How Cloud Computing is Revolutionizing Internet Startups
Steven Gregory
May 3, 2013
WRIT 340, Marc Aubertin
In internet services, reliability is everything. Moments of downtime at a critical point can
easily make or break a business. Perhaps nothing demonstrates this better than the recent failure
of the SimCity launch. SimCity was a classic computer game from the late 1980s that lets
players pretend to be mayor of a virtual city. The franchise went through four very successful
major releases up to 2004, and then in early 2013, the series was rebooted and reinvented with a
version that connects to other players online. With millions of dollars of backing, stunning
graphics, and fantastic pre-release reviews, the 2013 release was bound to be a blockbuster hit. It
was supposed to be the pinnacle of the return of Electronic Arts, the multi-billion dollar company
that created the game, and a company that has been struggling to keep market share against
hundreds of independent game studios. Launch day came in early march and what happened has
been described as “a disaster that makes zombie attacks and nuclear meltdowns seem tame.”
(Kohler) After all of the anticipation and advertising, over one million copies were sold in the
first two weeks. Consequently, huge numbers of people tried to play their new game at the same
time, and the Electronic Arts servers could not handle the load. There was a service outage for
weeks that left nearly every customer unable to use the product they paid for. The general
problem with such service spikes is that they cause outages at the most critical points of growth,
when more people than ever are trying the service out for the first time. They happen during the
debut period while people are rushing to find out what a product is like for themselves, and so
the reaction forms the public’s populous impression of the service. In the case of Electronic Arts
and the SimCity launch, the impression could not have been more embarrassing. The company
suffered a 13% drop in stock price, equating to well over 500 million dollars in evaporated
company value. The drop in reliability destroyed confidence that customers and investors had in
the company.
Then there is the story of Shazam. Shazam is a company of about 100 people with one
flagship product: a simple app that lets people use their phones to recognize music and other
media. Users simply open the app, tap a button, and let the phone listen to the song, movie, or
commercial. The audio data is then packaged and sent to Shazam servers that run a complex
algorithm to figure out what sample of audio in their database matches most closely. Then the
information identifying the tune is sent back to the phone and given to the user. The brilliant
product now has over 200 million users and is a top app on every app store. They have been
named “the world’s leading media discovery company.” (Amazon) But, like every company,
they began as a startup. They had explosive growth and even more severe usage spikes than
Electronic Arts. In 2012 the company decided to launch a Super Bowl ad campaign that would
suddenly inform millions of people of their app, and during just the right conditions for people to
download and start using it. They even challenged people to try “tagging” (Shazam’s word for
identifying) the other Super Bowl commercials with their app, leading immediately to millions of
users loading the servers. With spikes like this, how did the small company avoid any outage?
Without a Google or Amazon-sized data center, filled with hundreds or thousands of servers,
how did they survive at all? As it turns out, even though they did not own an Amazon-sized data
center, they were using one. In fact, they were using Amazon’s. Because problems like
reliability, scalability, and accessibility of computing technology have historically plagued web
services, companies like Amazon and Google have begun a new kind of industry in which they
sell their raw computer resources to other companies, like Shazam, as a commodity. This
industry is called cloud computing.
There are numerous other success stories of online services using cloud computing. Many
of them are well-known, household names. Netflix, for example, also uses Amazon Web
Services to store and stream movies to subscribers. Instagram, a website and app for processing
and sharing mobile photos, also supported its explosive growth on the Amazon cloud. And
Dropbox, the leader in personal online storage, is built on purchased, packaged, and resold online
cloud storage. Others include Pinterest, Spotify, Foursquare, and Reddit. Nearly all of the
networking, storage, and computational resources that these brands depend on is not actually
built and operated by these businesses. These businesses buy the raw resources from somebody
else and use their software and branding to build a product. The fact that the employees at
Dropbox may never see the actual hard drives which hold their customers’ data does not matter
to the market. All that matters is that the repackaged service is delivered reliably, simply, and
cheaply.
Internet services are unlike any other kind of services in their resource requirements and
distribution channels. Physical services and products usually deal with problems of logistics and
supply chain management. They worry about how to get, say, metal from Russia to a factory in
China, and then move the products from China to the United States. Their main bottlenecks in
growth have to do with geographic limitations and the time it takes to ship, and their main
barriers to entry are the costs for employees and raw materials. Internet services, though, have a
completely different landscape of challenges. Production and distribution is so rapid and
automatically ubiquitous (because the product is information) that things like location and
logistics are practically irrelevant. Instead, the main concern is about the reliability and
scalability of the computers that store, process, and serve the information to customers. This is,
in large part, because of the different consequences of reaching capacity. If a business that sells
physical products and services reaches capacity, then normally they will simply run out of
products. Though, if an internet business reaches capacity, then the product itself is temporarily
destroyed as the computers slow to a crawl or crash. In addition, the logistical limitations of
customers trying to access physical products put a reasonable limit on the number of possible
customers that will need to wait for a backorder. Though, online, a single ‘tweet’ of a hyperlink
can send millions of people to websites that are designed to handle only hundreds of visitors.
