Amazon’s Profit Falls as It Spends Heavily on Distribution Centers

On Thursday, Amazon told investors it’s still not time for a drink.

The Internet retailer reported a 37 percent decrease in profits for the first three months of the year.

That drop was expected, and it was even a bit less than some investors had forecast, which initially helped lift the company’s shares slightly in after-hours trading. The stock eventually ended up falling about 3 percent in after-hours trading.

Amazon said its net income for the first quarter, which ended March 31, fell to $82 million, or 18 cents a share, from $130 million, or 28 cents a share, a year earlier. Revenue jumped 22 percent to $16.07 billion from $13.18 billion.

While the company’s profit was better than analysts had expected, its revenue fell slightly short. Wall Street analysts expected Amazon to report earnings of 9 cents a share and revenue of $16.16 billion, according to an average of their estimates compiled by Thomson Reuters.

Amazon previously told analysts to expect its sales to grow to between $15 billion and $16.6 billion, or somewhere from 15 to 26 percent.

“It’s more of the same from Amazon,” said Colin Sebastian, an analyst at Robert W. Baird & Company.

Mr. Sebastian added that the waves of investments that Amazon was making were unlikely to abate soon. “That’s going to be a continuing trend,” he said.

The seeming indifference of many investors to Amazon’s slim profits shows how much more effective the company has been at articulating its vision of future opportunities to Wall Street than another tech favorite, Apple.

Apple, which made a profit 116 times bigger than that of Amazon last quarter, has been plagued by investor doubts about its growth prospects, driving its stock down 33 percent over the l ast year.

Amazon’s shares are up 38 percent in that period.

Jordan Rohan, an analyst at Stifel Nicolaus, said investors had been reassured by comments from Amazon management that suggested the company was not being hurt as much by weakness in European economies as another e-commerce giant, eBay. “That’s an acknowledgment that the growth outlook for Amazon remains quite robust,” he said.

Amazon is spending heavily on fulfillment centers to speed delivery of physical goods to customers. It is also investing aggressively in data centers to expand its Amazon Web Services business, which provides start-ups and big corporate clients with computers and bandwidth they can rent as needed for their online initiatives.

Then there are the consumer devices that are becoming an increasingly important part of Amazon’s plan to deliver media electronically to customers. The company’s Kindle e-readers are now a full-blown family of tablet computers, which it sells for little or no profit, with the goal of making money over the long term by selling books, movies, music and other services.

Amazon is also developing a television set-top box that it is expected to announce in the fall, a device that could give its video services a more meaningful audience in living rooms. The company recently introduced pilot episodes for 14 original comedy and children’s television shows and is soliciting viewer feedback to determine which ones will be turned into full series.

In a conference call, Tom Szkutak, Amazon’s chief financial officer, repeated an oft-stated Amazon motto about its priorities. “We believe putting customers first is the only way to create lasting value for shareholders,” he said.

Bits Blog: Facebook's 5% Solution in Data Centers

Alan Brandt/Agence France-Presse — Getty Images Facebook’s data center in Prineville, Ore.

Forget the way we live and share on Facebook. The biggest innovation at the social network may be in back-end plumbing and innovative pricing. It is starting to affect the rest of the tech industry.

Behind the cat photos and Oscar opinions of one billion humans is Facebook’s burgeoning network of data centers. As complex as managing people’s personal data and sending them ads is, the company tries to buy from a relatively small number of suppliers, whom it keeps on a short leash.

“In computing at this scale, the data center is a factory floor,” says Frank Frankovsky, vice president of hardware design and supply chain at Facebook. “We try to keep things simple.”

Equipping the data factory works like this: Mr. Frankovsky and his team of about 25 people design five types of computers to run most of Facebook. These are Web page servers, database computers, data storage systems, news feed servers and something called memcache servers, which speed overall performance. They then figure out what it costs to build each kind of machine, and buy from a supplier, known in the industry as an O.E.M., or original equipment manufacturer, if that maker can equal or better Facebook’s performance, at a price within 5 percent of what Facebook figures is its own cost.

“When we first said we’d build our own machines three years ago, the O.E.M.’s didn’t believe it,” Mr. Frankovsky says. In the last release of Intel’s mass-market semiconductor for servers, he says, “we were internally ready three months before everyone else.”

