Is Amazon Zeroing in on the Right Cloud?

Amazon reported its quarter and gave the Street a big upside surprise (refreshing in the tech space this quarter).  Since the company doesn’t break its numbers down as completely as I’d like I can’t dig too much into their details, but there are some things worth looking at.

Number one is Kindle Fire and ebooks.  Amazon made it clear that digital content was driving a LOT of growth for the company, which vindicates its strategy for seeding the market with a low-cost high-feature reader (Fire) and then reaping the profit on the sale of books to that device.  Or movies, or whatever.  It’s making it pretty obvious that the way Amazon intends to swamp rival Barnes & Noble isn’t by out-tecching them, but by making the retail book business into a giant albatross.  There’s already pressure from B&N investors to spin out the Nook and ebook business, which is pretty much a prescription for letting books sink while ebooks thrive.  Not that much can be done about that.

The potential risk Amazon faces here is that ebook success may be embodied in the Kindle Fire but it’s not the cause.  People are getting accustomed to living through an electronic agent (multiple agents in most cases) and so they’re now very comfortable with the idea of displacing “real” books with ebooks.  Two years ago in our first surveys on the topic, I found that only about a quarter of people said they “preferred” ebooks but half said they believed ebooks were the way of the future.  In the last survey, almost two-thirds said they preferred ebooks and almost everyone thought they were the drop-dead winner in the long run.  That acceptance is the risk, though.  People who want the convenience of living through an appliance are going to want something very general-purpose.  Amazon has thrown down the gauntlet to the Apple and tablet players; they have to make Fire a good enough tablet or they’re just creating the feature shopping list for their future competitors.

The Amazon challenge inevitably leads to the cloud.  OK, I’m sure you’re tired (at one level at least) hearing that the cloud changes everything, but the good news is that’s not what I’m saying.  The notion of always-on broadband and personal appliances is what changes everything.  The cloud is being pulled along by that force, just like ebooks are.  EC2 is an interesting offering.  IaaS, the prime product, is the lowest-margin service, the one with the least prospect breadth, and the hardest to sell to SMBs.  However, it’s the most versatile, and an online retailer isn’t generating high margins anywhere so Amazon can tolerate that.  Further, given EC2 as a resource, Amazon can draw on it to make its own processes elastic and also to create new online services.  The big question, one that we can’t answer, is whether Amazon sees the future opportunity (and risk) that generalized cloud-to-appliance services represent and will leverage EC2 to address it.  Apple has Siri now, AT&T says they’ll have “Watson”, and you can BET that Amazon is working on a personal agent.  Such agents, as I’ve said, can control the scope of a user’s information searching, and thus create what’s effectively a digital supermarket in which every Kindle user would shop and live.  It could be big, very big.  Big enough to give Apple some grief if Apple doesn’t get its own cloud service moving.

All of this is why I’m frustrated by network equipment vendors.  Here’s an area that’s spawning big-time investment from giant firms and somehow the network guys think that their own customers (whose networks are making the connections and carrying the traffic) aren’t interested in participating.  For Alcatel-Lucent and Ericsson and Juniper and NSN, all of whom have serious problems in cloud positioning, the same forces that are pushing Apple and Amazon are pushing the network buyers away from traditional boxes.  Why then rely on them?  Today, UBS said that they believe Cisco is gaining market share in networking.  Yes, that’s easy given that Cisco is the only major network equipment vendor who hasn’t reported.  It’s also likely true; my surveys of strategic influence have shown Cisco gaining ground since its rude awakening.  They also said that their surveys found “no surveyed CIOs actually plan to deploy either the general purpose top of rack or the more complete QFabric solution in 2012.”  Could it be because fabrics are most valuable in a cloud data center and Juniper has no cloud strategy?  Cisco has servers, all of the pieces of the cloud ecosystem.  Yes, they could (and likely will) do a better job of articulating the cloud reality, but the shortfall won’t matter with all their competitors’ heads in the sand.


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