Amazon’s core business of selling goods (ranging from books to fresh food and electronics to fashion cloths) through its e-commerce portal has seen exponential growth which necessitated a need for a massive storage and computing infrastructure that is always available and is resistant to failures. After building this, it is intuitive for Amazon to open up the infrastructure and sell it as a commodity. 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...