The speed with which Facebook made the new computers, he said, was a result more of the incumbent manufacturers’ older design, manufacturing and sales processes than anything novel that Facebook did.

The Facebook purchasing model has been disruptive to many traditional suppliers, like Dell and Hewlett-Packard. Initially. at least, it seems to have helped ultra-cheap Asian manufacturers like Quanta Computer. Quanta, which makes the laptops sold by Apple, H.P. and others, began selling Facebook and others shrink-wrapped racks of servers instead of individual boxes. It now now supplies 80 percent of Facebook’s Web servers, Mr. Frankovsky says.

H.P. has responded by taking a more active role in the Open Compute Project, an open source project started by Facebook to build big data centers that are more energy efficient. A Web server from H.P., code-named “Coyote,” is now being tested at Facebook. Its “Moonshot” server, built for big data centers with the type of chips usually in cellphones, should also be a candidate when it comes out later this year.

While H.P. is selling substantially fewer computers to Facebook than it used to, Mr. Frankovsky credits it for reacting to a trend. “This industry is shifting from supplying lots of small and medium-sized businesses with lots of different computer requirements, towards clouds,” he says. By selling new products to Facebook with little profit, he says, “they get low margins, but they understand what they could design to sell in the long term.”

It works out nicely for Facebook that way, too.

As painful and testing as this customer-led price demand may be, at least some suppliers say it is a healthy system. “The burden falls on the tech guys to keep their product from becoming a commodity,” says David Yen, senior vice president of the data center technology group at Cisco Systems. “Facebook is pushing new standards that force companies to innovate.”

In addition to Mr. Frankovsky, the Open Compute Project’s board includes Andy Bechtolshiem, a founder of the innovative server maker Arista Networks; Jason Waxman, the head of high-density computing at Intel; and representatives from Rackspace Hosting and Goldman Sachs, which consumes a lot of computing power.

What is missing from the group, it seems, is much of a presence from Amazon Web Services or anything at all from Google. Google, which builds its own machines inside perhaps the biggest data centers of all, has played alone, to a point of not patenting its inventions for fear of disclosing its methods and giving up secrets around power consumption and data transfer speed.

The Cloud Factories: Data Centers Waste Vast Amounts of Energy, Belying Industry Image

The company had been packing a 40-by-60-foot rental space here with racks of computer servers that were needed to store and process information from members’ accounts. The electricity pouring into the computers was overheating Ethernet sockets and other crucial components.

Thinking fast, Mr. Rothschild, the company’s engineering chief, took some employees on an expedition to buy every fan they could find — “We cleaned out all of the Walgreens in the area,” he said — to blast cool air at the equipment and prevent the Web site from going down.

That was in early 2006, when Facebook had a quaint 10 million or so users and the one main server site. Today, the information generated by nearly one billion people requires outsize versions of these facilities, called data centers, with rows and rows of servers spread over hundreds of thousands of square feet, and all with industrial cooling systems.

They are a mere fraction of the tens of thousands of data centers that now exist to support the overall explosion of digital information. Stupendous amounts of data are set in motion each day as, with an innocuous click or tap, people download movies on iTunes, check credit card balances through Visa’s Web site, send Yahoo e-mail with files attached, buy products on Amazon, post on Twitter or read newspapers online.

A yearlong examination by The New York Times has revealed that this foundation of the information industry is sharply at odds with its image of sleek efficiency and environmental friendliness.

Most data centers, by design, consume vast amounts of energy in an incongruously wasteful manner, interviews and documents show. Online companies typically run their facilities at maximum capacity around the clock, whatever the demand. As a result, data centers can waste 90 percent or more of the electricity they pull off the grid, The Times found.

To guard against a power failure, they further rely on banks of generators that emit diesel exhaust. The pollution from data centers has increasingly been cited by the authorities for violating clean air regulations, documents show. In Silicon Valley, many data centers appear on the state government’s Toxic Air Contaminant Inventory, a roster of the area’s top stationary diesel polluters.

Worldwide, the digital warehouses use about 30 billion watts of electricity, roughly equivalent to the output of 30 nuclear power plants, according to estimates industry experts compiled for The Times. Data centers in the United States account for one-quarter to one-third of that load, the estimates show.

