There’s no question that every venture capitalist within 100 miles of Silicon Valley wanted to squeeze their khaki-clad selves into what had become tech’s hottest deal of late.

That would be to get a piece of the new round of funding for start-up phenom Pinterest.

But while piles of VCs and other investors tried to work every angle possible to noodge into the action, the iconoclastic CEO and co-founder Ben Silbermann decided to go big and go global by hooking up with a Tokyo-based Internet giant.

Japan’s Rakuten will invest upwards of $50 million in a $100 million round that values the social bookmarking site at $1.5 billion.

Rakuten is one of the largest online commerce companies in the world, with a flagship site Rakuten Ichiba, among others. It was founded in 1997 and had revenue of $4.7 billion in 2011.

Most important in Pinterest’s calculation was apparently the link with its CEO Hiroshi Mikitani, whose nickname is Mickey. One the richest men in Japan, Mikitani is one of the best known entrepreneurs there where he’s been described as “Richard Branson meets Jeff Bezos.”

I briefly chatted with Mikitani last night about why he decided on the Pinterest deal, in a conversation where he focused a bit on Rakuten’s famed “omotenashi” or “empowerment” philosophy. Simply put, the concept is that — unlike an Amazon — Rakuten is a facilitator of commerce, much like its shopping mall metaphor beginnings. The approach is to aid merchants rather than compete with them.

It’s a little eBay, a little Alibaba, some Etsy and even a little Amazon Web Services mixed in. It’s also a place that can move retail globally, which is presumably the attraction to it by Pinterest.

ATD: Why did Pinterest pick you?

Mikitani: We are not a venture capitalist. We got together and talked about our story and our history.

We agreed that we shared a vision of the future of Internet e-commerce.

ATD: Why make an investment?

Mikitani: When we started to talk about being involved in the round of investment, we wanted to invest as much as possible.

We were very impressed by their business model and also the management style.

ATD: What made Pinterest so attractive in comparsion to other similar companies?

Everyone is talking about social commerce and best solution to social commerce, but Pinterest really was the first to use graphics that well to connect with people.

Rarely have we seen such a powerful media and we were seeing huge traffic coming from Pinterest [to Rakuten sites]. It was much higher than anyone else.

ATD: What do you bring to the table?

Mikitani: I think there are some things we think we can do with our expertise. Ben and his team have an extremely strong commitment to make their products as attractive as possible.

But we have 40,000 stores in Japan and we can give them access to our customers and do aggregation to engage in everything. And we have sites in many other countries too.

ATD: How are you going to work together?

Mikitani: We are not going to stop them from doing dealings with other e-commerce companies. But we can have more constructive input on how to make their site more effective from e-commerce point of view.

This is a long-term arrangement and we have a strong committment and attachment to this business. We truly understand their business and respect their management.

Other examples that have punctured my attention bubble in recent years are platform-as-a-service, infrastructure-as-a-service and storage-as-a-service, and there are probably many more. Then they get turned into ever-weirder acroynyms: Saas, PaaS, Iaas. You get the idea.

Today, Netsuite, the cloud player whose traditional approach is essentially to run your business from the cloud, today contributed its own new thing offered as a service: Commerce. (Cue the acronym: CaaS.)

One of the big things that businesses have to do is buy and sell goods and services from other businesses. The most basic example is that widget makers have to buy cardboard boxes from a supplier, because the goods don’t show up on the loading dock by magic. The same goes for every bit of physical stuff a business needs and also the services it pays for to keep its operations running smoothly.

Netsuite isn’t just managing the back-end business-to-business commerce, but also the direct-to-customer type of commerce. And the experience works pretty much anywhere a customer may be coming from: On a phone, tablet or PC, in a store or on social media.

As customers have essentially come to expect to be able to buy anything and everything online, the traditional back-end commerce engines like Microsoft Dynamics, Great Plains, Sage and even SAP were imperfectly combined with patchwork solutions for selling on the Web. And the bits of the system that faced customers have rarely if ever been unified with the ones that also face suppliers, which has a way of complicating things like inventory, the supply chain and everything else that stems from basic ebb and flow of supply and demand.

And things are getting even more complicated as machines are programmed to automatically buy things from other machines based on a pre-defined set of circumstances.

NetSuite has built what it calls a commerce engine — dubbed SuiteCommerce — that speaks directly to the core enterprise resource planning (ERP) and customer relationship management (CRM) functions that are already its bread and butter. In English that means that the new engine comes into the process already knowing what everything is, and also who everyone is. That makes it ready to wheel and deal not only with customers but also with suppliers. And when you get down to it, that’s a good way to reduce a lot of friction in any business, which is pretty much what cloud computing is supposed to be about.

The commerce service was probably the biggest news to come out of Netsuite’s SuiteWorld conference in San Francisco today, where CEO Zach Nelson (pictured) gave a keynote address. The company also announced a partnership with Square, the maker of little white credit-card reading thingies that you can insert into an iPhone or iPad for the purpose of accepting payment. Square’s Register application has been integrated with SuiteCommerce, so if you see more businesses using Squares, maybe this has something to do with it.

But there’s no denying the attraction of services like Amazon Web Services or Joyent or Rackspace, where you can spin up and configure a new virtual machine within minutes of figuring out that you need it. So, many companies seek to approximate the experience they would get from a public cloud provider on their own internal infrastructure.

It turns out that a start-up I had never heard of before this week is the most widely deployed platform for running these “private clouds,” and it’s not a bad business. Eucalyptus Systems essentially enables the same functionality on your own servers that you would expect from a cloud provider.

Eucalyptus said today that it has raised a $30 million Series C round of venture capital funding led by Institutional Venture Partners. Steve Harrick, general partner at IVP, will join the Eucalyptus board. Existing investors, including Benchmark Capital, BV Capital and New Enterprise Associates, are also in on the round. The funding brings Eucalyptus’ total capital raised to north of $50 million.

The company has an impressive roster of customers: Sony, Intercontinental Hotels, Raytheon, and the athletic-apparel group Puma. There are also several government customers, including the U.S. Food and Drug Administration, NASA, the U.S. Department of Agriculture and the Department of Defense.

In March, Eucalyptus signed a deal with Amazon to allow customers of both to migrate their workloads between the private and public environments. The point here is to give companies the flexibility they need to run their computing workloads in a mixed environment, or move them back and forth as needed. They could also operate them in tandem.

