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Why Investors Should Care About Amazon's Cloud Service Outages

By now you've probably heard of Amazon's (NASDAQ: AMZN  )  most recent web-hosting outage on Christmas Eve, leaving millions of Netflix (NASDAQ: NFLX  ) customers without an alternative to awkward small talk with their families. Amazon fixed the problem within hours, but not before other businesses paid the price.

Outages aren't about whiny customers
Amazon's cloud services failed three times in 2012, taking down the likes of Instagram, Foursquare, Salesforce's (NYSE: CRM  ) Heroku, Reddit, Pinterest, and others. It's tempting to simplify an outage with a "these things happen" approach, and poke fun at those who take to social media to vent their frustrations. But that would be missing the point. An outage is bad for Amazon, but it's worse for companies hosting their business with the company.

Heroku, which provides a cloud application platform for developers, has this marketing copy on its homepage: "Get up and running in minutes, and deploy instantly with git. Focus 100% on your code, and never think about servers, instances, or VMs again." (Emphasis mine.)

Heroku markets a product that its customers expect to work. It's possible that not many developers were using the service on Christmas Eve, but that doesn't change the fact that Heroku's business depends on the dependability of Amazon's web services.

In the case of Netflix, the company knows all too well how angry customers can react. Obviously, Netflix's Qwikster debacle and its recent Amazon-caused outage aren't the same thing. But there is one common thread: Netflix customers perceive them both as Netflix's problem. Customers typically don't know much about who's hosting their online services, nor do they probably care. So when an outage happens, it's easy for them to blame the company they're paying.

Why Amazon should take this seriously
Amazon's cloud hosting service may have started as a side project, but it's ballooned into something much bigger. The company doesn't disclose how much it makes from its Amazon Web Services, but some analysts have estimated the cloud service could bring in about $4 billion in revenue this year.

Last month, the AWS team attended its first trade show, to expose the company to more enterprise customers. But even before the latest outage, potential enterprise customers were skeptical of Amazon's ability to avoid outages. It seems like they're still right to be. Cloud competitor Microsoft offers an enterprise cloud platform, called Azure, and hopes to add customers to its cloud system through its massive SharePoint and Exchange customers. If Amazon can't convince enterprise customers that its cloud services are dependable, it won't lure Microsoft customers away.

What investors should look for
Amazon's advantage is that it offers a wide variety of cloud services like storage, databases, networking, applications development platforms and more. It's also lowered its infrastructure-as-a-service prices 21 times since it launched in 2006. In addition to this, Amazon's cloud services are only a small part of the company's business. 

I wouldn't make any stock changes based on the recent outage, nor would it keep me from buying Amazon. But investors should keep an eye out for how Amazon reacts to outages, both publicly and with new infrastructure or policy changes. Amazon needs to prove to its current and potential customers that it can provide dependable web services. 

Obviously, Amazon's cloud services aren't the only revenue generator for the company. But as the service grows and more companies sign up for AWS, investors should know how Amazon's cloud services fits into the company's overall strategy. The Motley Fool has published a premium research report on the company. The report lays out the reasons to buy and reasons to sell Amazon, and includes a full year of free analyst updates to keep you informed as the company's story changes. Click here now to get started.

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  • Report this Comment On January 29, 2013, at 7:28 PM, go2vid wrote:

    The bigger issue that most of the cheerleaders are missing is that this AWS outage was purely the result of a flawed process where a AWS developer had access to change production configuration that caused a ripple effect causing systems to fail. I totally buy the outages that are actually unavoidable and are caused by a unique combination of events that couldn't be caught by any amount of reasonable testing. But this wasn't one of those.

    A few months back, there was another outage where a newly rolled out replication feature for RDS actually didn't work when it was supposed to - when the primaries failed. That is just poor engineering.

    I love Amazon and AWS and trust their engineers but I just can't believe how the so called "pundits" almost always give AWS a clean chit whenever things fail with the banner that "things happen at scale".

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