“It’s staggering for most people, even people in the industry, to understand the numbers, the sheer size of these systems,” said Peter Gross, who helped design hundreds of data centers. “A single data center can take more power than a medium-size town.”

Energy efficiency varies widely from company to company. But at the request of The Times, the consulting firm McKinsey & Company analyzed energy use by data centers and found that, on average, they were using only 6 percent to 12 percent of the electricity powering their servers to perform computations. The rest was essentially used to keep servers idling and ready in case of a surge in activity that could slow or crash their operations.

A server is a sort of bulked-up desktop computer, minus a screen and keyboard, that contains chips to process data. The study sampled about 20,000 servers in about 70 large data centers spanning the commercial gamut: drug companies, military contractors, banks, media companies and government agencies.

“This is an industry dirty secret, and no one wants to be the first to say mea culpa,” said a senior industry executive who asked not to be identified to protect his company’s reputation. “If we were a manufacturing industry, we’d be out of business straightaway.”

These physical realities of data are far from the mythology of the Internet: where lives are lived in the “virtual” world and all manner of memory is stored in “the cloud.”

The inefficient use of power is largely driven by a symbiotic relationship between users who demand an instantaneous response to the click of a mouse and companies that put their business at risk if they fail to meet that expectation.

Even running electricity at full throttle has not been enough to satisfy the industry. In addition to generators, most large data centers contain banks of huge, spinning flywheels or thousands of lead-acid batteries — many of them similar to automobile batteries — to power the computers in case of a grid failure as brief as a few hundredths of a second, an interruption that could crash the servers.

“It’s a waste,” said Dennis P. Symanski, a senior researcher at the Electric Power Research Institute, a nonprofit industry group. “It’s too many insurance policies.”

The Cloud Factories: Data Centers in Rural Washington State Gobble Power

The technology giant created a stir here in 2006 when it bought about 75 acres of bean fields to build a giant data center, a digital warehouse to support various Internet services. Its voracious appetite for electricity would be fed by hydroelectric generators that work off the flow of the nearby Columbia River, and Microsoft officials pledged to operate their new enterprise with a focus on energy efficiency and environmental sensitivity.

“You’re talking about one of the largest corporations,” said Tim Culbertson, who was the general manager of the local utility at the time. “You’re talking Microsoft and Bill Gates. Wow!”

But for some in Quincy, the gee-whiz factor of such a prominent high-tech neighbor wore off quickly. First, a citizens group initiated a legal challenge over pollution from some of nearly 40 giant diesel generators that Microsoft’s facility — near an elementary school — is allowed to use for backup power.

Then came a showdown late last year between the utility and Microsoft, whose hardball tactics shocked some local officials.

In an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, Microsoft proceeded to simply waste millions of watts of electricity, records show. Then it threatened to continue burning power in what it acknowledged was an “unnecessarily wasteful” way until the fine was substantially cut, according to documents obtained by The New York Times.

“For a company of that size and that nature, and with all the ‘green’ things they advertised to me, that was an insult,” said Randall Allred, a utility commissioner and local farmer.

A Microsoft spokeswoman said the episode was “a one-time event that was quickly resolved.”

Internet-based industries have honed a reputation for sleek, clean convenience based on the magic they deliver to screens everywhere. At the heart of every Internet enterprise are data centers, which have become more sprawling and ubiquitous as the amount of stored information explodes, sprouting in community after community.

But the Microsoft experience in Quincy shows that when these Internet factories come to town, they can feel a bit more like old-time manufacturing than modern magic.

In Santa Clara, Calif., a hub of technology facilities in Silicon Valley, diesel emissions from generators at a Microsoft data center caught the attention of regulators for potentially threatening the health of workers at nearby businesses. Microsoft, which was notified by state regulators last year, says it has reduced its emissions.

Over the last few years, Quincy has become an unlikely technology outpost, with five data centers and a sixth under construction. Far from the software meccas of Northern California or Seattle, Quincy has barely 6,900 residents, two hardware stores, two supermarkets, no movie theater and a main drag, State Route 28, whose largest buildings are mostly food packers and processors. Its tallest building is a grain elevator.

“A farming community in the middle of a desert,” said Warren Morgan, the president of Double Diamond Fruit.

The remarkable scale of the Quincy data centers, and their power demands, have made this town something of a test tube for studying the planet’s exploding need to house and process digital information.

