AWS is looking to build economies of scale.

Amazon Elastic Compute Cloud (Amazon EC2) is a web service that provides re sizable compute capacity in the cloud. It is designed to make web-scale computing easier for developers.

Cloud computing services offer the tremendous benefits and flexibility that executives promise.AWS is looking to build economies of scale and set low prices that act as a barrier to entry for new competitors.

Service providers and IT vendors are quick to tout the benefits of cloud computing, citing the ease with which companies can test and deploy applications or scale up the number of servers they are running during periods of peak demand.

The value that companies get from these services should mean customers are willing to pay a premium for them, but AWS wants to keep its prices low, giving up the opportunity to earn higher margins in exchange for greater economies of scale that give it an edge over rivals — a strategy that Andy Jassy, senior vice president of AWS, said is rooted in the company’s heritage as an online bookseller.

The AWS business model is simple. The company offers a range of cloud-computing services and charges customers based on how much they use them. There is no minimum monthly fee.

Economies of scale also form a barrier to entry for new competitors as any company that wants to compete with AWS will have to match its low prices. The impact of AWS’s strategy is already being felt, even though adoption of cloud computing services is just getting started.

Cloud computing providers must offer services that create value beyond what AWS offers, either by offering platform services for custom applications or software applications that command higher prices and better margins than infrastructure services. That’s already starting to happen.

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