Adam Smith's Blog

Amazon S3’s Pricing Model is Arbitragable, and the Future of Cloud Storage

Here’s what you do.

Amazon S3 charges money for each gigabyte that you store.  You go to their top 50 customers, and tell them: we’ll dedup your data with the other top customers, resulting in overall cost savings.  We’ll split those cost savings with you 50/50.

You're basically stealing the economies of scale of redundancy elimination from Amazon.

You could also get sophisticated with delta encoding blocks of data that aren’t duplicates but are close.  Here’s a paper that goes detail on redundancy elimination.

You’d have to get people to trust you to not lose their data.  Maybe you use best practices, hire cperciva to write it, and get an insurance company to provide a $100 M policy against data loss that’s your fault – but it’d still be hard to pull off.

This line of reasoning raises questions about the future of cloud storage.  Mostly: does broad scale redundancy elimination matter?

If it does matter, we will see economies of scale in cloud storage.  Does that mean there will be one or only a few major providers, or will redundancy elimination be provided as a layer on top that’s operated by someone else?  Will cloud storage providers be forced to change their pricing models?

These are the questions that make our field so exciting!

Just to sweeten the pot, Data Domain, a data deduplication company, got bought for $2.4B a couple years ago, though they were certainly approaching a different market.

What do you think: will large scale redundancy elimination matter?

The Market Opportunity to Undercut Sonos

New technologies often start out serving the high end of the market where quality is more important than price, and over time a new disruptor comes in to serve the lower end of the market.  This is a classic part of the innovator’s dilemma.

It’s also pretty universally understood that geeks love their Sonos sound systems.  These boxes of magic synchronize music playback across speakers spread around your home, all wirelessly.  For example, right now I’m playing music from my PC into a Sonos line-in that gets piped into my living room speakers.  If I walk upstairs to do laundry I can pull out my iphone and use the remote control app to route that music into my upstairs speakers as well.  Playback is synchronized.

A low end Sonos system costs $800.

They also have all kinds of fancy features like integration/partnerships with Rhapsody, Napster, Audible, Sirius Radio, etc etc.  Their boxes have optical audio ports, ethernet ports, etc.  None of these things will matter on the low end.

So what, exactly, would the low end solution look like?  Easy: small wall-warts that have a wifi chip, an audio card (D2A and A2D chips), and a microcontroller/DSP to make it all work.  On the outside it would have two audio jacks: one for audio in and one for audio out.

(You might also sell a set of speakers with your device built in, since the less hacker-ish part of the market will want a total solution.)

Now, I have zero experience with hardware but I’d guess you could get the bill of materials down to $40, without speakers.  If you are super scrappy you should be able to bring the initial product to market for $750k.  But I could be totally off base.

The goal would be a cost point that's ten times cheaper.

Here’s the coolest part.  Using Sonos’ audio streaming today requires two Sonos boxes – one as the audio source and the other as the sink.  A standalone computer can’t be a source; if you want to play music from your laptop and move around you’re hosed.  (There is a way to do this, but you have to set up and use their player software, which is not the right solution.)

The low end disruptor would need this “virtual sound card” feature, for both PC and Mac OS.  The lowest common denominator would be having one of your devices plugged into your stereo system and you can stream music to it from your laptop.  And people can upgrade over time by just buying more of your cheap devices.

The only other meaningful player in this space is Apple’s AirPort Express, which can stream itunes to an audio jack.  I don’t believe you can play from any audio source on the computer, and I don’t believe you can stream to multiple AirPorts at the same time.

I’ve had this idea on my ideas spreadsheet for years, but Sonos just announced a major financing so I’m concerned that they might be eyeing this strategy, and frankly I need someone to scratch this itch for me.

So here’s the deal.  Let me know if you’re interested.  There are a couple of other interesting product and marketing angles that we could jam on, and I might want to put some money in.