The data centers, which include Yahoo and Dell facilities, wound up in Quincy by way of the Columbia. The river flows 1,200 miles from the mountains of British Columbia to the spectacular gorge between Oregon and Washington, where the water crashes into the Pacific Ocean.

Along the way, about a dozen large hydroelectric dams tame the river, providing irrigation for farms and the cheap, plentiful power that has become a magnet for large agricultural operations and heavy industries like aluminum, steel, paper and chemical plants.

When Microsoft was searching the country for a location for its new installation, the Grant County Public Utility District, which owns two of the dams, says it offered the company rates that would range from 2.5 cents to 3.8 cents per kilowatt-hour in its first five years — far below the national industrial average of 6 cents to 7 cents, according to analysis based on federal figures by the Electric Power Research Institute. The power from dams is also highly reliable, a critical factor for data centers, which can crash with the slightest interruption.

This article has been revised to reflect the following correction:

Correction: September 24, 2012

A previous version of this article misstated why Microsoft wasted millions of watts of electricity, according to records. It was an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, not underestimating its power use.

The Cloud Factories: Data Centers in Rural Washington State Gobble Power

The technology giant created a stir here in 2006 when it bought about 75 acres of bean fields to build a giant data center, a digital warehouse to support various Internet services. Its voracious appetite for electricity would be fed by hydroelectric generators that work off the flow of the nearby Columbia River, and Microsoft officials pledged to operate their new enterprise with a focus on energy efficiency and environmental sensitivity.

“You’re talking about one of the largest corporations,” said Tim Culbertson, who was the general manager of the local utility at the time. “You’re talking Microsoft and Bill Gates. Wow!”

But for some in Quincy, the gee-whiz factor of such a prominent high-tech neighbor wore off quickly. First, a citizens group initiated a legal challenge over pollution from some of nearly 40 giant diesel generators that Microsoft’s facility — near an elementary school — is allowed to use for backup power.

Then came a showdown late last year between the utility and Microsoft, whose hardball tactics shocked some local officials.

In an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, Microsoft proceeded to simply waste millions of watts of electricity, records show. Then it threatened to continue burning power in what it acknowledged was an “unnecessarily wasteful” way until the fine was substantially cut, according to documents obtained by The New York Times.

“For a company of that size and that nature, and with all the ‘green’ things they advertised to me, that was an insult,” said Randall Allred, a utility commissioner and local farmer.

A Microsoft spokeswoman said the episode was “a one-time event that was quickly resolved.”

Internet-based industries have honed a reputation for sleek, clean convenience based on the magic they deliver to screens everywhere. At the heart of every Internet enterprise are data centers, which have become more sprawling and ubiquitous as the amount of stored information explodes, sprouting in community after community.

But the Microsoft experience in Quincy shows that when these Internet factories come to town, they can feel a bit more like old-time manufacturing than modern magic.

In Santa Clara, Calif., a hub of technology facilities in Silicon Valley, diesel emissions from generators at a Microsoft data center caught the attention of regulators for potentially threatening the health of workers at nearby businesses. Microsoft, which was notified by state regulators last year, says it has reduced its emissions.

Over the last few years, Quincy has become an unlikely technology outpost, with five data centers and a sixth under construction. Far from the software meccas of Northern California or Seattle, Quincy has barely 6,900 residents, two hardware stores, two supermarkets, no movie theater and a main drag, State Route 28, whose largest buildings are mostly food packers and processors. Its tallest building is a grain elevator.

“A farming community in the middle of a desert,” said Warren Morgan, the president of Double Diamond Fruit.

The remarkable scale of the Quincy data centers, and their power demands, have made this town something of a test tube for studying the planet’s exploding need to house and process digital information.

The data centers, which include Yahoo and Dell facilities, wound up in Quincy by way of the Columbia. The river flows 1,200 miles from the mountains of British Columbia to the spectacular gorge between Oregon and Washington, where the water crashes into the Pacific Ocean.

Along the way, about a dozen large hydroelectric dams tame the river, providing irrigation for farms and the cheap, plentiful power that has become a magnet for large agricultural operations and heavy industries like aluminum, steel, paper and chemical plants.