Key to this is a provision of the deal with Amazon that gives Eucalyptus access to Amazon’s APIs. What that means is that you can run processes on your own servers that are fully compatible with Amazon’s Simple Storage Service (S3), or its Elastic Compute cloud, known as EC2. “We’ve removed all the hurdles that might have been in the way of moving workloads,” Eucalyptus CEO Marten Mickos told me. The company has similar deals in place with Wipro Infotech in India and CETC32 in China.

A letter sent to shareholders today by founder and CEO Jeff Bezos, titled “The Power of Invention,” tackles the publishing industry head-on by explaining how both authors and customers are benefiting from its Kindle publishing business.

While Bezos fails to address the DOJ lawsuit, which accused Apple and five major book publishers of conspiring to raise e-book prices, he provides a glimpse at how he’s changing the economics of the business on a small scale.

Bezos says Amazon’s Kindle Direct Publishing division has already produced more than a thousand authors who are selling more than a thousand copies a month. Some have reached hundreds of thousands of sales, and two have joined the Kindle Million Club.

Authors who use KDP get to keep their copyrights, keep their derivative rights, get to publish on their schedule – a typical delay in traditional publishing can be a year or more from the time the book is finished – and … saving the best for last … KDP authors can get paid royalties of 70%. The largest traditional publishers pay royalties of only 17.5% on ebooks (they pay 25% of 70% of the selling price which works out to be 17.5% of the selling price). The KDP royalty structure is completely transformative for authors. A typical selling price for a KDP book is a reader-friendly $2.99 – authors get approximately $2 of that! With the legacy royalty of 17.5%, the selling price would have to be $11.43 to yield the same $2 per unit royalty. I assure you that authors sell many, many more copies at $2.99 than they would at $11.43.”

If you can’t take Bezos at his own word, the letter includes eight quotes from customers and authors who have benefited from Amazon’s services, including its publishing, fulfillment and Web services.

“These innovative, large-scale platforms are not zero-sum — they create win-win situations and create significant value for developers, entrepreneurs, customers, authors, and readers,” he wrote.

The company’s stock was trading down 1.81 percent, or $3.46 a share today, to $187.23. In recent months, the stock has slipped from its 52-week high of $246.71 a share.

HP shares surged by more than 7 percent, or $1.69, today to $25.10, mainly on a positive report on the state of its personal computer business from the market research firms Gartner and IDC.

As I noted yesterday, HP saw its share of the global market grow fractionally, according to the reckoning of Gartner, at the expense of Dell, Acer and Asus, while China-based rival Lenovo grew even more. IDC saw similar results, and both research houses were surprised to see the overall market grow in the first quarter of the year where a market decline had been expected.

That was enough to give HP shares a long-awaited jolt. So far in 2012, HP shares have fallen a little less than 3 percent, but that comes on top of the ridiculous 40 percent drop they suffered during 2011.

Much of that decline was suffered on Aug. 19, 2011, a day after the company, under then-CEO Léo Apotheker, missed its quarterly forecasts, spent $12 billion to acquire the British software firm Autonomy and floated an ill-advised plan to spin off the very PC operations that gave investors a rare moment to cheer. Looking back now, it does make for some irony, no?

To be sure, HP’s share price has had a better than average week. On days when the Dow was mostly in the red, HP has been one of the few stocks on the board showing green all week.

And frankly an uptick in the PC business, while welcome indeed, isn’t exactly going to fix HP in any fundamental way. At least not yet. PC sales were 31 percent of overall sales in 2011, and declined slightly over the prior year. And while that made HP’s Personal Systems Group the biggest business unit at HP last year — and now combined with printers it’s even bigger — profits both in PCs and in printers are seriously under attack.

The hope lies in the enterprise and in services, and maybe in the cloud. Profit margins in the enterprise business and in the services group were roughly twice what they were in PCs. HP also made a big announcement on the cloud computing front earlier this week that would seem to put it on course to compete with the likes of Amazon in providing computing capacity in a similar for-hire fashion as the Web retailer does with its Web Services unit.

It’s hard to know how profitable that business is for Amazon because it doesn’t disclose its operational size and profit margins and lumps that operation into its $1.4 billion category labeled “other.” However it’s worth noting — as HP surely has — that Amazon’s “other” category grew by 73 percent in 2011 and nearly tripled in size from 2009. There may be a real light at the end of that tunnel yet, but there’s lot’s of work to do.

The comments follow a less than stellar fourth-quarter performance in which the gigantic e-commerce provider spent nearly as much money as it brought in the door — even during its busiest quarter of the year.

Profits for the quarter fell 58 percent, while annual earnings were cut nearly in half.

Some analysts were hoping that the end of the year would be a low point for margins and that Amazon would start growing in 2012 as it benefited from the steep investments made the prior year.

But that’s not part of the plan.

“We’re incredibly optimistic about the opportunity that we have, and that’s why we have invested the way we have and why we’re continuing to invest in the business,” said Amazon’s CFO Tom Szkutak in a conference call with analysts.

For clarity, Piper Jaffray analyst Charles Munster asked again: “So, your outlook in terms of investment philosophy hasn’t changed versus last quarter going forward?”

“No, no,” Szkutak said. “We are continuing to look as we always do. We learn every week, month and quarter about customer adoption. We are looking at a lot of positive things across the business in terms of adoption, specifically Kindle growth from a device standpoint and content that’s following that.”

Other categories seeing growth, he said, include clothing, consumables, consumer electronics and Amazon Web Services.

“There’s a lot of interesting opportunities that we continue to invest in. So we are pleased with the performance in Q4 and what it means going forward for us.”

Over the past year, Amazon has invested heavily in infrastructure, including 17 fulfillment centers around the globe. At the end of the year, it had 56,200 employees, up 67 percent year over year, with most of the hiring coming in operations and customer service.

It has also invested heavily in the digital content business, including the Kindle.

It’s widely assumed that Amazon is breaking even or taking a slight loss on the sale of each Kindle Fire. It’s also securing expensive partnerships with content companies across music, video and books, and giving some of that content away as part of the $80 Prime membership, which also includes free two-day shipping.

All of those are bets that Amazon is hoping will reap profits over the long term, as customers continue to consume after they purchase an e-reader or tablet or sign up for Prime.

So far, it’s too early to see how the investment is faring, especially when it comes to new categories.

“It’s very, very early,” Szkutak said, “but so far, we like what we see, so that’s why we are continuing down the path of adding more content and making Prime better. … Because we are investing a lot, we are making sure we understand it very well.”

