Posts Tagged Amazon
Amazon’s Secret Plan to Sell You Everything!
Something strange is happening in the township of Woodbridge, New Jersey, just 20 miles outside of Manhattan. It started when a real estate development partner of Amazon.com purchased a nearly one-million square foot warehouse. The previous tenant was a grocery wholesaler and so the building is equipped with refrigeration. Now Amazon (AMZN) has quietly posted job listings for facility and operation managers in the area.
Last week a research analyst put the pieces together and came to the conclusion that Amazon.com is going to expand AmazonFresh into New York City. That means Amazon.com will be taking orders and providing same-day delivery to the nation’s largest market. That may not mean much yet, but it suggests that the way eight million people buy groceries is about to change forever.
The vision goes well beyond just groceries. Groceries are a Trojan Horse. The dirty secret of Amazon is that it really doesn’t distinguish between a head of lettuce and a big screen TV. If Amazon can pull off same-day grocery delivery in NYC, it ostensibly means consumers can order anything online and receive it the same day. By logical extension, that means Jeff Bezos, the CEO of Amazon, is on the cusp of rendering every retailer on earth obsolete.
When Amazon.com went public in 1997, Bezos promised shareholders that the company had ambitions well beyond merely becoming the “world’s largest bookstore.” Bezos didn’t outline exactly what that meant, but he vowed that the company would be run in the interest of pursuing opportunity rather than profits. True to his word, Bezos has built a $61 billion-a-year company that controls 5% of all e-commerce and earns next to nothing.
While the critics howl about Amazon stock being overpriced, Bezos has used cheap funding from Wall Street to plow money back into the business at every turn. He has rewarded investors by endlessly expanding the company into different product categories and services. From books, Amazon moved into home electronics, sporting goods, apparel and Kindle tablets and apps. Skeptics predicted that no would buy such things online — Bezos has proved them wrong.
What Bezos saw that others didn’t was that his business was about distribution, not inventory or product categories. It turns out, customers will buy just about anything online if they get a good deal and reliable service. Forget books, TVs and groceries, Amazon has the potential to be the merchant of just about anything.
“They’re incredible, and they’re doing it exactly the way Sam Walton built Walmart,” says Howard Davidowitz of Davidowitz & Associates, in the attached video. “He built it by building infrastructure.”
Walton knew that winning over the long term meant controlling the timing of the shopping experience. While other retailers in the ’50s and ’60s relied on outside distributors, Walton built his own warehouses from which he would service Walmart (WMT) stores in the surrounding areas. That gave Walton a leg up on both cost and efficiency. While other retailers were waiting for goods, Walmart was sending out their own trucks. That may not sound like a big deal, but it’s the foundation of the world’s largest private employer. Walmart wins by being better, faster and cheaper than the competition.
“That’s the way Bezos is building this business: building infrastructure, building distribution centers all across America to service customers,” Davidowitz says. He scoffs at the notion that Amazon would go to the trouble of buying a distribution center 20 miles from New York City just to sell produce. With the right system in place, Amazon will be able to deliver anything to customers the same day it’s purchased online.
Slowly but surely Bezos is eliminating the division between physical stores and shopping online. There’s no such thing as “e-commerce” in Amazon’s world. There is simply commerce.
“I believe what Bezos believes,” says Davidowitz. “He’s going to be the only one who can really do same-day delivery everywhere.”
The only difference between products like groceries, sunglasses or TVs is how they are stocked and stored. Because Wall Street trusts Bezos to invest company income wisely, Amazon has the best, most highly automated warehouses in the world. Sometimes the product isn’t even touched by human hands until it’s unwrapped by the buyer.
When Amazon started, it used standard USPS to deliver books. Now AmazonPrime customers can get two-day delivery for $79 a year. Going from two days to same-day isn’t revolutionary, but it is simply the end of an evolutionary process that started when Amazon.com sold its first book in 1995.
Forget your local grocery store. Grocers in Manhattan have been in decline for years withoutcompetition from Amazon. If that warehouse in New Jersey really is going to be home to AmazonFresh, it’s simply going to end those puny, low-margin grocery chains’ misery. It marks the beginning of the end of shopping as the whole world knows it; malls will collapse, chains will disappear. “Running errands” will no longer mean jumping from the grocery store to the pharmacy and then to the mall.
Shopping will mean going online, clicking away and waiting for one of Bezos’ minions to deliver a box to your door. What the box contains doesn’t matter in the least.
