Amazon.com (AMZN) Vice-President James Hamilton's schooling in computer data centers started under the hood of a Lamborghini Countach.
Fixing luxury Italian autos in British Columbia while in his 20s taught Hamilton, 51, valuable lessons in problem solving, forcing him to come up with creative ways to repair cars because replacement parts were hard to find. "It's amazing how many things you can pick up in one industry and apply to another," Hamilton, who has also been a distinguished engineer at Amazon since 2009, says in an interview.
Hamilton is putting these skills to use at Amazon, where he's central to an effort by Chief Executive Officer Jeff Bezos to make Amazon Web Services, which leases server space and computing power to other companies, as big as the core e-commerce business. He's charged with finding ways to make data centers work faster and more efficiently while fending off competition from Microsoft (MSFT) and IBM (IBM), his two prior employers, and AT&T (T).
Revenue from the kinds of cloud services offered by Amazon is likely to surge to $56 billion in 2014, from more than $16 billion in 2009, according to research firm IDC. Amazon's Web services brought in about $500 million in revenue in the past year, according to estimates from Barclays Capital and Lazard Capital Markets, or about 1.5 percent of Amazon's $34.2 billion in sales. The company doesn't disclose revenue from Web services, also called cloud computing.
As they pursue growth, Hamilton and his team will have to ensure that Amazon's investment in Web services is well-spent. Investors pummeled shares of Seattle-based Amazon on Jan. 28, the day after the company said it would boost spending on data centers and warehouses, fueling concern that margins will narrow.
Although still relatively small, Amazon Web Services is growing at a faster rate than the company's core business, and it's more profitable, says Sandeep Aggarwal, an analyst at Caris & Co. Web services may generate as much as $900 million in sales this year, and operating margins could be as wide as 23 percent, compared with 5 percent margins in the main business, Aggarwal says. "There aren't many companies with an incremental business that's more profitable than their core business," he says.
Hamilton, who has filed almost 50 patents in various technologies, is tasked with developing new ideas in cloud computing, which lets companies run their software and infrastructure in remote data centers on an as-needed basis, rather than in a computer room down the hall.
He spends much of his time shuttling between departments, encouraging teams focused on storage, databases, networking, and other functions to work together. One aim: devising ways to squeeze costs out of multimillion-dollar data centers and pass those savings on to customers such as Eli Lilly (LLY) and Netflix (NFLX).
Hamilton and the teams must figure out how to build the business on the fly. Cloud computing is so nascent that engineers can't rely on case studies or past industry experience to guide their decisions, says Lew Tucker, chief technology officer of cloud computing at Cisco Systems (CSCO). "This is not in college textbooks yet," says Tucker, who has followed Hamilton's work as an industry peer. "These architectures are new and evolving every day."
Among the challenges Hamilton and his colleagues face is making Amazon flexible enough for customers that want customized services, while overcoming companies' concerns about storing sensitive information outside their own secure firewalls. They've met with early success, with Amazon emerging as the leader in cloud computing among developers, according to consulting and research firm Forrester Research (FORR).
Amazon's Web services unit will have to stay innovative to keep ahead of competition from Rackspace Hosting (RAX), which manages applications for businesses. Startups such as Cloud.com also are aiming to carve their own niche in cloud computing. Amazon has been able to stand apart from rivals by introducing unique products, says Jeff Hammond, an analyst at Forrester. For example, the company unveiled a service last month called Elastic Beanstalk, which lets even novices who don't know how to write computer code plug into Amazon's computing power. "These guys continue to innovate in a way that the large traditional companies—the IBMs and the Oracles and the Microsofts of the world—are not doing," Hammond says.
Last year, Amazon introduced a service called Spot Instances, which took a nontraditional approach to managing underused servers. While many companies pack tasks onto underused servers and unplug the extra ones, Hamilton and his colleagues began auctioning off idle computing capacity. The result: Amazon got revenue rather than an unused server and the customer got a cheaper price than the normal rental rate. "The trick is to find a steady stream of things like that," says Hamilton, who with his shoulder-length hair and jeans-and-T-shirt work uniform could be mistaken for a member of a 1970s rock-and-roll band. "We can make such a big difference here on services and server efficiency."
Hamilton, who holds a master's degree in computer science from the University of Waterloo and focused on data-center design at Microsoft and IBM, works from Amazon's campus near the waterfront in downtown Seattle. On a recent afternoon, his office whiteboards were filled with diagrams mapping the speed of light through fiber, and scribbles about the time it takes for two workloads to go across a geographical distance. Amazon's culture encourages speed—a new idea can be implemented in days, Hamilton says—and novel approaches. A video of a rapping monkey announced the acquisition of daily-deal site Woot.com last year, for example. This has spurred him to seek ways of thinking from industries unrelated to computing.
A conversation with a major retailer about how it moved sweaters through the supply chain to ensure that stores were always stocked led Hamilton to realize that Amazon could apply the same process to ordering servers and component parts. When Zynga Game Network launched its hit social-networking game Farmville in 2009, it relied on Amazon's servers to support a number of users that far surpassed Zynga's estimates, says Mark Stockford, a vice-president at Zynga. Without an outside partner, Zynga wouldn't have been able to keep up with growth, he says. "Had we done that in a traditional data center there's no way we could've scaled our infrastructure," Stockford says.
Beyond giving customers ways to grow quickly, Amazon constantly studies its internal data to figure out how to decrease the cost of its services, Hamilton says. It's attention to data that led Amazon to turn down the air conditioning in its computing warehouses, slashing energy costs. Most companies can afford to run their data centers above the 68-degree-to-77-degree temperature range recommended by the American Society of Heating, Refrigerating and Air-Conditioning Engineers, Hamilton says—although they don't know it.
He will have more chances to squeeze costs from servers. This year Amazon will more than double capital expenditures to $851 million, analysts at Goldman Sachs Group (GS) estimate, as it constructs more data centers and warehouses for its retail business. "If you've got an idea that can save $5 per server and you're going to buy 100 servers, nobody really cares," Hamilton says. "If you're going to buy thousands of servers every week, it becomes super-relevant."