A lot of details, like Kindle sales numbers, are still being kept under wraps, but he promised Amazon will someday share more about how it is doing.

Unfortunately, the market isn’t as patient. In after-hours trading, the stock was down almost 10 percent at one point. During the session, it ended up down, 8.7 percent, or nearly $17 , to close at $177.50 a share.

Motive

As the saying goes, people are motivated by either greed or fear. I think for many big companies, it’s more the latter. And Microsoft has a lot to be scared about.

If you poke behind its $71 billion in revenue and 39 percent operating margins, 30 percent of the goldmine comes from multiyear volume licensing agreements, which Microsoft calls Enterprise Agreements (EAs). According to industry analyst firm Forrester Research, “these profitable agreements bring in the kind of regular revenue preferred by financial-market analysts that monitor Microsoft’s performance.”

What motivates a customer to sign up for an Enterprise Agreement instead of simply buying Microsoft products, like Office, off the shelf? Well, historically, Microsoft pitched EAs as a way to ensure you can cover your workforce with Microsoft products at a discounted price level.

With companies investing in post-PC devices like smartphones and tablets, and evaluating alternatives to Microsoft productivity solutions, such as Google Apps or Salesforce.com, CIOs are starting to wonder whether renewing their EA is still a top priority.

In response to this threat, Microsoft is now pushing its Software Assurance (SA) licensing model, which allows customers to upgrade to newer products and also use its cloud services. The reason for the possible shift, Forrester says, is that “the twin revolutions of client mobility and cloud servers will kill device-based licensing, which is Microsoft’s existing model.”

So if Microsoft doesn’t embrace the cloud in a big way, the EA gravy train could come to an end.

Means

Apple is cool. Facebook is friendly. And Google isn’t evil. Yet look across a sea of computers in a typical company, and you’ll still see Microsoft everywhere.

And I’m not just talking about Windows. Microsoft has two key assets that will help it win the enterprise cloud:

• Office: While the Web and Web-based apps are fabulous for consuming content and even collaborating around it, Microsoft Office is still the standard in productivity to create corporate content. Love or hate those PowerPoint presentations, but they are still how most companies run. And for flexible analysis, Excel is unmatched. Heck, the Macintosh Business Unit at Microsoft (which is primarily Office for Mac) is a $350 million business on its own.
• Outlook/Exchange: For many workers, Microsoft Outlook (with Microsoft Exchange Server on the backend) is the first thing they boot up to start their workday, and the program they remain in all day long. According to industry analyst firm Radicati, 301 million corporate mailboxes used Outlook in 2010. Indeed, some companies have switched from Microsoft Outlook/Exchange to Google Apps and back, because users are too addicted to the interface and functionality of Microsoft Outlook.

So Microsoft still owns two of the key ways “knowledge workers” work with knowledge.

Opportunity

Microsoft isn’t working from a standing start. It actually jumped into the cloud relatively early in 2008 with its Business Productivity Online Suite (BPOS), a hosted platform for collaboration. While BPOS suffered from many challenges, mainly because it was based on a platform that wasn’t designed for the cloud, Microsoft made it clear several years ago that they are “all in” as a company in the cloud.

This year, after many delays and much anticipation, Microsoft finally announced its first platform built for the cloud, Office 365. The new version of Exchange is finally on par with its on-premise alternative. Microsoft SharePoint Online is now flexible enough to meet many enterprise use cases. And Microsoft Lync Online, a real-time chat and videoconferencing system, could be a game changer for company productivity.

In parallel, Microsoft is working away on Windows 8, its big bet on the tablet revolution. With all of Microsoft’s failed past attempts at mobility and tablets, some level of cynicism is expected. But some believe Microsoft’s conviction is real. If Microsoft even gets it 80 percent right on tablets, they will likely win in enterprises that are used to the manageability of Windows, and will be attracted to the inevitably deeper Office integration.

Conclusion

Don’t get me wrong: The innovation in the cloud is coming from all over, mainly from start-ups. For many of these start-ups and other non-enterprise organizations, a non-Microsoft approach will likely be the winner. But for the millions of you working in corporate America, Microsoft is probably the one bringing the cloud to a desktop near you.

Nick Mehta is CEO of LiveOffice and has served in senior operating roles in the enterprise and consumer technology markets for much of his career. He spent more than five years at Symantec Corporation and Veritas Software Corporation (now Symantec), where he served as vice president and general manager of the Enterprise Vault information archiving and discovery software business.

“My response was, ‘It’s the same technology we use to sell them,’” said Selipsky, vice president of marketing, sales and product management at Amazon Web Services. “There was no popular term like cloud computing at the time.”

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Google+ VP of Product Bradley Horowitz replied in an interview yesterday: “We will compete on features — including simplicity. We are absolutely in a feature race, and I think we will run that race.”

Technology companies tend to talk about how innovative and incomparable their strategies are, so that’s a pretty rare admission.

Horowitz added, “If I had to say what fraction of Google+ is launched right now, we’ve just got the very basic foundation in place. Profiles, circle editor and stream, that’s sort of the minimum viable set of features that you need to start doing interesting things.”

I talked to Horowitz in advance of his appearance at our AsiaD conference next week, held Oct. 19-21 in Hong Kong. He said to expect new stuff to be announced there. In fact, he said to expect new features to launch every week through the end of this year — for instance, see today’s real-time search announcement.

As for whether Google+ usage is fluctuating or falling, as many watchers have speculated, Horowitz brushed them aside, saying external measurements can’t grasp the “dark matter” of Google+.

This dark matter consists of private sharing, which continues to account for two-thirds of all Google+ activity. In fact, Horowitz said, that number is “trending slightly up.”

Horowitz asked for observers to have a little patience while Google+ is being built, saying the project was never intended for such a large audience or so much scrutiny at this stage.

Shortly after I spoke with Horowitz at Google’s campus yesterday, Google engineer Steve Yegge published a scathing critique of Google’s lack of a platform strategy that was particularly hard on Google+, calling it “a knee-jerk reaction, a study in short-term thinking, predicated on the incorrect notion that Facebook is successful because they built a great product.” Yegge later said the post was intended for internal eyes only, but in addition to critiquing Google+, he apparently also had a bit of trouble using the site, and accidentally posted his manifesto on his public Google+ page. Google declined to comment on Yegge’s post.