- Amazon Ramps Up $13.9 Billion Warehouse Building Spree (bloomberg.com)
- What Makes This Internet Benchmark a Top Contender Moving Forward (stateofglobe.com)
- How will Jeff Bezos ‘fix’ the Washington Post? (bizjournals.com)
- Update: Amazon back online after 40-minute outage (geekwire.com)
- Amazon.com, Inc.(NASDAQ:AMZN): Secret Plan to Sell You Everything! (etfdailynews.com)
- Biographical info on Amazon founder Jeff Bezos (sacbee.com)
- Jeff Bezos Doesn’t Want to Hear About Your Headache (allthingsd.com)
- It’s time for Bezos to disclose his politics (finance.fortune.cnn.com)
- These Two Paragraphs From The New York Times Jeff Bezos Profile Perfectly Sum Up How Secretive Amazon Is (AMZN) (businessinsider.com)
- Apple and Netflix Could Learn From Amazon (thestreet.com)
U.S. Department of State cancels large Kindle contract
The U.S. Department of State had expected to buy $16.5 million in devices and systems from Amazon
By , IDG News Service
August 17, 2012, 3:56 AMThe U.S Department of State has withdrawn plans to place a $16.5 million order on Amazon.com for its Kindle Touch devices along with content management, and logistics, that it intends to conduct additional market research and re-examine its requirements for the program.
The department had in June that it intended to award the contract to Amazon.com, with an anticipated value of $16.5 million over the life of the contract, which would be one base year and four option years.
The acquisition by the department included an immediate need for 2,500 e-readers and 50 titles of content, and required provision of a secure, centrally managed content distribution and management platform to manage unlimited number of devices, besides the ability to access and download content over 3G cellular networks and Wi-Fi connections worldwide, according to a note in June.
The Kindle was identified as the only product that met the department’s requirements, according to the for other than full and open competition. Apple’s was rejected because it fell under the tablet or computer category rather than as a single-function e-reader, and had additional features that “are not only unnecessary, but also present unacceptable security and usability risks for the government’s needs in this particular project.”
The Kindle also scored over some other e-readers on the market as the competitors could not provide the text-to-speech requirement, the long-lasting battery life and the free Wi-Fi with a global network that was required, the note said. The J&A had stated that “costs associated with downloading content either via 3G or Wi-Fi must be not separately priced.”
The e-reader had to have a battery life no less than about 8 hours of continuous reading or approximately 7.5 hours of video playback.
Amazon.com was not immediately available for comment on the cancellation of the order.
- U.S. Department of State Cancels Large Kindle Contract (pcworld.com)
- State Department revokes $16.5M Kindle contract offer (news.cnet.com)
- State Dept./Amazon.com Deal for Kindle Devices Officially Cancelled & More eBook Contract News (infodocket.com)
- U.S. Department of State cancels large Kindle contract (pcadvisor.co.uk)
- State Dept. Cancels $16.5M Kindle Contract (yro.slashdot.org)
- U.S. State Department pulls plug on big Kindle contract (geekwire.com)
- State Department cancels large Kindle contract (macworld.com)
- Good news for Apple: State Department cancels its $16.5M Kindle order (venturebeat.com)
- U.S. Department of State Launches Pathways Internship Program (svcgs.wordpress.com)
- U.S. Puts Big Kindle Deal on Hold While It Browses E-Reader Market (allthingsd.com)
I Want It Today
How Amazon’s ambitious new push for same-day delivery will destroy local retail.
Amazon logistical center
Amazon has long enjoyed an unbeatable price advantage over its physical rivals. When I buy a $1,000 laptop from Wal-Mart, the company is required to collect local sales tax from me, so I pay almost $1,100 at checkout. In most states, Amazon is exempt from that rule. According to a 1992 Supreme Court ruling, only firms with a physical presence in a state are required to collect taxes from residents. Technically, when I buy a $1,000 laptop from Amazon, I’m supposed to pay a $100 “use tax” when I file my annual return with my home state of California. But nobody does that. For most people, then, most items at Amazon are significantly cheaper than the same, identically priced items at other stores.
In response to pressure from local businesses, many states have passed laws that aim to force Amazon to collect sales taxes (the laws do so by broadening what it means for a company to have a physical presence in the state). Amazon hasn’t taken kindly to these efforts. It has filed numerous legal challenges, and fired all of its marketing affiliates in Colorado, North Carolina, Rhode Island, and California. It also launched a $5 million political campaign to get voters to turn back the California law. And when Texas’ comptroller presented Amazon with a $269 million sales tax bill last year, the company shut down its distribution center in Dallas.
But suddenly, Amazon has stopped fighting the sales-tax war. Last fall it dropped its repeal campaign in California and instead signed a deal with lawmakers to begin collecting sales taxes later this year. That was followed by several more tax deals—over the course of the next couple years, Amazon will begin collecting sales tax from residents of Nevada, New Jersey, Indiana, Tennessee, Virginia, and on July 1, it began collecting taxes from Texans. It also currently collects taxes from residents of Kansas, Kentucky, New York, North Dakota, and its home state of Washington. After all the tax deals go into effect, the company will be collecting taxes from the majority of its American customers.
