Wednesday, April 23, 2008

Cheap Infrastructure

Google's App Engine is the latest service to reduce operating costs for Web startups.

By Erica Naone

Credit: Technology Review

Reporter's Notebook: Erica Naone

Two weeks ago, Google launched a test version of App Engine, an infrastructure service aimed specifically at Web developers. The product is one of several offering cheap infrastructure to Web businesses, so that they can rent storage and processing power and avoid expensive hardware purchases. Experts say that despite lower operating costs, venture capitalists aren't likely to change their funding strategy.

Ramu Yalamanchi, founder and CEO of hi5, says that changes to infrastructure have made a big difference over the years in terms of how startups operate. According to Yalamanchi, in 2003, when hi5 was founded, open-source software, such as the database system PostgreSQL and the Linux operating system, along with cheap components, made it possible for the company to get by with only $250,000 in seed money--a feat that wouldn't have been possible just a few years previously. "Today, we would have looked very closely at Amazon S3," Yalamanchi adds, noting that infrastructure costs are continuing to drop.

Amazon Web Services, including Amazon S3 and Amazon EC2, only charge companies for the storage and processing they use. As a result, explains Adam Selipsky, Amazon Web Services' vice president of product management and developer relations, startups don't have to pay for servers that sit idle much of the time, waiting for a sudden surge in traffic. Selipsky says, "That means you have to raise a lot less money from angels and venture capitalists, and the reduction of risk is very attractive to startups themselves, and very attractive to their initial backers." (Angels are private investors who typically invest their own money in startups, as opposed to venture capitalists, who typically manage pools of money from a variety of sources.)

Google's App Engine offers features similar to Amazon's Web services. Tom Stocky, a product manager at Google, says that the company has given a great deal of thought to building an environment to help Web-based applications get off the ground quickly and grow easily. "Even the most proficient developers can get benefit here, because they get access to the same infrastructure Google engineers use," Stocky says. For example, in addition to being hosted on Google's servers, developers can use Google's software to authenticate customers. App Engine, Stocky explains, also includes access to some of Google's own methods for managing data, including the company's load balancing algorithms and data storage systems that allow for faster access to data.

Edward Roberts, founder and chair of the MIT Entrepreneurship Center and a professor at the MIT Sloan School of Management, says that given the lower initial costs of starting a business, people should "expect more startups." However, he says that he doubts venture capitalists will change the size of their investments, since they need to invest certain quantities in order to keep their funds working to maximum capacity. "More startups may, however, get funded by angels or angel groups who have less money than the venture capitalists," Roberts says.