Since Yegge’s critique wasn’t out when I visited Google yesterday, I wasn’t able to ask Horowitz what he thought of it, but his responses to my various questions might help fill in the gaps. First, Horowitz does think Google+ is a larger platform play rather than just a product, in that it will be a layer on top of all of Google’s products. And second, his team severely “underestimated the appetite for this product,” and it is currently rushing to push out all sorts of things users are asking for, as well as other stuff they haven’t anticipated.

I’m not sure those answers would suffice for Yegge, who would have preferred that Google have invited developers to be part of Google+ from the beginning, so that it could reap the benefits of being a service-oriented platform, as Amazon has through its Amazon Web Services for other developers.

Still, Yegge’s key examples of platform companies, Facebook and Amazon, only built their platforms after they had success with their own products — a social network and an e-commerce site. While some companies, like Foursquare, build their own products on top of their APIs, the usual pattern is product first, platform later.

Anyways, enough with a phantom argument between two people who work at the same company!

In my interview with Horowitz yesterday, I asked whether he thinks people are using Google+ because it’s an alternative to other social networks with a more precise structure for sharing.

“I think in the early going there was a lot of looking for an alternative,” Horowitz replied. “But I think increasingly the people who are using Google+ are the people using Google. They’re not looking for an alternative to anything, they’re looking for a better experience on Google.”

This idea of Google+ as a utility might be expressed as a button on Google Maps that helps a user send directions to attendees of a party, Horowitz said.

So does that make Google+ just a utility on top of the Google products people already use?

“That’s one rendering of it,” said Horowitz. “But there’s a stream, there’s a circle, a profile, there’s Hangouts, there’s games. It is both a means of communication and a destination.”

A recent IBM poll of 1,500 CEOs identified “creativity” as the top leadership skill needed in the future. But being creative doesn’t just happen. It’s one of those intangible qualities that people simply have or do not. Yet if you could make it tangible — put it in a bottle and sell it — you’d strike it rich. Clearly, there’s something that innovative companies and people have that the less innovative ones lack. Just what the heck is it?

That’s the question that business professors Jeff Dyer and Hal Gregersen set out to answer by teaming up with famous innovation guru Clay Christensen. Nearly 15 years ago, Christensen coined the phrase “disruptive innovation,” and wrote two best-selling books on the subject. The Innovator’s Dilemma and The Innovator’s Solution both examined disruptive technologies, business models and companies.

The Innovator’s DNA, co-authored by all three, makes it a trilogy. In it, they seek to answer the most basic questions about innovation: What makes an innovative company, and what companies can do to become more innovative.

Gregersen is a professor of leadership at INSEAD, the international graduate business school. Dyer, who I spoke with recently, is the Horace Beesley Professor of Strategy in the Marriott School of Management at Brigham Young University. I started by asking him how the idea for the book came about.

AllThingsD: What’s the book about and how did it happen?

Dyer: The book is really the product of a conversation I had with Hal Gregersen and Clayton Christensen. And the question we raised in that conversation was this: Where do disruptive business ideas come from in the first place? What are the origins of disruptive business? And [we wondered] if we could tell people something about where disruptive and innovative ideas come from that might be useful and helpful. One of the things we knew from research in psychology is that if you ask any crowd of people whether creativity is a genetic endowment or if it’s something that’s learned, 90 percent will say it’s genetic. We either have it or we don’t. But the way psychologists research this is they take identical twins — ideally who have been raised apart — and then, between ages 16 and 24, they will give them general intelligence tests. And what they find is that about 80 percent of performance seems to be genetically based. But then they give them creativity tests. There, only 20 to 40 percent of performance is genetically based. What that means is that creativity is much more learned than we think. Therefore the ability to generate innovative business ideas may come from things people learn and do, more than just because the people involved are who they are. For the book, we decided to go back and study business innovators and figure out, as best we could, the antecedents of people coming up with the ideas that they did, and what contributed to their ability to come up with innovative ideas.

And what sorts of things did you study?

One example we looked at was Steve Jobs at Apple. The story that everyone knows is the story of the graphical user interface and drop-down menus and the mouse. He, of course, didn’t originate an idea, but having seen it at Xerox, he returned to Apple laser-focused and determined to apply them to the Macintosh. He assembles a team of engineers and they create the first computer with a graphical user interface. But the idea was really born of an observation. He had seen something that he was able to take back and solve a problem. Another innovation of his was beautiful typography on the Mac and the LaserWriter printer. That came because he dropped out of college, and dropped in on a calligraphy class, and had no idea that it would ever have a practical application in his life. Ten years later, when he was working on the Macintosh, it all came back with the idea for a computer that could create beautiful typography. It was an important differentiation, and it occurred because of a time when he was out exploring. When we looked at the genesis of disruptive ideas, we found that the ideas occured when the innovator was asking a question, engaged in an observation, networked with someone who had a different point of view, or because they were experimenting.

Well, let’s talk about experimenting for a minute. There are lots of ways to experiment with things, and you discuss these in the book. What are they?

We have three ways of experimenting. Most of us think of it as just testing and piloting an idea, and that’s the classic method. But the second is taking apart a product or service or process or idea, and then putting them back together. That’s how Michael Dell came up with the idea for Dell Direct. The other is simply an exploration, where you’re learning a new skill like Jobs did in learning calligraphy — where you’re having a new experience that you can later draw upon. One of the innovators we talked to was a guy named Nate Alder. He came up with the idea for an argon vest. He was scuba diving in South America, and argon gas is used to keep you warm when you scuba dive. He was a snowboarding instructor at the time. He wondered if he could use the same argon to keep warm on cold days. So he came back and developed a line of products called Klymit jackets. And it happened because he was out exploring and trying something new.

So then the problem becomes this: If you’re a CEO or COO reading this book, how do you apply these ideas? I can send my team off for a retreat or something, but they’re not necessarily going to come back any more creative than they were. How do you encourage these behaviors at a company?

What we found is that at innovative companies, there’s a high correlation between the extent to which the leaders of the company engage in and display these discovery skills and the innovation performance of the company. It starts at the top. If you don’t do it, you’re not likely to imprint your behaviors on your organization as processes. What we saw was that when someone like Jeff Bezos is good at experimenting and questioning and coming up with new ideas, he then sets about creating processes within the company for doing experiments. Innovative companies are more likely to have processes that encourage questioning, observing, networking and experimenting. This is how it becomes more embedded in the organization’s culture.

