The arrival of Amazon Web Services in Australia is a watershed moment for the local IT industry – just about every player in the game stands to make millions, save millions or lose millions.
For many Australian organisations, the shift to the public cloud came well before AWS Sydney officially opened. Commonwealth Bank CIO Michael Harte told the excited crowd at Amazon’s heavily oversubscribed “customer appreciation day” at the Westin Hotel last month that he had cut costs by 40 percent by moving a dozen applications to Amazon.
That speech – and several similar – will give a lot of confidence to those that had sat on the fence.
It makes for an unsettling Christmas and New Year for the operators of local hosting services – just how much will the landing of Amazon and imminent arrival of Rackspace have on their fortunes? Do they stick to their dedicated hosting products, imitate their foreign rivals or simply become resellers of the cloud solutions stealing their business?
Hitting the hosts where it hurts
Amazon Web Services (AWS) is more than just another hosting company. Its scale, geographic reach and range of products — provided at highly competitive prices — are compelling for non-critical applications.
Try this for scale. As of Q1 2012, AWS’ storage service (S3) contained one trillion objects. It operates over 20 data centres around the world and each day adds the same amount of server capacity it once required to power the entire Amazon website in 2003.
That $US5.2 billion upstart is now worth $US48.2 billion and employs 70,000. And while Amazon.com doesn’t break out figures for Amazon Web Services, recent estimates put its share of revenue at $US1 billion.
Amazon.com uses economies of scale ruthlessly to drive down prices and make it harder for new cloud market entrants to compete. In the past six years the company has reduced prices 23 times. And as AWS’ feature set rapidly expands, solutions architects have designed ways to make the commodity service reliable enough for more than the brochure-ware sites.
Just last week, the largest news website in Australia, NineMSN, predicted it would slash IT costs from $A5 million a year to “sub $A1 million” by moving applications — including its flagship content management system — from Australian hosting company Hostworks to cloud services run my Microsoft Azure and Amazon.
While some production systems will remain with Hostworks, NineMSN expected to migrate most applications to Amazon and Microsoft’s cloud hosting platform Azure over the next 18 to 24 months, pending the maturity of both services.
The news company isn’t yet willing to bet entirely on public cloud – “it’s a long project and there are lots of twists and turns,” a spokesperson said, but it’s a bet they are willing to take on.
Melbourne City Council has meanwhile moved its internal servers for major events to the Amazon cloud, while retail promotions group RedBalloon has also shifted in 17 servers from BlueFire into AWS.
Many of the biggest names in Australian hosting are putting up a fight, of sorts. No-one dares to take on Amazon head-on on price. Instead, local players are reframing discussions around business outcomes backed by comprehensive SLAs and other higher value services.
Paul Mullen, Hostworks’ managing director, says his company only targets high-value customers that want to bundle application management, connectivity and security rather than just raw computing power.
“We haven’t seen Amazon impacting (our business) so far,” Mullen says. “We’re hearing a fair bit of talk, and customers will often provide pricing comparisons, but we don’t unbundle. At the end of the day what they are buying is our solution. If we chose to ditch our infrastructure (and use Amazon) we wouldn’t be able to offer anywhere near the same SLA that we offer our customers.”
Hostworks is beta testing the second iteration of its own elastic compute service with more granular controls over provisioning and configuration than the first service, which hosted SBS’ 2010 World Cup web site.
Mullen says that over time, he actually expects NineMSN to buy more services from Hostworks.
“We continue to expand our range of services with NineMSN and don’t expect NineMSN to be leaving us as a customer,” Mullen says. “At the same time I wouldn’t expect any customer to do 100 percent with us.”
SLAs are emerging as a line in the sand. Hostworks and Macquarie Telecom both offer SLAs tied to business outcomes while Amazon’s technical SLAs relate only to the availability of services. In other words, Amazon only refunds a portion of the hosting fee, rather than the consequences of lost availability to a business.
“The SLAs attached to AWS will not have CIOs sleeping easily at night,” says Matt Oostveen, head of research at analyst firm IDC. “If you have an outage of your workload in AWS then the SLA is typically designed to refund you the $A2.70 for the time the system is down rather than the cost to your business.”
As such, organisations will tier their applications and workloads and only send non-critical applications to the AWS cloud, he said.
Shane Owenby, managing director of Amazon Web Services in the Asia Pacific defended AWS’ SLAs as more straight-forward than other providers.
“Many of the SLAs you see out there are written in a way that either defines out a lot of downtime as maintenance or are written so a vendor never has to pay out.
“More importantly though, what matters most is demonstrated performance, and ours has been strong. We provide a Service Health Dashboard that shows the current operational status of each of our services in real-time, so that our uptime and performance are fully transparent.”
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“I’ll tell you who’s worried," says IDC analyst Matthew Oostveen. "The telcos and the hosters who are playing in that same SMB space."
Some of the biggest brands in Australian hosting are signing up to use Amazon’s cheaper infrastructure, rather than build more of their own.
Amazon has built an Australian partner network that includes Anchor, ASG, Bulletproof Networks, Fronde, Industrie IT, The Frame Group, Melbourne IT, SMS IT and Sourced Group.
AWS has become a base building block upon which many of these organisations now build differentiated services.
“We see Amazon’s entry into Australia as a fantastic thing for our business,” says Michael McGoogan, CEO of Uber Global, Australia’s third largest hosting company by market share.
Uber intends to use Amazon as its supplier and will start switching over products for new sales and moving its existing 110,000 business customers over a five-year refresh cycle.
McGoogan estimates he will save 20 percent to 30 percent on its infrastructure costs by using Amazon. He says he doubts Amazon will have many competitors at the raw IaaS level.
