, as the business is called, could improve chances for a new generation of Web startups by slashing how much they spend up front on costly infrastructure.

MileMeter Inc., a Dallas-based startup that plans to sell auto insurance by the mile, started out running its own server in a data center. Recently, it moved most of its applications onto virtual computers in Amazon Web Services' Elastic Compute Cloud.

EC2 lets its customers quickly start up a virtual computer in the "cloud" -- industry slang for data centers around the world -- then use it as a Web server or for crunching data and shut it down just as fast.

"I don't need to have a systems administrator or a network administrator," said Chief Executive Chris Gay. "I don't have to worry about hardware becoming irrelevant."

Gay said he also uses Amazon's online payments service and is evaluating its data storage and simple database services. During the first dot-com boom, he said, "It was a badge of strength to have as much as possible in house.

"Now, unless that is your core business...it's a liability."

Adam Selipsky, vice president of product management and developer relations for Amazon Web Services, said Amazon wants entrepreneurs to focus on their ideas, not on hardware leases and crashing servers.

"We want to let developers innovate and make money," he said.

Amazon is certainly not the only player. James Staten, an analyst at Forrester Research, said Akamai Technologies Inc., Enki and Terremark each offer at least a portion of the Web services Amazon is selling. IBM Corp. and Sun Microsystems Inc. offer pricier versions aimed at big businesses, while Google Inc. and Microsoft Corp. are thought to be working on services similar to Amazon's.

Amazon comes closest to utility-style billing, Staten said. Most competitors demand a contract or minimum payments.

Amazon, which gives away the computer code to access its services, bases its fees on how much data is shifted around and stored. For example, the company charges 15 cents per month for every gigabyte of data stored in its Simple Storage Service. Developers pay another 10 cents each time they send a gigabyte into the cloud and 18 cents per terabyte when they pull data back out.

SmugMug Inc., a photo sharing startup, had considered storing its users' digital pictures and movies in the cloud with other services. But "the pricing was out of our reach, and it wasn't simple to engineer" before Amazon Web Services launched, said co-founder Chris MacAskill.

Today, the Mountain View, Calif.-based company keeps more than 400 terabytes of data in Amazon's Simple Storage Service. It also uses up to 750 "instances," or virtual machines, in Amazon's Elastic Compute Cloud during peak hours to help turn its clients' high-resolution photos and video files into different sizes for display online.

In the first 12 months it used Amazon Web Services, SmugMug saved $1 million.

"It is hard to get your head around: 'Why is this retailer that ships me toys for my kids for Christmas ... also my supplier of IT services?'" MacAskill said.

Amazon executives would say that's because theirs is a technology company, not just a retailer. In 2005, it ramped up spending on "technology and content," a catchall expense line that includes data centers and R&D to support its own global growth, Web Services, its third-party seller platform, its digital music and movie download stores and other projects.

In 2005 and 2006, the company dropped $1.11 billion on technology and content, eating into margins and souring Wall Street on its stock. With Web Services, Amazon has a chance to earn back a slice of that investment.

It's too soon to tell if Amazon will be able to turn Web Services into a business with revenue to rival its retail lines. The company declined to say what Web Services brings in, saying only that it had signed up 330,000 customers -- startups, Fortune 500 companies, students, researchers and others -- by late 2007.

"Is it any meaningful percentage of revenue? I doubt it," said Global Crown Capital analyst Martin Pyykkonen. "As far as being a technology company...Eh. It depends on how you want to get into labeling it. It's retail."

It's also not clear how many startups will want to outsource their data center functions.

At Shelfari, a social networking startup for avid readers that is partly funded by Amazon, Chief Executive Officer Josh Hug doesn't intend to use the new Web services.

Having IT staffers to keep a close eye on things is important for a consumer service, Hug said. "It's worth the extra cost."

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