How deep can the questioning go? You can look at Nokia, for example, which made rubber boots and toilet paper. And at some point, someone must have questioned the fundamental business plan that caused it to pivot to building electronics. That’s a pretty fundamental shift. If the questions can go that deep, is it always constructive?

In innovative companies, you find that that kind of question is always okay. And then we try to look at that question from a variety of angles to see if it warrants an answer. In companies that don’t innovate well, those kinds of questions aren’t considered or tolerated. If you don’t try to change the status quo, how are you ever going to innovate? That’s why it’s so important for the leaders to legitimize it, and to say that they want things that are new and different.

This is something you teach, so I wonder what you’ve learned from the process of sharing these ideas with other companies. The reason I ask is that there’s often a lot of entrenched resistance to change.

One of things I’ve done is courses where we teach with the case method — you give the students a case study on Sears or Kmart, and then ask them to come up with a new strategy to compete better with Wal-Mart. I gave one group the task and simply asked them to come up with a new strategy. I gave another group the same case and said that I wanted a new strategy, but that I also wanted it to be creative and innovative. I told them to push the boundaries. In third-party reviews, the groups where I legitimized being creative were all judged as having been more creative and original and likely to make a real difference than in the cases where I didn’t legitimize it.

You also ranked several companies for their ability to innovate. What companies are on your list? Number one and number two are Salesforce.com and Amazon, but I’m also interested in number three. Can you explain them?

We did rank several companies on their innovation prowess, using something we called an innovation premium. We interviewed [Salesforce CEO] Marc Benioff for the book. Salesforce has a founder who is really good at questioning the current model. He asked a fundamental question: In the age of the Internet, why are we installing software on individual computers? He just challenged that whole business model, and continues to try and challenge it now. And we all know about Amazon and Jeff Bezos. He loves to experiment and try new things, even if they’re weird. It’s gone from being the world’s biggest book retailer to the world’s biggest discount retailer to launching the Kindle, and now running Amazon Web Services. They just keep trying new things. Number three was Intuitive Surgical. They make the da Vinci system of surgical robots, and so they’re bringing robot-assisted surgery to the world. They innovated through tons and tons of observations of how surgeons do their work, and then creating robots that could mimic that, and that could be manipulated with tremendous precision.

With that in mind, Box is now adding support for Android tablets and Research in Motion’s PlayBook. The company already has apps for the iPhone, iPad, Android phones and webOS, among others.

“Philosophically, we want to be anywhere our customers are,” Box CEO Aaron Levie said in an interview. While Apple’s tablets are the most popular, Levie (pictured right) said that his company is seeing its customers seeking support for a wide range of mobile devices. In many cases, companies are simply letting workers use whatever device they have, as long as there is a secure means of doing so.

“When we look at our enterprise customer environments, the diversity of the technology they are using is really remarkable,” he said. “They are not picking winners.”

In addition to adding the new tablet apps, Box is also overhauling its mobile Web site with new HTML5-based features. Over time, the company hopes there is more convergence toward the mobile Web.

“It makes our development process a lot more efficient and ultimately scalable,” Levie said.

The company announced back in February that it had raised $48 million in Series D funding to help bulk up its development efforts.

Box and other cloud storage companies are increasingly finding themselves competing against the titans of tech, including Apple, Google, Microsoft and Amazon. The company hopes its broad support for all manner of devices will help it stand out from companies that are primarily interested in promoting their own platform.

Today Amazon announced that it is working with SAP, the business software company, to not only run several of its key applications in the cloud, but that the Amazon Web Services environment has been certified by SAP. The applications include SAP Rapid Deployment, and SAP Business Objects. These applications account for about half of SAP’s business.

Typically, SAP applications are deployed on the customer’s own in-house infrastructure, and though it’s not uncommon for AWS customers to run SAP, it’s usually for test and development purposes, though some do so in a full production environment, Adam Selipsky, vice president of Product Management for Amazon Web Services told me yesterday. SAP customers, whether new or existing, can use their SAP software licenses and move their applications to AWS and cut down on their operating costs. Selipsky said that SAP has done a lot of work testing and optimizing its software to run in the AWS environment, and that the benchmarking shows that it runs as well on AWS as it does on traditional infrastructure.

One application that isn’t certified–at least not yet–is SAP’s Enterprise Resource Planning software. Selipsky says Amazon and SAP are working to certify that application now. “There’s so much demand for this from our customers we didn’t want to hold anything up,” he said. He expects ERP certification to “happen shortly.”

Since it was the first time I’ve spoken to Selipsky since he was the subject of a Seven Questions interview in March, and since memories of the AWS outage are still fresh, I asked if he had anything new to say about the outage and its implications, especially in the context of adding a new service like SAP, which companies actually use to run their businesses.

“I think we were as thorough as we knew how to be in our 10-page post mortem. We tried to say everything we knew,” he said. “All I can say is we’ve got many large corporations around the world who are eager to run SAP on AWS. So our business continues to go strong and grow quickly.” I asked him if AWS has lost any customers because of the outage. He said “none that I’m aware of.” At least one survey showing Amazon cloud customers were more or less unfazed by the outage suggests he’s right.

Meanwhile Amazon shares are up by more than 12 percent since the end of April. As a percentage of Amazon’s business, AWS is still pretty small, but as everyone knows it punches above its weight in terms of influence, given the number of small and medium Web companies that rely upon it. Much of that surge in Amazon’s value has come on speculation that it is about to get into the tablet business.

It all started at 12:47 am PT on April 21 in Amazon’s Elastic Block Storage operation, which is essentially the storage used by Amazon’s EC2 cloud compute service, so EBS and EC2 go hand in hand. During normal scaling activities, a network change was underway. It was performed incorrectly. Not by a machine, but by a human. As Amazon puts it:

The configuration change was to upgrade the capacity of the primary network. During the change, one of the standard steps is to shift traffic off of one of the redundant routers in the primary EBS network to allow the upgrade to happen. The traffic shift was executed incorrectly and rather than routing the traffic to the other router on the primary network, the traffic was routed onto the lower capacity redundant EBS network.

EBS works using a peer-to-peer technology that keeps data in sync across several nodes, and using two networks–one fast, used for normal operation, and one slower, used as a backup when the primary one fails. Each node uses the network to create multiple copies of the data being used as needed, and when one node stops talking to another mid-stream, the first one assumes the second one failed and looks for another to replicate to. This normally happens so fast that humans aren’t even involved.