Why would Amazon give up its precious tax advantage? This week, as part of an excellent investigative series on the firm, the reports that Amazon’s tax capitulation is part of a major shift in the company’s operations. Amazon’s grand strategy has been to set up distribution centers in faraway, low-cost states and then ship stuff to people in more populous, high-cost states. When I order stuff from Amazon, for instance, it gets shipped to California from one of the company’s massive warehouses in Kentucky or Nevada.’ Barney Jopson
But now Amazon has a new game. Now that it has agreed to collect sales taxes, the company can legally set up warehouses right inside some of the largest metropolitan areas in the nation. Why would it want to do that? Because Amazon’s new goal is to get stuff to you immediately—as soon as a few hours after you hit Buy. (Disclosure: Amazon Associates, an “affiliate” advertising plan that rewards websites for sending customers to the online store. This means that if you click on an Amazon link from —including a link in this story—and you end up buying something, Amazon will send a percentage of your final purchase price.)participates in
It’s hard to overstate how thoroughly this move will shake up the retail industry. Same-day delivery has long been the holy grail of Internet retailers, something that dozens of startups have tried and failed to accomplish. (Remember Kozmo.com?) But Amazon is investing billions to make next-day delivery standard, and -day delivery an option for lots of customers. If it can pull that off, the company will permanently alter how we shop. To put it more bluntly: Physical retailers will be hosed.
Can Amazon pull it off? It’s sure spending a lot of money to try, and it has already come up with a few creative ways to speed up deliveries. In each of the deals it has signed with states, the company has promised to build at least one—and sometimes many—new local warehouses. Some of these facilities are very close to huge swaths of the population. Amazon is investing $130 million in new facilities in New Jersey that will bring it into the backyard of New York City; another $135 million to build two centers in Virginia that will allow it to service much of the mid-Atlantic; $200 million in Texas; and more than$150 million in Tennessee and $150 million in Indiana to serve the middle of the country. Its plans for California are the grandest of all. This year, Amazon will open two huge distribution centers near Los Angeles and the San Francisco Bay Area, and over the next three years it might open as many as 10 more in the state. In total, Amazon will spend$500 million and hire 10,000 people at its new California warehouses.
But Amazon isn’t simply opening up a lot of new shipping centers. It’s also investing in making those centers much more efficient. Earlier this year, it purchased Kiva Systems, a company that makes cute, amazingly productive “picking robots” that improve shipping times while reducing errors. Another effort will allow the company to get stuff to you even faster. In Seattle, New York, and the United Kingdom, the firm has set up automated “lockers” in drug stores and convenience stores. If you order something from Amazon and you work near one of these lockers, the company will offer to drop off your item there. On your way home from work, you can just stop by Rite Aid, punch in a security code, and get your stuff.
All these efforts seem to be paying off. I’m a frequent Amazon shopper, and over the last few months I’ve noticed a significant improvement in its shipping times. As a subscriber toAmazon’s Prime subscription service, I’m used to getting two-day shipping on most items for free. But on about a third of my purchases, my package arrives after just one day for no extra charge. Sometimes the service is so speedy it seems almost magical. One Friday afternoon last month, I ordered three smoke alarms, and I debated paying extra for shipping so that I could install them over the weekend. The $9 per item that Amazon charges for Saturday delivery seemed too steep, though, so I went with standard two-day service. The next morning, the delivery guy arrived with my smoke detectors. I’d gotten next-day Saturday service for free. I have no idea how Amazon made any money on my order (the whole bill was less than $30) but several people on Twitter told me that they’ve experienced similarly delightful service.
If Amazon can send me stuff overnight for free a distribution center nearby, it’s not hard to guess what it can do once it has lots of warehouses within driving distance of my house. Instead of surprising me by getting something to me the next day, I suspect that, over the next few years, next-day service will become its default shipping method on most of its items. Meanwhile it will offer same-day service as a cheap upgrade. For $5 extra, you can have that laptop waiting for you when you get home from work. Wouldn’t you take that deal?
I bet you would. Physical retailers have long argued that once Amazon plays fairly on taxes, the company wouldn’t look like such a great deal to most consumers. If prices were equal, you’d always go with the “instant gratification” of shopping in the real world. The trouble with that argument is that shopping offline isn’t really “instant”—it takes time to get in the car, go to the store, find what you want, stand in line, and drive back home. Getting something shipped to your house offers gratification that’s even more instant: Order something in the morning and get it later in the day, without doing anything else. Why would you ever shop anywhere else?
