StartUps Embracing Amazon S3’s S3 storage web service is proving to be quite a hit amongst the very early stage start-ups.

Despite my early skepticism, the growing number of early-stage start-ups signing up for Amazon S3 indicates that something big is afoot. One of the reasons for the growing popularity of S3 is because the service is optimized for developers and offers REST/SOAP access to its system at pretty affordable prices. Amazon currently charges $0.15 per gigabyte of storage per month and $0.20 per gigabyte of data transferred.

These prices, as Jeff Barr of Amazon explained at SF TechSessions in June, will trend lower, thanks to constant commoditization of hardware and Amazon’s scale. “We are not speculating on the future except to say that we will continue to offer Amazon S3 at extremely competitive pricing by passing along Amazon’s own benefits of scale to Amazon S3 customers,” a company spokesperson said.

S3 is proving to be particularly attractive to community-based media companies – homegrown photos, video, even music. Altexa, Elephant Drive, Jungle Disk, MediaSilo, Ookles, Plum and SmugMug are some of the start-ups that are currently using Amazon’s S3. Online photo sharing company SmugMug CEO Don MacAskill seems to be one happy customer, with a good reason!

He was facing a hefty tab for storage – Smug Mug is adding about ten terabytes worth of photos every month and claims he saved almost $500,000 in storage expenses. His monthly tab just in storage is around the $1500. An Apple 7TB XServe RAID costs about $13,000. Of course there are cheaper options, but still it is a lot of savings.

S3’s early success makes you think that if the on-demand infrastructure can be delivered at an affordable price, the cost of setting up an online business is going to decline even further, perhaps prompting a whole cycle of new entrepreneurial activity. Amazon’s Alexa platform plays into this trend quite well since it allows developers to process and analyze data on Amazon, store it (on S3), and serve it back out to the world.(Amazon, after all is the harbinger of Web 2.0 trends.)

Is this extreme commoditization? In the first stage of commoditization, we say the value shift from specialized chips to all-purporse processors, only to be followed by an appliance movement. The value moved into the software. Maybe what we are seeing is the early signs of value moving into user experience and developer skillset. (Nick Carr, if you are reading this, do let us know what you think. Jonathan Schwartz, chime in, for I know, you know a lot about this trend, first hand!)

Despite its early adoption, it is hard to say if S3 (or Alexa) are a financial success. Yet, it is not hard to imagine S3 as a rallying symbol of on-demand infrastructure, just like turned software-as-a-service (SaaS) as a viable business option. What do you think?

Nick Carr’s take on this is here.