When the network change didn’t work properly, one group of EBS nodes lost contact with their replicas. When their connection was restored, so many had gone down that when they started up replicating again, the available space ran out. That left several nodes in a bad loop looking over and over again for space on other nodes when there was none. New requests to create new EBS nodes piled up, overwhelming everything else. At 2:40 am Amazon disabled the ability of customers to create new volumes. Once new requests stopped piling up, it seemed Amazon had turned a corner, but those hopes were short-lived.

The EBS volumes kept looking for new nodes to replicate to, putting continued strain on the system. By 11:30 am, technicians had figured out a way to quiet things down without affecting other communications between nodes. Once this was done, 13 percent of EBS volumes were still “stuck.” By noon, attention shifted to finding new capacity for the stuck volumes to replicate to. Not easy. That meant undergoing a time-consuming process of physically moving servers and installing them into the degraded EBS cluster. Naturally, it took a lot longer than expected. The process didn’t start in earnest until 2 am the following morning. By 12:30 pm April 22, only 2.2 percent of affected volumes were still “stuck.”

With the new capacity installed, Amazon started work on letting each node communicate normally again. This had to be done gradually, and work to dial it up just right went on well until the early morning hours of April 23. By 6:15 pm that day, operations were almost back to normal–except for the 2.2 percent of volumes that had remained “stuck.” It turned out they would have to be recovered manually. Their data was backed up to Amazon S3, its general storage service. By noon the next day, all but 1.04 percent of that data was recovered.

A more intensive recovery process was tried, and in the end 0.07 percent of the data involved in the crash could not be recovered, Amazon says.

The company says it is auditing its process for carrying out changes in its network, which is where the problem started, and that it will “increase automation” to prevent a similar mistake from happening again. From that statement I gather that it was a human-caused mistake that was then exacerbated by the way the cloud system was designed to work. Customers who used the affected services, whether or not their services were interrupted, are getting a 10-day credit. The list of other changes it is promising is long and detailed, ranging from having more capacity on hand for use in a recovery to making it easier for customers to access more than one availability zone (those who had done prior to the outage fared better than those who hadn’t) to improvements to its status dashboard.

Finally, Amazon apologized:

Last, but certainly not least, we want to apologize. We know how critical our services are to our customers’ businesses and we will do everything we can to learn from this event and use it to drive improvement across our services. As with any significant operational issue, we will spend many hours over the coming days and weeks improving our understanding of the details of the various parts of this event and determining how to make changes to improve our services and processes.

What’s not clear is the effect not only on Amazon and its reputation, but on the planning of customers who rely on its cloud services or are thinking about using them. A failure as widespread and as widely publicized as this may be forgiven but it won’t be forgotten. Mike Rowan, CTO of RatePoint, a reputation management service for small businesses, indicated on Twitter that he was happy with the billing credit. But time will tell if Amazon loses customers over this.

Last week I talked with David Young, co-founder and CEO of Joyent, an Amazon rival with 30,000 customers around the world. His criticism of Amazon in this instance is rather harsh. The way the Amazon cloud is built, he said, virtually guaranteed that a service outage such as this would happen. While on one hand he gives Amazon high praise for “evangelizing the cloud computing model,” with the other he disparages it as “the Atari of the cloud.”

“Amazon does not represent the cloud,” Young says. “These guys are booksellers who got in the cloud business. That’s like Nordstrom’s getting into the cash register business,” he told me. “They may be the market leader, but there’s a bunch of us who are building things in such a way that we don’t see these downtimes.”

It’s hard to miss Amazon’s outsize influence. Though Amazon Web Services amounts to just a fraction of the company’s overall revenue, it is the market leader, controlling about 60 percent of the market with Rackspace, IBM, Joyent and Terremark, recently acquired by Verizon.

Joyent, which is privately held and backed by investments from Greycroft Partners and Intel Capital, would never have suffered an outage, Young claimed, because of the way it is built. Amazon, on the other hand, was never designed for what he calls persistent computing that customers need to be available all the time. The problem, he said, started in Amazon’s Elastic Block Storage, which is vulnerable to being overwhelmed by demand, something he likened to a run on a bank, where depositors panic and rush to withdraw the cash from their accounts.

Essentially, he said, Amazon became a victim of its own popularity, unable to meet the demands placed upon the EBS storage infrastructure by the network, causing in the end a cascading failure. The company has blogged about its theory in greater technical detail here.

Meanwhile, there were Amazon customers who managed to keep their services up despite the crash, and they were comparing notes today. Don MacAskill, CEO of the photo-sharing site SmugMug, blogged about how designing for failure allowed its service to remain live during the crash. Others tweeted, like Mathias Meyer of Basho Technologies, who noted that having their service running in more than one Amazon region helped avert failure.

There were others. Donnie Flood, VP of engineering of Bizo, an advertising service aimed at business executives, said that the company used all of Amazon’s regions except its most recently launched one in Japan, and combined that with a global Domain Name Service system that would direct traffic to the nearest Amazon region. When Amazon’s U.S. East region went down, all traffic in the U.S. was routed to its Amazon instances running in Amazon’s Western U.S. data center. “We were able to stay up fully the entire time,” Flood said.

Oren Michels, CEO of Mashery, a cloud-based manager of software APIs, said that his company had additional cloud infrastructure in place from Internap that took over when Amazon failed. Neither Michels nor Flood said he was likely to move the services currently hosted with Amazon to another provider.

Amazon hasn’t made any public statements about what happened, beyond those made in its status dashboard, and it hasn’t responded to any of my messages seeking a comment on any aspect of this. The company reports earnings tomorrow, so expect some questions on the conference call about Amazon’s terrible, horrible day that stretched into nearly a week.

While most of the larger sites that were initially affected–like Foursquare and Quora–have come back, lots of other sites are still having trouble. The New York Times special project site is still down, as is the news application page on ProPublica. Everyblock remains offline this morning. Heroku said it was partially back, but still working to restore shared databases. Two sites popular with the Hollywood crowd, Harry Knowles’ Ain’t It Cool News and Box Office Mojo were both down this morning.

One site that caught my eye on Twitter this morning was Blue Sombrero, which offers a service for clubs and organizations to register its members online for events. It took to Facebook this morning to vent its frustration and apologize to its customers. There are still, apparently, lots of Blue Sombreros out there. A site called EC2disabled.com purports to be a complete list of sites affected by the outage.