- How Amazon’s Same-Day Delivery Plan Will Kill Your Local Stores [Amazon] (gizmodo.com)
- Amazon same-day delivery: How the e-commerce giant will destroy local retail. – Slate Magazine (cuene.com)
- Amazon’s ambitious new push for same-day delivery will destroy local retail. (aaramshoppro.com)
- Amazon’s emerging strategy: Same-day delivery (feldmanfile.blogspot.com)
- Amazon To Focus On Same-Day Delivery, Collection Of Sales Tax In More States (wibw.com)
- How Amazon ‘caving’ to sales tax demands could spell trouble for traditional retail (theverge.com)
- Commentary: Attention, shoppers – Amazon getting faster (mysanantonio.com)
- Temple: Attention, shoppers – Amazon getting faster (sfgate.com)
- Amazon to Offer Same-Day Delivery, Could Pummel Brick-and-Mortar Retailers (dailytech.com)
- Amazon’s Same-Day Strategy Could Kill Brick-and-Mortar Retail Dead (slog.thestranger.com)
California Sales Tax Rebates: Who Is The Taxpayer? – OpEd
May 28, 2012
With the growth in internet commerce, one of the big tax issues is that on-line buyers are not paying sales taxes on their purchases. One proposed solution is a multi-state compact that would be enforced by the federal government, in which sellers in participating states collect sales taxes and remit the revenues to the purchasers’ states. Called the Streamlined Sales Tax, the premise behind this is that the purchaser is the taxpayer, and the seller merely collects sales taxes that purchasers pay.
Another way one might look at sales taxes is that the sellers are the taxpayers, but if this were the case, the problem of non-payment would be solved simply by charging sellers sales tax on their sales, regardless of the state of residence of buyers. This makes sense to me. If I, as a Floridian, travel to California and buy something in a California store, I pay California sales tax on the purchase, not Florida sales tax, even though Florida is my state of residence. So, if I buy from an on-line retailer selling from California, why shouldn’t the same principle apply, and the California retailer pay the sales tax on my purchase, just as if I had physically gone to the state to make the purchase? But, that is not the solution states want. They claim the tax is on the buyer, not the seller, and that the tax should be remitted to the buyer’s state for on-line sales.
(Note that if California did place the tax on the seller, California has a relatively high sales tax rate that starts at 7.25%, which would put the state at a disadvantage compared to other states. That’s one reason for the state to argue the taxpayer is the purchaser, not the seller.)
Now, two California cities, Patterson and San Bernardino, are working on a plan to rebate most of the local portion of the California sales tax to Amazon in exchange for their locating warehouses in their cities. Of course, governments give tax incentives to businesses all the time. But wait a minute. Following the logic of the internet sales tax debate, Amazon is not the taxpayer in this case; those who buy from Amazon are.
That means that these cities are proposing to tax people who shop at Amazon and transfer some of the taxes they pay directly to Amazon in exchange for Amazon’s locating their warehouses there. Tax one party (Amazon shoppers) and pay tax revenues directly to another (Amazon).
Amazon is the organization that would collect the tax revenue from the buyer. I don’t think redistribution this direct has ever been proposed before. This proposal would give Amazon the right to directly tax its purchasers and keep the tax revenue for its benefit.
If my logic is faulty here, and Amazon is really the taxpayer, and this really is a rebate, that calls into question the idea that sales taxes on internet sales should be remitted to the state in which the purchaser resides. Who is the taxpayer, the buyer or the seller? Can California have this both ways?
- Amazon may pay Calif. sales tax, get much of it back (seattletimes.nwsource.com)
- Amazon Poised To Get Cut of CA Sales Taxes (yro.slashdot.org)
- The Golden State Gone Broke – OpEd (eurasiareview.com)
- What Are State Sales Taxes? (turbotax.intuit.com)
- The State Sales Tax Deduction (turbotax.intuit.com)
- TurboTax – Deduct the Sales Tax Paid on a New Car (turbotax.intuit.com)
- Cash for Clunkers: Don’t Overlook Sales Tax Break (turbotax.intuit.com)
- Amazon begins petition push to end California’s electronic sales tax (dontmesswithtaxes.typepad.com)
- Amazon Taxes Are The REAL Hunger Games (forbes.com)
Apple Not Likely to Be a Loser in the E-Book Legal Fight
April 12, 2012
If Apple loses the legal case filed against it and book publishers on Wednesday over e-book pricing, will it be deeply wounded in its growing rivalry with Amazon?
Not likely, analysts say.
The Justice Department’s lawsuit against the company and five publishers, three of which settled the case, paints a vivid picture of Apple’s thinking from several years ago about how it could use its entry into electronic books to hurt Amazon, a growing player in digital media and devices with the Kindle. At the time, Apple saw having a competitive e-book offering as a critical element of its strategy for introducing the iPad.
