Ahead of the Crowd

Many bloggers, including respected author Nicholas Carr, recently applauded Amazon for offering a Service Level Agreement (SLA) for its S3 storage service in response to competition from Nirvanix. Though SLAs have long proved an effective technique for managing corporate information technology, in Web infrastructure the SLA is nothing more than a scam that only a used car salesman could love. (Thanks, Paul D. Cocker, for the lemon.)

See what the Amazon SLA offers:

we commit to 99.9% uptime, measured on a monthly basis. If an S3 call fails … this counts against the uptime. If the resulting uptime is less than 99%, you can apply for a service credit of 25% of your total S3 charges for the month. If the uptime is 99% but less than 99.9%, you can apply for a service credit of 10% of your S3 charges.

Sounds great, doesn’t it? Let’s calculate “99% uptime,” which is the same as 1% downtime. A month has 43,830 minutes, so your site will be down 1% of that time, 438 minutes, or over 14 minutes per day on average. Suppose just 14 minutes of downtime occurs during your daily peak period. How will that downtime impact your revenue? Will being able to “apply for a service credit of 25%” compensate you for lost income, troubleshooting time, and unhappy customers?

Now consider the worst case of having all 438 minutes of downtime occur in one big failure during, say, the peak selling hours of the day after Thanksgiving. Then what recourse do you have? The dirty little secret is that the SLA protects the infrastructure provider, not the customer.

Amazon’s 99.9% uptime commitment means average daily downtime of 1.4 minutes. To put this statistic in perspective, I hosted a website for family and friends at a data center that, according to my measurements, delivered slightly worse than 99.9% uptime over a 3 month period. The number of complaints I received and the time I spent dealing with downtime astounded me. Do you think the infrastructure provider graciously provided me the 100% refund to which I was entitled according to its generous SLA? Think again.

I would have been fired for delivering 3 months of 99.9% availability back in the 1980s when I managed a corporate data center.

Web SLAs today are no better than the “9/90 warranty” my father offered years ago on his used car lot. If you shopped carefully, you could buy an awesome car at my dad’s store, but the warranty was only good for the first 9 seconds or 90 feet, whichever came first.

At the shoe shine stand on Friday, the workers busily buffed and chatted with customers. When I mentioned I worked in Information Technology, the shoe-shine guy bragged he had just flown back on the red-eye from the O’Reilly Emerging Technology (ETech) conference in San Diego.

How was the conference? “Great, I was amazed at how much fun everyone had,” he gushed. “Especially those alpha geeks, the scraggly guys with Apple laptops.” I gave him a skeptical look. “All the beautiful people were there, but I was disappointed to miss the rock star who got the death threat,” he intoned with a visible wince. Could that be Kathy Sierra? “Yeah,” he marveled, “she writes a wonderful world-class weblog.”

What’s the buzz on emerging technology? “To be honest, we non-geeks had no idea what the alpha geeks were talking about. But the geeks grokked each other and their stuff looked pretty cool,” he confided as he stroked the final buff. I handed him a wad of cash including a generous tip. Deftly straightening the rumpled bills, he whispered, “I have an even better tip for you: Buy Google stock.”

Pondering this surreal encounter, I felt as though I had passed through a time machine and landed on Wall Street in 1928, six decades before alpha geeks roamed the planet. Back then, Joseph Kennedy, Sr. spoke these prophetic words: “You know it is time to sell when the shoe-shine boy tries to give you stock tips.”

How many Dell employees does it take to screw in a light bulb? According to Heard on the Street (paid subscription) in today’s Wall Street Journal, that’s a question CEO Michael Dell and his management team are now deliberating. The company’s employee base jumped by nearly 50%, to 82,200 workers, in the past two years. Wall Street thinks now is a perfect time for Dell to reduce headcount, just as rival Hewlett-Packard successfully did two years ago. A Goldman Sachs analyst upgraded her rating of Dell’s falling stock to ‘buy’ because she predicts that slash-and-burn moves are imminent. I counsel thinking one more move ahead in this chess game.

Given that the key to Dell’s past success was an efficient direct sales model, why did headcount go out of control? Was it sloppy management? Or is something more fundamental going on?

No doubt missteps occurred, including an ongoing SEC investigation into company finances as senior managers fell on their swords. After Dell faded in customer satisfaction and laptops exploded in flames, plenty of bad press ensued. In response the company said last September it was investing $150 million to enhance customer relationships, including adding 2,000 support staff. But that move failed to reignite sales.

Why didn’t ramping up support headcount pay off? It’s tempting to blame poor execution. But I think that Windows PC support costs are rising so fast that Dell, no matter how hard they run, will never profitably catch up. When customers suffer malware, phishing attacks, or defective patches, they call tech support. With razor-thin margins in the PC hardware business, every tech support call erases a pile of profit. As a thought experiment, imagine what two additional years of support (above the one year warranty) for a $359 PC should cost. Now go to the Dell website, price that computer, and check out the support cost. Ouch.

Why is Dell considering offering Linux on its computers? Hint: it’s not just to save the few dollars that go to Microsoft for every computer shipped. Support costs are almost certainly a key part of the equation. Imagine how many tech support calls would vanish if Dell delivered a robust operating system.

What’s more, Dell is struggling with a global trend: transition from a computer industry driven by corporate information technology to one that’s centered on consumers. The company’s response involved broadening its product mix to include consumer items like digital cameras and television sets. That strategy didn’t pan out for CompUSA; it nearly put them out of business. Considering Dell’s accounting issues, it’s hard to evaluate the toll this strategy has taken, but the outlook isn’t favorable.

So the time has come not just to “streamline the organization,” but to consider real alternatives to the Dell 1.0 business model, which has grown too long in the tooth. The company must recognize that Windows PCs have become low-margin appliances like lamps, dishwashers, and toasters. Going forward, PCs need to be reliable like lamps and supported like toasters. You can’t achieve that by throwing thousands of warm bodies into a call center in India in a futile attempt to screw in that light bulb. Dell 2.0 ought to mean reshaping PC support by totally redefining the PC product experience. Else nobody will be left at Dell to turn out the lights.