Even if the website is able to meanwhile handle its capacity of hundreds, and turn away the rest,
only a very tiny fraction of customers would be satisfied. Whether from tweets, blogs, news
articles, or message boards, these kinds of extremely rapid shifts in demand happen all the time
on the internet, and it has led to the concept of online viralness. The moment an open web
service goes viral, it obtains its debut usage spike that will define the service forever. Therefore,
in order to be successful, internet services need to be ready. They must plan a way to quickly
increase capacity by orders of magnitude.
The traditional method for solving the problem of viral spikes was to simply artificially
limit growth. Businesses would stop overwhelming flows of users by restricting signups to
limited groups of people, like friends of existing users. Facebook and Gmail, two services built
before cloud computing, are examples of businesses that used this method. Facebook expanded
from one university to the next as servers were slowly added to a stockpile. Gmail let users invite
only a limited number of friends. While the method worked out in these cases, its use clearly has
a few problems. The most obvious is that limiting growth is, of course, counterproductive to
maximizing expansion. Businesses would ideally be able to expand as rapidly as demand.
Additionally, web services in particular often require a kind of “critical mass” of users, or a
certain amount of users needed before the public decides that it will be the standard solution.
Registration limits on these services might prevent their success altogether. And lastly, some
businesses concepts depend on the service remaining open and useful to people without user
accounts. YouTube and Shazam, for example, were made many times more useful by the
decision to not require a user account to use the service. Viewing a clip or tagging a song had to
be open to anybody. For these services, registration limits would be impossible.
Cloud computing completely tackles these issues. While a startup would have difficulty
networking a data center to manage their usage spikes, the cloud providing companies like
Google and Amazon have already mechanized the process. They regularly build and expand data
centers. Originally, the data centers were for their own service, but in 2006 Amazon launched
Amazon Web Services, and in 2012, Google launched the Google Compute Engine. Numerous
other companies have also launched similar services. These services are a collection of
commoditized computer infrastructure resources that could be bought online on-demand. Today
a virtual Amazon server, ready to perform calculations or serve web pages, can be bought for
only cents per hour. It can be provisioned and active online within a matter of seconds. Given the
concerns that web services previously faced, this is an almost magical capability. The reliability
of a startup can be effectively be pegged to the reliability of Amazon. On top of this, with the
modern features of these cloud technologies, summoning of resources can even be done
programmatically. Web services can be programmed to automatically make authorized
purchases of more computer hardware to expand to so that there is no human delay in scaling a
service to meet a usage spike. In essence, there is no longer any significant practical limit to the
size and speed that web startups can grow.
As an added bonus, this cost structure allows for resource contraction. If a usage spike
subsides, the virtual servers can be turned off and the resources are returned to the supply pool.
This means that the company does not need to maintain a large reserve of resources during the
times that usage is light. Instead, the cloud provider holds a reserve collectively for its customers,
and the usage spikes for all of the customers is smoothed over by the number and variety of
customers. While online productivity services might see usage spikes during weekdays,
entertainment apps may see spikes on the weekend. By having more different kinds of cloud
customers, the probability that a certain proportion of services would see a usage spike at the
same time is reduced. This is a bit like an insurance policy on server overload, and it helps make
the overall use of resources massively more efficient.
With these barriers to entry removed, and much lower startup costs, the internet has
entered a new era in which everything is about software. Perfect or near-perfect reliability is now
a given in online web services and there is an expectation (with the exception of Electronic Arts,
who decided to use only its own data centers) that they can expand immediately to any size.
Networking and hardware issues are a thing of the past as they are only a concern only for the
cloud companies, so the only remaining barrier is the software development required to make a
web service. While the full effects of this era are probably unrealized, some effects can be seen
from what has already happened. The of startups that have successfully used cloud technologies Netflix, Spotify, Reddit, Foursquare, Dropbox, Instagram, and others - illustrate this the best. All
of these services entered the market and dominated within a startlingly fast time period and
observed unprecedentedly fast appreciation in value. Instagram, for example, went from official
incorporation in late 2010 to being bought by Facebook for one billion dollars in early 2012.
These services are also incredibly competitive and quality-driven. They focus on making their
service as useful and welcoming as possible. Since the barriers to entry are so low, these
companies must keep very competitive products to prevent being replaced by the next generation
of web services. In summary, these circumstances have created a “high-stakes” internet economy
where the bar for quality is high and the potential for profit is unheard of.
Exactly how this will play out in the future is difficult to predict. Many of the current
trends will probably continue and the types of web services offered will probably diversify
greatly. Now that a full-fledged web service can be reliably established with the monetary
resources of a Mom and Pop store, economic niches that were never given attention from Silicon
Valley will likely be filled by masses of aspiring technical entrepreneurs. The opportunity for
value creation by leveraging technology has never been greater. Perhaps the hypothetical hope
that created the dot-com bubble is being realized. This time around, anybody really can make an
internet business.
Bibliography
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Reynolds, Erik. "SimCity Sells More Than 1 Million at Launch." Press Release
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