In an e-mail sent by Eddy Cue, the Apple executive in charge of the company’s Internet services, to Steven P. Jobs, then Apple’s chief executive, about a year before Apple introduced the iPad and iBookstore, Mr. Cue said, “It would be very easy for us to compete and I think trounce Amazon by opening up our own ebook store.” Apple eventually cut a deal with publishers that gave them control over pricing of e-books and that forced other retailers, including Amazon, to raise prices, the lawsuit alleges.
Apple’s bluster, though, was unfounded. Amazon may have lost some share in e-books, but it still dominates the fast-growing market. At the same time, Apple’s failure to trounce Amazon in e-books did little to diminish the appeal of the iPad, which became a smash hit for other reasons. James McQuivey, an analyst at Forrester Research, said research by his company indicated that games, Web browsing, Facebook and other applications are bigger parts of the appeal of the iPad than e-books.
“The fact is that they didn’t weaken Amazon the way they had hoped to, but it doesn’t harm them,” Mr. McQuivey said.
If e-book prices plummet as a result of the lawsuit — one possible outcome — chances are the financial impact on Apple will be small. Already the three publishers that settled the lawsuit have agreed to negotiate new deals with retailers that could lead to a return of the $9.99 Amazon used to charge for best-selling e-books before Apple entered the business. If Apple loses the case, other publishers could be forced to follow suit.
Since Apple has never shown much stomach for losing money on the sale of digital goods, as Amazon did with $9.99 Kindle best-sellers, it’s doubtful the company would try to match the low prices of its rival. That, in turn, would hurt Apple e-book sales but do very little direct damage to Apple’s overall business. In the holiday quarter, Apple reported $2 billion in revenue from Internet services — about 4 percent of total company sales — with an undisclosed, but most likely small, percentage of that coming from e-book sales.
Book publishers are worried that a return to low pricing by Amazon could drive them out of business, which could harm book lovers in the long run, but that concern won’t help them much as a legal defense in the case, legal experts say. “I think this is a strong case,” said Nicholas Economides, a professor of economics at New York University. “The way U.S. antitrust law is written, in a conspiracy case it does not have to show adverse effects on consumers.”
Mark Lemley, a law professor at Stanford specializing in antitrust and intellectual property, said he did not expect Apple to give up easily in the case. “Apple has a history of being fairly aggressive in litigation,” Mr. Lemley said. “There’s some sense in their corporate culture that we’re right.”
- Price-fixing suit hits as eyes turn to e-books (hazima.wordpress.com)
- Why Apple will probably win its e-book legal battle (business.financialpost.com)
- U.S. files e-book price-fixing lawsuit against Apple (business.financialpost.com)
- DOJ lawsuit against Apple over e-books may come Wednesday (electronista.com)
- Department of Justice sues Apple alleging ebook price-fixing (iphonelife.com)
- Apple and publishers accused of price fixing (vator.tv)
- APPLE ANTITRUST LAWSUIT: U.S. Files Suit over eBook Pricing (blippitt.com)
- DOJ Sues Apple, Publishers Over E-Book Price-Fixing – WSJ.com (opsudwinger.wordpress.com)
- Apple and others sued by Justice Department over ebook price-fixing (intomobile.com)
- Justice Dept. Sues Apple and Publishers Over E-Book Pricing; 3 Publishers Settle – NYTimes.com (policyabcs.wordpress.com)
Exclusive: Google, Amazon, and Microsoft Swarm China for Network Gear | Wired Enterprise | Wired.com
Exclusive: Google, Amazon, and Microsoft Swarm China for Network Gear
By Cade Metz
Google, Amazon, Microsoft, and Facebook buy more networking hardware than practically anyone else on earth. After all, these are the giants of the internet. But at the same time, they’re buying less and less gear from Cisco, HP, Juniper, and the rest of the world’s largest networking vendors. It’s an irony that could lead to a major shift in the worldwide hardware market.
Over the past few years, the giants of the web have changed the way they purchase tens of thousands of the network switches inside the massive data centers driving their online services, quietly moving away from U.S.-based sellers to buy cheaper gear in bulk straight from China and Taiwan. According to J.R. Rivers — an ex-Google engineer — Google has built its own gear in tandem with varous Asian manufacturers for several years, and according to James Liao — who spent two years selling hardware for Taiwan-based manufacturer Quanta — Facebook, Amazon, and Microsoft are purchasing at least some of their networking switches from Asian firms as well.
“My biggest customers were these big data center [companies], so I know all of them pretty well,” Liao says. “They all have different ways of solving their networking problems, but they have all moved away from big networking companies like Cisco or Juniper or [the Dell-owned] Force10.”
