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Competing – and Cooperating – with Amazon

Plenty of online retailers sell the same items as Amazon and host their websites on the giant’s cloud services. Is there a smart way to manage a relationship with the 800-lb. gorilla of Internet retail? By Deborah L. Asbrand

Partnerships are a key aspect of any successful business. But contracting out a core aspect of your operations to a rival? Particularly a huge rival? That’s the unlikely but ingenious premise of Amazon Web Services (AWS), which is on track to be the Seattle giant’s next billion-dollar business. Companies, even those that sell many of the same products that Amazon does, rent AWS’s backend services (such as Elastic Computer Cloud and  Simple Storage Services) instead of creating their own. It’s a clever play for Amazon but a tricky one for its customers.

For now, web services remain a modest slice of Amazon’s $48 billion in annual revenue. But by aggressively underpricing competitors like Google and Microsoft, Amazon has wooed enough customers to make AWS the de facto cloud service provider for many etailers. In early March, the company dropped prices for its cloud-computing services, with customers of its EC2 service seeing price cuts of as much as 37 percent, according to media reports.

There’s little that Amazon’s empire doesn’t sell, but there’s a limit in how close it says it wants to get to its customers. “Our version of a perfect customer experience is one in which our customer doesn’t want to talk to us,” Amazon CEO Jeff Bezos told Wired. “Every time a customer contacts us, we see it as a defect.”

How does Amazon work this seam between service provider and competitor?

By being extremely reliable, for one thing. Handing over core aspects of their businesses to an outside company with whom they compete may feel too cozy for some companies. That has certainly been the case for some businesses, with Target being the most notable example. The large retailer left the Amazon fold after nearly 10 years to take on its own hosting duties -- and promptly suffered two high-profile website outages.

In return for that reliability, some companies are implicitly sharing information with Amazon. Consider Dropbox, the hit cloud-based storage business that launched on AWS.

“In its role as Dropbox host, Amazon must know nearly as much about that business as Dropbox does,” observed columnist Robert X. Cringely. “Amazon might well know more than Dropbox, actually, since it sees those numbers in the context of all AWS customers — information that I doubt Dropbox gets to see.”

In the end, it’s a trade-off. As Bentley College associate professor Patrick Scholten notes, “The small company gets a larger network and access to consumers that they wouldn’t otherwise.” They also get a 99.9% uptime guarantee, something that eases the late-night concerns of many retailers. And that makes an alliance worth it, even if the companies compete in other areas.

About the author

Deborah L. Asbrand is a journalist whose work has appeared in The Industry Standard, Forrester, MIT Technology Review, and many other publications.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of FedEx.