Amazon's Less Is More

Its move away from new tech spending may be its shrewdest.
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With its stock price soaring after saying it would lay off spending on new technology, Amazon.com (AMZN) - Get Report is now pushing the envelope even further.

The company is pioneering new ways to make money out of its previous spending, as it steps up efforts to pitch its new Web-services offerings.

Amazon is now putting its muscle behind Simple Storage Service (S3), which sells empty space on the company's sea of servers, and its Elastic Compute Cloud 2 (EC2) platform, which sells the latent computing power in the company's technology grid. CEO Jeff Bezos took the stage at the hugely popular Web 2.0 conference in San Francisco last week to plug the service.

The move marks a significant turning point for Amazon. Not only is it turning away from investing in new technology toward finding new ways to make money off past investments, it's also moving from fumbling with novel, potentially high-profit products last quarter back to its roots as a retailer of low-margin, mass-market items.

While Amazon's push into Web services is innovative from a product standpoint, it's not as technologically ambitious as its Unbox film-downloading system, which was riddled with technical glitches in its debut last quarter, or A9, the company's attempt at a cutting-edge search engine, which was scrapped during the quarter as well.

Nor are profit margins as high in Web services as they could have been in the company's more technologically bold moves. But Bezos is fine with that, since it plays to Amazon's strengths. "I always think high-volume, low-margin businesses are more defensive," he said at Web 2.0. "We are good at it, we know how to do it, and we think it can be a meaningful and financially attractive business one day," he said of the new platform.

Selling its unused capacity also marks a renewed focus on containing costs -- another item on Wall Street's long-standing wish list for the company. "Our biggest cost is not power or servers or people. It's lack of utilization. It dominates all other costs," Bezos said.

The move is especially shrewd because it allows Amazon to offset costs in a way that doesn't interfere with top-line revenue growth. And Amazon's 20% yearly revenue increase is the key to its growth story -- and a rare justification of why it is able to command a multiple of 56 times forward earnings, the richest even in the Internet sector.

Cutting costs by scaling back the deep discounts it offers consumers, for example, would get in the way of growing revenue. But renting out technology it already paid for when it isn't using it allows the company to help its bottom line while not hurting growth.

And while the services are just getting off the ground, they could soon generate some serious cash, given the rise of a new generation of ambitious, bandwidth- and computing-hungry smaller companies. Take

ElephantDrive

, a startup that offers users unlimited amounts of storage -- a proposition obviously heavy on server space. S3 is on the spot for ElephantDrive, which has seen the amount it spends on the service grow 355% a month since October, according to Michael Fisher, the company's CEO.

Meanwhile, Powerset

, a high-profile search startup that aims to outdo

Google

(GOOG) - Get Report

by offering search that understands natural language, is a huge consumer of Amazon's EC2.

While Amazon is now the first tech company to take advantage of the enormous amounts it spends on its own tech infrastructure, it was in many ways among the least likely. Giants like Google,

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

have more technology firepower than the Internet retailer. "We were waiting for Google or Microsoft maybe -- sitting there thinking, 'Any day now'," says Fisher. "Then the S3 press release came out, and we called Amazon that day saying this is exactly what we are looking for."

But necessity may be the mother of invention in Amazon's case. While Google and Microsoft's tech reserves eclipse those of Amazon, they're not under the gun to stretch tech spending in the same way. For example, while

concerns have been raised about Google's rising tech spending, CEO Eric Schmidt waved them off by crediting Google's blowout quarter to the performance made possible by those investments.

But while both companies have made big gains since they announced quarterly earnings, Amazon's stock has rallied sharply mainly because it said it would take a break from technology spending.

Wall Street will be especially welcoming if the company can build momentum behind its offering and shift its stance from spending on tech to finding new ways to profit from it. "On the analyst side, Amazon gets hammered for its technology spending -- including by me," says Martin Pyykkonen, an analyst at Global Crown Capital. "But this is a move in the right direction."

A warm reception for its new Web services could once again make Amazon look like a true innovator -- even if it's a less technological one than it might have hoped to be a few quarters ago.