The move away from U.S. network equipment stalwarts is one of the best-kept secrets in Silicon Valley. Some web giants consider their networking hardware strategy a competitive advantage that must behidden from rivals. Others just don’t want to anger their business partners in the hardware sector by talking about the shift. But cloud computing is an arms race. The biggest web companies on earth are competing to see who can deliver their services to the most people in the shortest amount of time at the lowest cost. And the cheapest arms come straight from Asia.
J.R. Rivers is one of the arms dealers. He runs a company called Cumulus Networks that helps the giants of the web — and other outfits — buy their networking hardware directly from “original design manufacturers,” or ODMs, in China and Taiwan. And he’s worked in this world for an awfully long time. He’s one of the Google engineers who secretly designed a new breed of networking switch for the company’s data centers, the massive computing facilities that drive its search engine and the rest of its web services.
Rivers joined Google in October 2005, after five ears as a distinguished engineer at Cisco, the company that dominated the worldwide market for networking gear. At the time, Google was still connecting its servers using standard networking switches from the likes of Cisco and Force10 Networks. But these mass-market switches just didn’t suit Google’s unusually large operation.
“When Google looked at their network, they need high-bandwidth connections between their servers and they wanted to be able to manage things — at scale,” Rivers says. “With the traditional enterprise networking vendors, they just couldn’t get there. The cost was too high, and the systems were too closed to be manageable on a network of that size.”
So Google drew up its own designs — working alongside manufacturers in Taiwan and China — and cut the Ciscos and the Force10s out of the equation. The Ciscos and the Force10s build their gear with many of those same manufacturers. Google removed the middlemen.
The search giant does much the same with its servers, buying custom-built machines straight from Asia rather than going through traditional sellers such as Dell and HP. Because its web services were used by such an enormous number of people, Google faced all sorts of data center problems no one else faced — problems of power and space as well as cost and logistics. So it built all sorts of custom hardware to solve those problems.
“They all have different ways of solving their networking problems, but they have all moved away from big networking companies like Cisco or Juniper or Force10″
Now, the other giants of the web are running into the same issues, and they too are going straight to Asia for hardware. Following closely behind are companies that run large internal server farms, including financial houses and healthcare outfits.
As J.R. Rivers serves this market with Cumulus Networks, James Liao is doing much the same thing with a second startup calledPica8, offering networking gear that comes straight from the ODMs. Pica8 is a spinoff of Liao’s former employer, Quanta — one of the companies that manufactured Google’s original networking switches, according to Rivers.
According to Liao, tens of thousands of switches are already being sold by the Asian ODMs directly to the likes of Amazon, Facebook, and Microsoft. And that doesn’t include the gear Google has bought over the past seven years. “This is just the beginning,” Liao says, pointing out that these buyers operate the biggest data centers on earth. These companies account for only a part of the $7-billion-a-year Ethernet switch market, but as more and more outfits move their operations into the proverbial cloud, the influence of these web giants will only grow.
Liao estimates that Amazon, Microsoft, Facebook and others have bought Asian network switches spanning “millions” of network ports — i.e., connections to servers — and he guesses that in 2011, about 60 percent of these ports provided 10Gigabit Ethernet connections. According to Matthias Machowinski — a directing analyst with Infonetics, a research firm that tracks the networking market — the official market for 10Gigabit Ethernet spanned about 9 million ports in 2011.
J.R. Rivers declines to name the companies he’s working with at Cumulus Networks, but he confirms that some of the big-name web outfits are already buying networking switches from ODMs in Asia. In all likelihood, these companies are also purchasing switches from other sources as well. Cisco says it has a “significant presence and mindshare” in the big-name web market, and Juniper says it has a relationship with all of the top five web players, pointing out that data center networks require more gear than just switches. But the market is on the move.
The Future of ‘Web Giant 3.0′
“We are continuously exploring new infrastructure technologies that may evolve further efficiencies across our portfolio. We normally have discussions with ODMs and large and small OEMs to better understand their capabilities and evaluate their products,” reads a statement sent to Wired by a Microsoft spokesperson and attributed to Dileep Bhandarkar, a distinguished engineer who oversees the data centers driving Microsoft’s online services. But the statement did not specifically address the purchase of networking gear.
Amazon did not respond to a request for comment about its hardware practices, and a Google spokeswoman sent us a one-sentence statement: “We work with a variety of vendors to manufacture the equipment we use in our data centers,” she said. These two companies — particularly Google — are rather tightlipped about their data center practices.
“This supply chain change is nascent. But it’s the most exciting thing going on in Silicon Valley right now”
Facebook declined to discuss how it purchases networking gear, but in response to secretive approach of Amazon and Google, the company has openly discussed some of its other practices, and it has actually shared its server and data center designs with the rest of the world. It purchases its servers directly from Quanta and Wistron, another Taiwanese ODM.