“Amazon is changing the whole game at a cent per hour level to a price that domestic competitors simply can’t compete with,” McGoogan says. “They’re able to buy their technology at a global level and bring it into Australia at a much cheaper price. The guys that have built their IaaS have all done so paying the Australian premium, but Amazon doesn’t pay the Australian premium.”
Melbourne IT has also committed to this route, arguing that there is no longer any point in providing commoditised units of storage, networking and compute. Like Uber and Telstra, Melbourne IT had attempted to build its own public cloud services using commercially available virtualisation software, but simply couldn’t build out enough scale before Amazon’s arrival.
“The value today is in the solutions and the way you package up those (computational) units, not in the delivery of those units on their own,” says Peter Wright, Melbourne IT’s executive general manager.
The hosting market should open up to more integrators that use Amazon to provide a cheap, reliable platform on which to sell their applications.
Wright argues that companies that already have experience at building business-focused solutions have an advantage over newer competition.
“I would argue there are very few hosting or cloud organisations that are yet to get their heads above the technology parapet and understand the business outcomes,” Wright said. “Smaller hosting businesses haven’t had the experience in putting solutions together and they’re still competing on offering a technology proposition to the marketplace. I wouldn’t like to be in their shoes.”
Bulletproof Networks is another hoster that has jumped with both feet into Amazon and is loudly promoting itself as the best candidate for the managed Amazon experience.
The Australian host plans to configure and monitor customers’ hybrid and public cloud environments, whether they be private environments that burst into AWS or hybrid cloud farms built on large physical back ends.
Others focus on migration.
HubOne’s Nick Beaugeard says an uptick in his Amazon-related business suggests there was “a heap of pent-up demand” for Amazon’s Sydney outpost.
“In the past few months we were doing $A4,000 to $A10,000 a month of Amazon business as an Amazon reseller. Last month that hit $A36,000 and I reckon we’re going to do $A70,000 this month, and that trajectory is not slowing,” Beaugeard said.
Most companies are moving from on-premise to Amazon, he said, citing a hotels group for whom HubOne helped to move 60 servers to AWS. Others, however, are migrating from Australian hosters.
Beaugeard claims to have reduced the hosting bill for 30 servers operated by an IT services company from $A45,000 a month down to $A6500 a month by moving them from Macquarie Telecom to Amazon Web Services.
But Macquarie Telecom says such comparisons are unfair, because Amazon’s pricing doesn’t include the labour costs of managing the workloads.
“You don’t get end-to-end control at Amazon, even with integrators involved,” says Aidan Tudehope, managing director of hosting at Macquarie Telecom.
“Part of our proposition is that we own the entire stack. We are a telco, we understand what it takes to get good internet connectivity in Australia. Inside the data centre we run the servers and the firewalls and load balancers and the storage. And we have engineering access on top of that to help design the customers’ environment, to implement, run and optimise it. An end-to-end scenario is a very different proposition.”
Amazon offers little support to customers, Tudehope says. The only phone number on the website is for billing inquiries.
Macquarie Telecom’s customers want “one throat to choke” rather than chasing problems between an integrator and a cloud service.
“In material terms there is no overlap” between Macquarie Telecom’s services and integrators using Amazon Web Services, Tudehope says. “Managed hosting is worlds apart from self-service, pay by credit card, pay by the hour, where you don’t know how much the bill is going to be.”
The issue of data sovereignty has also not been laid to rest, Tudehope says.
AWS Sydney’s data centre may have solved latency issues but he claims it does not address the implications of the Patriot Act.
“Amazon is still a US based legal entity and they are obligated to follow US law regardless of where their data centre resides,” he said.
While he admits that “not all buyers of cloud services have put their minds to the issue” of data sovereignty, he believes it should remain a factor. He stopped short of suggesting Australian customers should pay a premium — a data sovereignty tax — for onshore hosting.
“All things being equal, people will choose providers that address the data sovereignty issue,” he said.
But Owenby describes the data sovereignty argument as a “red herring”.
“It’s not a factor in who customers choose for a technology infrastructure provider,” he said. “The reality is that the Patriot Act is actually less severe than data access laws in many of the countries in which we do business. None of these data access laws have had meaningful impact on our customers or businesses.”
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Only time will tell whether the high ground taken by Macquarie Telecom and Hostworks will protect them the rising tide of cheap, public cloud services.
Equally, integrators excited at the prospect of an AWS-fuelled sales spree should heed the cautious advice of trailblazers.
“Amazon Web Services has been good for us to a degree,” says Arthur Marinis, managing principal of Base2Services, a pioneering integrator which has been moving companies to Amazon for several years.
Over time, he said, the commodity service has proven more and more difficult to derive a profit from.
Small companies don’t want to pay a third party to migrate and implement their systems, and prefer to muddle through it themselves, he noted. Large enterprise, meanwhile, often employ IT teams that gradually learn the ropes for hosting on Amazon and migrate the rest of the company’s data centre assets themselves.
“The IT departments are empires themselves and they don’t want to dissolve those empires,” Marinis says.
Andy Pattinson, commercial director at ProQuest Consulting had much the same experience.
"IT infrastructure departments in enterprise organisations are initially cautious of AWS adoption and consider it a threat to their roles," which can lead to consulting opportunities, he said.
"But once they understand the ease of use and see the benefits of AWS they quickly skill up and take over primary responsibility for their AWS environments — this can limit long term consulting opportunities."
Other consultancies are mulling whether to scupper their AWS practices because they are too unprofitable.
Base2Services has cut back to 15 staff, focuses on mid-market app migrations and no longer does development work for Amazon because of the high level of competition.
The dust is yet to settle on Amazon’s impact, but once Rackspace arrives next year - and more large organisations take the cloud plunge - the hosting landscape is sure to look very different.
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