Amazon continues to send intermittent status updates via its dashboard, but it’s difficult to get much of an idea as to when they expect to be fully back to normal, though minutes ago it said it is starting to see “meaningful progress” in getting things under control. These are the latest messages from its EC2 status feed:

6:18 AM PT We’re starting to see more meaningful progress in restoring volumes (many have been restored in the last few hours) and expect this progress to continue over the next few hours. We expect that we’ll reach a point where a minority of these stuck volumes will need to be restored with a more time consuming process, using backups made to S3 yesterday (these will have longer recovery times for the affected volumes). When we get to that point, we’ll let folks know. As volumes are restored, they become available to running instances, however they will not be able to be detached until we enable the API commands in the affected Availability Zone.

Earlier it said:

2:41 AM PT We continue to make progress in restoring volumes but don’t yet have an estimated time of recovery for the remainder of the affected volumes. We will continue to update this status and provide a time frame when available.

And before that:

10:58 PM PT Just a short note to let you know that the team continues to be all-hands on deck trying to add capacity to the affected Availability Zone to re-mirror stuck volumes. It’s taking us longer than we anticipated to add capacity to this fleet. When we have an updated ETA or meaningful new update, we will make sure to post it here. But, we can assure you that the team is working this hard and will do so as long as it takes to get this resolved.

One of the companies listed on the EC2 Disabled site is Sony Online Entertainment. It’s probably just a coincidence, and its Web site is up this morning. However, it’s notable because of another ongoing outage now in its second day as well, of Sony’s Playstation gaming network. It’s latest official blog entry says the network may be down for a day or two.

The buzz about this outage, though Sony hasn’t addressed it, is that it’s the result of another attack by Anonymous, the loose coalition of hackers who are outraged at Sony’s recently settled legal fight with George Hotz. Known by the nom-de-keyboard GeoHot, Hotz had figured out a way to jailbreak the Playstation 3 so that it could run games not approved by Sony. Anonymous has denied involvement. The outage started Wednesday night and coincided with the release of three big games.

Companies as large and widely known as Foursquare and as small and unknown as CampgroundManager.com all turned to Twitter to advise their customers that service would be down for awhile, apologizing and asking for patience. It’s because of this that Amazon will have to work extra hard to win back the unquestioning confidence it has so long enjoyed. Meanwhile, competitors like Microsoft Azure, IBM and others will do their best to capitalize on this and lure customers away from Amazon.

Amazon wasn’t helped as the day went on and the list of affected customers grew longer and included ever more prominent names: The New York Times lost service on its Projects subdomain at projects.nytimes.com, a section where the Times publishes special projects like this one on the Census (link goes to Google Cache for now).

Another victim was ProPublica. Three days after winning its second Pulitzer Prize in as many years, the section of ProPublica’s site where it hosts its data-heavy news applications, such as this one which displays federal stimulus funding by county, was out of commission. (Again, the link goes to a Google Cache.)

Everyblock, a hyper-local news site that became part of MSNBC in 2009 is still down as of this writing. Foreign Policy, the Washington Post-owned journal, saw its Web site fail too, but as noted by Jim Romenesko today, it quickly switched to publishing its content on Facebook, and made light of the situation on Twitter.

One victim which surprised me was Heroku, the Cloud-based Web development concern that Salesforce.com acquired last year. Heroku kept its users apprised of the situation throughout the day without mentioning Amazon by name. Interestingly, Salesforce’s infrastructure showed no sign of trouble all day.

To its credit, Amazon did its best to communicate about the situation all day, but the incident couldn’t help but give its Web services division–which is relatively small as a percentage of revenue but obviously punches above its weight in terms of influence–a black eye. Late in the day it had isolated the trouble to a single “availability zone,” or group of machines running together in its Northern Virginia data center, and was trying to shift services away from the affected zone.

As of 4:20 PM PT its latest messages indicate it seems to be getting closer to resolving the issue, though many services were still reporting on Twitter that the outage was keeping them offline.

At 1:48 PM PT, the status dashboard for EC2, its compute cloud service, said:

A single Availability Zone in the US-EAST-1 Region continues to experience problems launching EBS backed instances or creating volumes. All other Availability Zones are operating normally. Customers with snapshots of their affected volumes can re-launch their volumes and instances in another zone. We recommend customers do not target a specific Availability Zone when launching instances. We have updated our service to avoid placing any instances in the impaired zone for untargeted requests.

Another message concerning its Elastic Beanstalk service came at 2:16 PM PT:

We have observed several successful launches of new and updated environments over the last hour. A single Availability Zone in US-EAST-1 is still experiencing problems. We recommend customers do not target a specific Availability Zone when launching instances. We have updated our service to avoid placing any instances in the impaired zone for untargeted requests.

The outage also affected Amazon’s CloudFormation and CloudWatch.

2:40 PM PT We are continuing to see delays and failures creating and deleting stacks containing EC2, EBS and RDS resources in a single Availability Zone in the US-EAST-1 region. We are working towards a resolution. Please see the Amazon Elastic Compute Cloud (N. Virginia) and Amazon Relational Database Service (N. Virginia) status for more details.

This message went out to Amazon MapReduce customers at 3:12 PM:

Customers can now start job flows with CC1 instances in the US-EAST-1 region by not targeting a specific Availability Zone.

Not that a big and nasty outage isn’t serious business. It certainly is, and I feel for the people at Amazon and all their customers. But having sat through more on-the-job system outages in my career than I care to count, I know that at the end of the day you have to laugh a bit at the head-slapping frustration of it all, and play a little loud music. In that spirit of sympathy and understanding I offer Freddie King’s “Going Down.” Sorry, Amazon. Here’s hoping tomorrow’s a better day.

(Image and headline obviously inspired by the Judith Viorst book I so loved as a kid.)

I can tell you that Windows Azure is going to make the telematics systems in the next generation of Toyota cars smarter. And I also know that this unit of Microsoft has been in a state of management flux recently. Amitabh Srivastava, the Microsoft Distinguished Fellow, who in 2006 took over a project then known only as Red Dog that went on to become Azure, left the company in February.

It’s no secret that, like so many other companies, Microsoft has some big plans for cloud services. It recently disclosed that it plans to spend more than $8 billion in research and development funds on its cloud strategy.

On a recent visit to the Microsoft campus in Redmond, I got a chance to sit down with Doug Hauger, Microsoft’s general manager of Windows Azure. And my first question was really really basic.