Martin Casado — the chief technology officier of a third Silicon Valley networking startup, Nicira — confirms that the hardware market is shifting to Asia. Offering a software platform that virtualizes networking gear in much the same way that VMware virtualized servers, Nicira helps some of the big web players build their networks. The Nicira platform was designed specifically for companies along the lines of Google that want to use cheap commodity switches to physically construct their network but then do all the complex management in software.
“If you’re building web giant 3.0, you can go to Quanta in Taiwan and buy crates … of switches,” he says. “This supply chain change is nascent. But it’s the most exciting thing going on in Silicon Valley right now.”
Google Goes to Asia
According to J.R. Rivers, Google began work on its custom-built networking switches in early 2005, before he arrived at the company. In the beginning, River says, Google worked in tandem with Quanta and other Asian ODMs. But eventually, he says, Google took all the engineering work in house. Basically, he says, the company wasn’t happy with the work the ODMs did at the time. Google engineers would design the switches, and then they would bring the completed designs to contract manufacturers in Asia, outfits along the lines of Foxconn, the Asian company that builds Apple’s iPhones and iPads.
Google has never discussed its practices publicly, but rumors have long indicated that the company built its networking switches in this way. In 2007, research analyst Andrew Schmitt noticed that certain manufacturers were producing enormous numbers of chips for 10Gigabit Ethernet switches but that the switches themselves weren’t actually turning up on the market. “It didn’t make sense to me why someone would be building so much of a given component if there were no customers that could use it,” he says. “What I was able to determine is that Google was purchasing switch chips straight from the comment suppler.”
“It didn’t make sense to me why someone would be building so much of a given component if there were no customers that could use it”
The switches Google was building typically sat at the top of a rack of servers in the data center, connecting the servers to the rest of the network. As Juniper points out, this is only part of the networking hardware used in the data, but it’s a large part.
Google, Rivers says, is a unique company. It has the wherewithal and the talent to built its own switches, but other companies may not be up to the task. With Cumulus Networks, J.R. Rivers and his partner, Nolan Leake, are trying to grease the wheels. “[The other web players] are trying to figure out what the best model is, and that’s one of the reasons we started up,” Rivers says. “Google is unique in its willingness to build something just because they know it can be done. Most other people see a risk/reward trade-off. We seek to minimize that risk.”
Though Rivers declined to name the ODMs his company is working with, he says that these are well-known manufacturers in Taiwan and China. “We’ve been working for the last year on opening up a supply chain for traditional ODMs who want to sell the hardware on the open market for whoever wants to buy,” he says. “For the buyers, there can be some very meaningful cost savings. Companies like Cisco and Force10 are just buying from these same ODMs and marking things up. Now, you can go directly to the people who manufacture it.”
This has become possible in recent years, Rivers says, because the ODMs have slowly acquired more and more engineering talent. You can now buy commodity gear from more places. “Networking is opening up much like the transition from mainframes to RISC machines and later to x86 servers,” says Rivers’ partner, Nolan Leake. “We’re moving towards a world where customers have more control over their destiny.”
‘The Arms Dealer’
Before spinning Pica8 out of Quanta, James Liao was already selling similar networking switches to the big web players. Nicira’s Martin Casado refers to James Liao as “the arms dealer” in this networking revolution. “He’s the conduit between the rest of the world and Quanta. He knows this space better than anyone,” Casado says. “And I love him because he talks like he’s part of organized crime.”
From July 2009 to September 2011, Liao was the senior director at Quanta in charge of product strategy for network switching and data center products. He was based in Silicon Valley, and his job was to serve the giants of the web. He declines to go into much detail about how these companies acquire their hardware, but he’s unequivocal in saying that the other big companies — Amazon, Microsoft, and Facebook — are now following Google’s lead in going directly to Asia for their gear.
James Liao. Photo: Courtesy Liao
Networking switches, he says, have become a commodity. “They all use the same chips. They have to same latency. They have the same bandwidth. This is a clear signal that the hardware platform is commoditizing,” he says. “You can actually find a lot of [ODM] suppliers that have the capability to manufacturer and design this kind of platform.”
Like Cumulus Network, Liao’s new venture, Pica8, brings this low-cost networking hardware to a much larger market. In the past, one of the problems with buying directly from the ODMs is that you had build your own software to drive your switches. But Pica8 aims to provide software for those companies that don’t want to build their own. The company has open sourced an early version of this software — known as Picos — and it plans to open source a more extensive version of the platform next month.
“We give you the hardware and the software,” Liao says. “If you take our platform and compare it to Cisco, the protocol features we provide and the hardware performance are all in the same range. The only difference is that the price is 40 percent to 60 percent lower.”
Though Pica8 spun off of Quanta, Liao says that the company will also sell switches from other ODMs. But he declined to name them. But he does say Pica8 is selling gear to Japanese telecom giant NTT and Baidu, the company that dominates the Chinese search engine market.
