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By Carl Howe

Amazon.com just announced its new Elastic Compute Cloud (EC2) virtual hosting service. This is a system that allows any user who opens an Amazon Web Services account to simply upload a Linux disk image to Amazon's servers (i.e., in the Internet "cloud"), and Amazon will execute that Linux image on the user's behalf for USD$0.10 an hour, plus bandwidth and storage charges. In essence, Amazon has jumped into the hosting business, big-time. My guess is that they are using virtualization technology such as VMWare or the like to make this economical, and there's no question the technology statement this makes is very cool and exciting.

But from a marketing and branding point of view, this is such a bad idea I don't know where to start. To cite investing guru Peter Lynch, it's a classic example of "diworsification"; getting into new businesses that make your existing business worse.

Let's dive into this by asking some simple questions about the types of images I might upload to Amazon. Read along with the Amazon terms of service if you like and check my thinking.

1. Can I upload a Web site that competes with Amazon?

It appears this is both legal and appropriate to the terms of service.

2. Can I upload a system that hosts a discussion group critical of Amazon and its products?

Yup, that seems within the terms of service too.

3. Can I upload a system that hosts a legal pornography site?

Here, I think that section 8 under Participation might play out: 8) "If your Application is determined (for any reason or no reason at all, in our sole discretion) to be unsuitable for Amazon Web Services, we may suspend your access to Amazon Web Services or terminate this Agreement at any time, without notice." But there is no explicit clause against serving pornography provided it is legal in Washington state and not judged legally obscene.

Clearly, this service is going to require some policing on Amazon's part. And since the URLs associated with these services have Amazon Web Services addresses, cases where they don't police the content well could tarnish the Amazon brand.

But the bigger marketing issue is simply this: How will services hosting help Amazon's business? Through this one entry, Amazon has just sent a message to HP, IBM, Earthlink, and others that it wants a piece of their hosting business. And what does this have to do with selling more books, toys, and electronics? Almost nothing.

Amazon.com has fallen into a strategic trap. Instead of investigating more and better ways to serve its retail customers, it has decided to focus on being a technology company instead, presumably because technology companies often command higher valuations. This EC2 service (even the name is geeky) will distract the company's energy when it should be gearing up for a tough fourth quarter selling season. Amazon survived the dot com bust because people could understand its business and its competitive advantages in retail. Moves like EC2 will make that understanding much harder now.

AMZN 1-yr chart:

AMZN 1-yr chart

Source: Amazon's New Hosting Service: Technology Diworsification