Pricing: How low can you go?

Limbo Dancer under very low poleWhile I was at Demon Internet, and a good year before Amazon appeared in the UK, we used to promote a small local company called Bookpages, who were selling Books online. At one point, I heard that US-based Amazon had a meeting with the Directors of the company in London, so guessed they’d enter the UK soon – but kept absolutely quiet. In the event, they jumped into the UK market by buying Bookpages, inheriting all their management team – all a complete surprise to me. Just very glad that I had kept shtum throughout.

Around a year later, I called in to see the Business Development Director in Amazon Slough for a chat about advertising to our customers. I was offered a tour after our meeting; I ended up confronted with a football pitch size warehouse that looked exactly like this:

Amazon Book Warehouse
Having been used to walking around warehouses from my time in IT Distribution, I asked the Business Development Director how many days inventory was in the building. He said: 2 days. Like, wow – they’d fill and empty that warehouse 180 times a year; the scale was absolutely intimidating.
 
We finished the tour passing the packing/shipping area, where a flood of books were being served on conveyor belts to four or so teams; all items relentlessly being sealed into cardboard packing to the incessant bass of loud beat music, and sent over the loading bay into one of the waiting 40 ton Royal Mail lorries.
 
Genius
 
I’ve been a customer of Amazon ever since, and these days hold shares in the company. At some point i’ll get the bandwidth to read the The Everything Store: Jeff Bezos and the Age of Amazon, one book waiting for me on my iPad. There are several strokes of genius in their business model, one of which is their focus to live on the bottom rung of the value chain ladder. To suck all the oxygen out from potential competitors trying to attack them from underneath – which is the way most large companies get disrupted.
 
I found this great article that explains Amazon’s pricing strategy very eloquently. It’s also the first time I’ve heard that Apple rotate their stock faster than Amazon do, which is an amazing feat for a manufacturing company.
 
 

Amazon Web Services

The one surprise to me these days is the public perception of Amazon Web Services being the 100 pound industry gorilla selling Cloud Computing Capacity at lowest prices, that keep ratcheting down as their scale advantages allow them to do so. The largely unknown secret is that they are being completely murdered at the low end and with software developers by relative newcomer Digital Ocean, who have recently got VC funding from Andreessen Horowitz (A16Z).

Future Trouble at t’Mill?

The WordPress network from which this site is served is hosted on Digital Ocean in Amsterdam – cost $12/month for a Linux virtual server, 30GB of flash storage and 3TB of Network capacity per month, which includes the cost of backups and snapshots. When I talk to AWS and indeed to Google, it doesn’t take long to be given special offers paying the first $2000 of my hosting cost – which suggests their pricing is way higher than what i’m able to develop on already. Probably more sophisticated than I need right now, but I guess it’ll be some time before I need to scale to a size that will become interesting to them.

Amazon are far from alone. While folks like Rackspace are a leading proponent of OpenStack to commoditise Hosting Centre Infrastructure, Digital Ocean are walsing way with thousands of their previous customers; it is almost like they are paying no attention to Netcraft Hosting Provider Switching Stats – and at the same time, issuing profit warnings of their own.

I wonder if Amazon similarly start feeling the same heat in the months ahead – and if they are likely to address it before Digital Ocean go flying past.

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