Matthias Machowinski, of research firm Infonetics, says he is “very much aware” of this trend, though he adds that it is extremely hard to track. He says that the big web giants account for only a part of the overall switch market — “the number of customers that might choose to go down this route are very limited. Today, you can count them on one hand, and maybe over the next two years, two hands might be enough” — but he also acknowledges that as businesses move their applications onto services such as Amazon EC2 and Microsoft Azure — rather than running stuff in their own data centers — these web giants will account for an even larger part of the switch market.
Like Server, Like Switch
This shadow networking market is a repeat of what happened in the server world. Years ago, Google started building its own servers in tandem with the Asian ODMs, and other web giants followed. These companies are looking to save cost, but they’re also looking to reduce their power consumption, customizing machines so they’re far more efficient than their mass-market brethren.
In 2009, Google revealed some server designs it produced several years before. But, as with networking practices, the company says very little about its server gear. Amazon operates in much the same way. But Facebook had taken a different approach. Last year, after building its own data centers and working with various manufacturers to build its own servers, the social networking giant open sourced these designs to the rest of the world, hoping that others across the industry can help improve those designs, buy more hardware based on the designs, and ultimately drive down the price of the hardware.
“It’s kind like buying couches. If you buy one, you go to a retail store. If you buy 10,000 couches, you go straight to the factory”
This Open Compute Project already has several other big-name backers, including Texas-based cloud computing outfit Rackspace and Japan’s NTT. And it doesn’t stop at data centers and servers. Last month, Frank Frankovsky — the ex-Dell man who oversees hardware design at Facebook — told us that the company is in the midst of building its own storage hardware and that these designs will be open sourced in early May.
In these cases, Facebook and Amazon and Google and others bypassed “original equipment manufacturers,” or OEMs, such as Dell and HP. The servers sold by the likes of HP and Dell are actually manufactured by those same ODMs in Taiwan and China.
James Liao, of Pica8 and formerly of Quanta, does not work with servers. But he says that it’s common knowledge that — like Google and Facebook — Amazon purchases at least some of its servers from ODMs in Asia. “For servers, Facebook and Amazon are taking almost exactly the same approach,” he says. “Amazon also has some very high power designers, but they don’t do the design themselves. They come up with a certain architecture and they tell the ODMs: ‘This is my vision. These are the goals. And I want help designing the hardware.’”
Now, Liao says, this same sort of thing is happening with, well, everything. “All of the data center hardware is bought this way,” Liao says. “You can refer to Facebook as an example, where one of the big projects inside the Open Compute effort is storage. Even the storage side is being commoditized. Servers, storage, and networking — all of them are going to this way.”
Howard Wu — the president of greater China for Joyent, an Amazon-like cloud computing outfit based in San Francisco — agrees. “If you’re a small business and you’re going to buy five servers, you’re going to Dell or HP, because of the support services. But if you’re a data center operator and you’re going to buy 10,000 servers, you’re going straight [to the ODMs],” he says. “It’s kind like buying couches. If you buy one, you go to a retail store. If you buy 10,000 couches, you go straight to the factory.”
That said, Joyent is not yet buying its gear from the ODMs.
“We are definitely in talks, but it hasn’t actually happened yet,” he says. “We have other contractual obligations right now.” The market has not completely shifted to Asia. It’s moving in stages. These web companies have many suppliers — that’s just good for businesses — and in some cases, they’re still buying hardware from the traditional players — perhaps because they still have contracts in place. Facebook, for instance, is still buying some servers from Dell and HP. And Amazon is still buying custom servers from Rackable, a stateside manufacturer, and apparently other outfits based here in America.
The hardware supply chain is vast and varied. But it’s consolidating. Now that they have the engineering talent, J.R. Rivers says, the ODMs are transforming into OEMs. “The market is maturing to the point where anyone can buy directly from ODMs,” he says. “You don’t have to be Google.”
- Google, Amazon, Microsoft Go East For Network Gear (hardware.slashdot.org)
- Super-Secret Google Builds Servers in the Dark (wired.com)
- WSJ: Google Targets Amazon and Apple with Online Tablet Store (wired.com)
- WiredTree Announces Comprehensive Data Center Network Upgrades (prweb.com)
- Network Hardware Giant Cisco Eyes Software Network Revolution (wired.com)
- Amazon Kindle Fire $139 today only (gearlive.com)
- Google cuts the lights at server farm to hide gear from competitors (9to5google.com)
- Amazon Appstore generates more revenue than Google Play (intomobile.com)
- Google leaves data center servers in the dark (slashgear.com)
- Facebook Shakes Hardware World With Own Storage Gear | Wired Enterprise (leticiadelmonte.com)