3 areas where Amazon Web Services might be vulnerable (if the competition can exploit them)

Amazon(s amzn) Web Services has been the biggest and best cloud computing platform for years, and many would argue it still is. But competition is picking up — led primarily by Google(s goog) and Microsoft(s msft) — leading some to question whether AWS’s old habits will end up helping or hindering the business. One of the critics is Brad Feld, Foundry Group managing partner and TechStars co-founder, who recently explained the situation via metaphor: It’s in a scorpion’s nature to sting even when that’s not in its best interests.

Feld came on the Structure Show this week to flesh out that metaphor and explain the infrastructure trends he’s seen among his firm’s portfolio companies. It’s definitely worth listening to the whole thing for more insights on the economics of computing in the cloud and the challenges startups face when dealing with large companies as customers or partners. But here are some highlights, explaining three areas where Feld thinks AWS and all cloud providers could stand to improve if they want to continue being the fan-favorite choices for IT infrastructure.

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When scale happens, every penny counts

“[A]s the scale continues to increase for a traditional service … your operational excellence as a web service, or whatever you’re doing as a business around that infrastructure, starts to become an important characteristic of your business,” Feld explained. “And depending on on Amazon, or AWS,  for that, you don’t get the cost savings that you think you’re getting because you still have to have the people to manage that. … The argument that you don’t need the people goes away at some point.”

Historically, he said, some companies tired of their AWS bills and experience used to test out SoftLayer(s ibm), Rackspace(s rax) or other options where they could still be in the cloud but also have more control over their resources. Increasingly, though, they’re just installing their own gear in colo data centers and seeing impressive results:

“When you get to the other side of it, it’s just awesome, because all of the things that you’re struggling with in terms of direct control is gone, and on just a raw economics perspective … we’ve seen as much as 20 percentage points margin uplift … which probably translates into 33 percent uplift in gross margin. Almost all of it falls straight to the bottom line.”

However, Feld noted, pricing is one area where one element of Amazon’s nature — to be the lowest-cost provider — is a benefit. That is, if AWS can keep Google from disrupting AWS’s economics too much, too quickly, like it did to Microsoft not so long ago. “It’s a very powerful position to be in to be able to say, ‘We’re just gonna change the pricing game,'” he said. “If you roll back 15 years, Microsoft effectively went to subscription pricing with Office … and then all of a sudden today, it’s like ‘Why am I paying for this stuff?’

Foundry Group's Brad Feld

Brad Feld

Finding the middle ground between self-service and expensive service

Feld acknowledged that AWS support has gotten better over the years, but that the improvement has come at a price, in terms of a percentage of the customer’  total AWS bill, that many startups think is too high. If growing companies think they’re paying top dollar for support, they’d better feel they’re getting top-level service:

[blockquote person=”” attribution=””]”The challenge is when it fails and … AWS might be just fine, but as a customer, something’s wrong with my instantiation on it somewhere, and it’s segmented from me, so it’s a black box, and the service people are working on it, but they get to it and there’s latency. That’s really bad … When you have 140,000 paying customers and you have a problem like that that is really abstracted away from you too far, and you’re paying what you think is premium for support, and there’s latency on it, that’s tough. That doesn’t have to happen very often for a company to start to say, ‘This isn’t working for me.’”[/blockquote]

Startup executives really get talking about exploring alternatives when they have to pay for credits or some sort of recompense after an outage happens. Feld said that has happened “in less than 10, greater than 1 of the 70 companies we’re invested in.”

Managing reputation in a market where reputation matters

As these sorts of complaints add up, Feld said, a company’s reputation starts to suffer. All of a sudden, the company that blazed the trail for so many others, and actually generated emotional responses from users, becomes just another IT vendor users have to deal with:

[blockquote person=”” attribution=””]”Interestingly, some of those companies when they get to that scale, are now pushing harder on Amazon. They’re paying the premium support fees, they’re saying ‘We really, really, really don’t want to do this.’ There’s a sort of inflection point for some of those companies where they justify what’s going on and hang in there, but they’re not delighted customers anymore, they’re not the ones screaming from the top of their lungs the praises of AWS. They’re kind of the customers that you kind of don’t want. They’re the ones that are stuck with you, but they’re not that happy.”[/blockquote]

Larger companies and their small-company partners can also fall prey to the trap of cannibalizing partner ecosystems — something of which AWS has been accused and which Feld, who was involved as an early Microsoft partner in the early ’90s, knows all too well. Maybe it’s because of customer demand or maybe it’s just greed, but large companies undercutting their smaller partners with cheaper, inferior products is not a good look.

“[O]ver time, the startups start saying to each other, ‘Hey, you should be careful, because we had that corp dev conversation with Amazon, and here’s how it went,'” Feld began. “‘And two months later they came out with a competitive product that was inferior and stuff like that, but it didn’t feel very good to us to go spend a whole bunch of time with them and tell them everything we’re doing under the guise of maybe a deeper partnership, and then watch them come out with something that competes with us.'”