When Microsoft was searching the country for a location for its new installation, the Grant County Public Utility District, which owns two of the dams, says it offered the company rates that would range from 2.5 cents to 3.8 cents per kilowatt-hour in its first five years — far below the national industrial average of 6 cents to 7 cents, according to analysis based on federal figures by the Electric Power Research Institute. The power from dams is also highly reliable, a critical factor for data centers, which can crash with the slightest interruption.

This article has been revised to reflect the following correction:

Correction: September 24, 2012

A previous version of this article misstated why Microsoft wasted millions of watts of electricity, according to records. It was an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, not underestimating its power use.

The Cloud Factories: Data Centers Waste Vast Amounts of Energy, Belying Industry Image

The company had been packing a 40-by-60-foot rental space here with racks of computer servers that were needed to store and process information from members’ accounts. The electricity pouring into the computers was overheating Ethernet sockets and other crucial components.

Thinking fast, Mr. Rothschild, the company’s engineering chief, took some employees on an expedition to buy every fan they could find — “We cleaned out all of the Walgreens in the area,” he said — to blast cool air at the equipment and prevent the Web site from going down.

That was in early 2006, when Facebook had a quaint 10 million or so users and the one main server site. Today, the information generated by nearly one billion people requires outsize versions of these facilities, called data centers, with rows and rows of servers spread over hundreds of thousands of square feet, and all with industrial cooling systems.

They are a mere fraction of the tens of thousands of data centers that now exist to support the overall explosion of digital information. Stupendous amounts of data are set in motion each day as, with an innocuous click or tap, people download movies on iTunes, check credit card balances through Visa’s Web site, send Yahoo e-mail with files attached, buy products on Amazon, post on Twitter or read newspapers online.

A yearlong examination by The New York Times has revealed that this foundation of the information industry is sharply at odds with its image of sleek efficiency and environmental friendliness.

Most data centers, by design, consume vast amounts of energy in an incongruously wasteful manner, interviews and documents show. Online companies typically run their facilities at maximum capacity around the clock, whatever the demand. As a result, data centers can waste 90 percent or more of the electricity they pull off the grid, The Times found.

To guard against a power failure, they further rely on banks of generators that emit diesel exhaust. The pollution from data centers has increasingly been cited by the authorities for violating clean air regulations, documents show. In Silicon Valley, many data centers appear on the state government’s Toxic Air Contaminant Inventory, a roster of the area’s top stationary diesel polluters.

Worldwide, the digital warehouses use about 30 billion watts of electricity, roughly equivalent to the output of 30 nuclear power plants, according to estimates industry experts compiled for The Times. Data centers in the United States account for one-quarter to one-third of that load, the estimates show.

“It’s staggering for most people, even people in the industry, to understand the numbers, the sheer size of these systems,” said Peter Gross, who helped design hundreds of data centers. “A single data center can take more power than a medium-size town.”

Energy efficiency varies widely from company to company. But at the request of The Times, the consulting firm McKinsey & Company analyzed energy use by data centers and found that, on average, they were using only 6 percent to 12 percent of the electricity powering their servers to perform computations. The rest was essentially used to keep servers idling and ready in case of a surge in activity that could slow or crash their operations.

A server is a sort of bulked-up desktop computer, minus a screen and keyboard, that contains chips to process data. The study sampled about 20,000 servers in about 70 large data centers spanning the commercial gamut: drug companies, military contractors, banks, media companies and government agencies.

“This is an industry dirty secret, and no one wants to be the first to say mea culpa,” said a senior industry executive who asked not to be identified to protect his company’s reputation. “If we were a manufacturing industry, we’d be out of business straightaway.”

These physical realities of data are far from the mythology of the Internet: where lives are lived in the “virtual” world and all manner of memory is stored in “the cloud.”

The inefficient use of power is largely driven by a symbiotic relationship between users who demand an instantaneous response to the click of a mouse and companies that put their business at risk if they fail to meet that expectation.

Even running electricity at full throttle has not been enough to satisfy the industry. In addition to generators, most large data centers contain banks of huge, spinning flywheels or thousands of lead-acid batteries — many of them similar to automobile batteries — to power the computers in case of a grid failure as brief as a few hundredths of a second, an interruption that could crash the servers.

“It’s a waste,” said Dennis P. Symanski, a senior researcher at the Electric Power Research Institute, a nonprofit industry group. “It’s too many insurance policies.”