What Startups in Amazon's Ecosystem Should Learn From VMware

Amazon’s Elastic Compute Cloud (EC2) is orders of magnitude bigger than its next largest Infrastructure as a Service (IaaS) competitor. At first glance, this would seem to imply that Amazon’s massive scale should give AWS a significant cost advantage over fledgling IaaS cloud offerings. But the advantage Amazon gains from its scale is not necessarily on the cost side. Instead, it is in the growing list of startups racing to fill the holes in its Amazon Web Services (AWS) offering. But is Amazon eyeing the same product road map? To help answer this question, startups can look to VMware to understand the existential risk inherent in being a vendor in AWS’ ecosystem.

AWS is not without its faults. Notably, a person using AWS services like EC2 must still perform all the manual “plumbing” such as applying patches, managing configurations, etc, that they would have to if their servers were in their captive data center.  For entrepreneurs and investors alike, this creates an exciting opportunity: The sheer size of EC2 means that thousands of EC2 customers need a new toolkit to help manage their infrastructures in the cloud. This is also great for Amazon. While Rackspace needs to dedicate development resources to build a management console for Mosso, vendors like Rightscale are doing this work for Amazon. As Amazon’s ecosystem matures, AWS only stands to benefit.

In many ways, this parallels what happened in the virtualization management space. As VMware’s hypervisor, ESX, penetrated the data center, IT administrators realized their existing data center management tools were ill suited for virtual environments. So startups emerged to fill the holes in VMware’s only management console, Virtual Center.

But once VMware realized that the hypervisor was getting commoditized, it rushed to build a deep management layer toolkit that it could then sell with juicy margins. Just by announcing its vCloud product roadmap at VMWorld 2008, VMware paralyzed swaths of startups in its vendor ecosystem that had been trying to solve the various management pain points companies were feeling with their VMware implementations.

Amazon Web Services is almost by definition a commodity service. Consequently, Amazon, like VMware, is probably eyeing the management layer as an opportunity to generate high-margin revenues. This is not to say that there isn’t an opportunity to build a significant company by supporting AWS; Amazon can’t fight all fires in all customer segments as well as a specialized startup can. But Amazon’s entrance into the management space is probably less a question of if than when. Startups looking to innovate in the space would be do well to look at which startups have thrived in the virtualization management ecosystem — and which ones haven’t.

Sarah Tavel is an associate with Bessemer Venture Partners in New York.

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