NewEnterprise: Doug, there’s so much happening in the cloud computing space these days, and most of the time when people think of cloud services they think of Amazon Web Services. And if they mention Windows Azure, they think, well, that’s Microsoft’s answer to Amazon. But you describe Azure as more of a platform-as-a-service. Can you walk me through the differences?

Hauger: Windows Azure started about five years ago. At that point it started because the company, as with all service providers, was facing some challenges on providing large, scalable, manageable services, not just to consumers, but to businesses that could dynamically scale, and that we could innovate on quickly, and bring out new features. Originally it was meant to be a platform we would use internally for services that we would then deliver out to customers. We quickly realized that we should sell it to partners and customers, and allow them to build on it as a platform.

There are fundamental differences between infrastructure as a service and what we did as platform as a service. It’s different in key ways from, say, what Amazon does with EC2 and S3 or VMWare being implemented in a data center. Our starting point for the design was to see the data center as a unit. That means the networking structure, the load-balancers, the power management, and so on–rather than in infrastructure as a service, you start from an individual server and move up.

If you allocate a service into Windows Azure and say you want it available 100 percent of the time, we will allocate it across multiple upgrade domains and physical power domains in such a way so that if any individual rack goes down or if we’re upgrading the operating system, there’s no interruption in service. That’s just a fundamentally different starting point, with an individual server and moving up. And the way that we do that is we have built out an abstraction layer of APIs that let you write to a set of services, storage services, computer services, networking services, et cetera. As a developer you can write to the service, and give us your application, and it just gets provisioned through what we call a fabric controller, that controls the data center, and also across multiple data centers. That was a design point. That’s how we allow people to write services that can scale and won’t fail and will be available all the time.

The conversation about infrastructure as a service typically starts at cost savings. You go see a customer and they say they want to cut their IT budget and outsource their IT, and so they start there. Platform as a service you start at the cost savings, but very quickly you see 10, 20 or 30 percent cost savings. But the conversation quickly turns to the innovation life cycle that they can get out of the platform. It’s much faster than you can at infrastructure as a service.

The big point that everyone gets about the cloud is that they can use it to save money, but then they quickly start asking what more can they do with the cloud. Are you seeing the same thing?

Yes, exactly. In the enterprise, they’re starting to turn the crank on innovation. I talk to customers who are turning things around in six weeks or a month whereas before they would six months or a year. I actually just talked to a customer the other day, and they said their developers were spending 40 to 50 percent of their time managing services and they couldn’t use that time writing software which was their job. When they moved to a platform as a service, they didn’t have to worry about that anymore. We’re seeing this happening in the enterprise where people are doing this for internal development and on services they’re building for their customers.

One example, Daimler just did their new version of the smart car. They wanted a service so you can check the status of your car when its charging from your smart phone, locate it, et cetera. They turned it around in a couple of weeks on Azure and launched it at the same time as the car launched.

We’re also seeing small players compete at the enterprise level. There’s a small company called Margin Pro and they do mortgage analysis and risk assessment on mortgages. Basically it’s a couple of economists and developers. They wrote the software on Windows Azure, and now they have 70 banks around the world, tens of millions of dollars in revenue, and they are competing with some of the biggest financial services companies in the world because of this back-end infrastructure data center they can use to deliver their results to their customers.

But do you have customers who run standard apps on it too?

Many standard applications have some level of customization, and so we’re seeing a lot of hybrid applications, where customers are extending them into Azure. We have a case with Coca-Cola Enterprises which has a back-end order-processing app that they’ve extended into Azure. And what they wanted to do was get more reach and more agility for the front-end. So they built a secure connection between their data center and Windows Azure and then extended the application out to their partners and customers, essentially people like Domino’s Pizza who order Coca Cola products. We’re seeing a lot of these cases of existing applications being extended like that.

We’re also seeing companies using the high performance computing workload. One example is a company called Greenbutton, which has done a high performance scheduling and billing system on Azure. Another is Pixar, which has an application called RenderMan, which does rendering. Most large animation houses have their own clusters they do this rendering on. Pixar wanted to open up a market for smaller animation houses, little Pixars if you will. They’re working with Greenbutton to embed their technology into RenderMan. They can farm their rendering out to Azure and be billed on a usage basis. That’s a case where you have a large company and a smaller one working together and leveraging the power of the cloud to open up a whole new marketplace where they can be competitive. We call it the democratization of IT.

At what point is the customers’ thinking right now? Are they still at that point where they want to see how much money they can save by moving things that are on-premise to the cloud or are they past that by now?

I would say there’s three buckets of customers. I’ve been in this role for three years and the conversations have evolved in some interesting ways. Three years ago I was telling people they should be adopters and get on board with this platform early. They all said to come back and talk to them in five years. Then about two years ago, the majority of customers were in the first bucket, interested in wanting to save money but they weren’t interested in doing any new innovation. And then there were a few willing to innovate a bit by extending their applications into the cloud. Today I would say many, but not the majority yet, but a lot of them say they get the cloud, they get the cost savings, and now they want to drive the innovation life cycle faster. And there is a growing percentage who are willing to do something completely different and compete in a new way and build a brand new business. It’s been exciting to see that.

What’s been really exciting has been seeing mid-sized companies realizing they can use the cloud to give them an advantage to innovate faster and compete against really big companies. So that is sort of the landscape. Interestingly, I’ve been seeing a lot more adoption among the financial services companies than I had anticipated.

Aren’t they the ones who are supposed to be the most conservative when it comes to IT? I mean, they’re aggressive on performance, but obsessed with security and so skeptical of using the cloud because they don’t want to let their data leave their hands.

Exactly. But think about financial services. They’ve been in cloud computing forever, but it’s just been running on their own proprietary clouds. And so they are very good about understanding their application portfolio, and what can run in a public cloud, what has to stay in a private cloud, and how they can span those clouds. You can basically say you want to do risk assessment on portfolios, you anonymize the data, and you run it on the public cloud, you do all the analytics, you bring it back on-premise and then you deliver it to your customer. Having that kind of mentality in that industry allows them to move very quickly.

Also, manufacturing is moving and adopting the cloud faster than I would have guessed. And interestingly enough, government–not so much federal, because there’s so many certification requirements–but state and local governments are embracing the cloud because of the economic situation, and these are not just governments within the U.S. In Australia and Western Europe, we’re seeing governments adopting and building out applications so they can get services out to their citizens.

So what’s keeping you up at night? What makes you worry?

There’s a few things I think about. While we drive customers to a very fast innovation life cycle, we need to stay ahead of that innovation life cycle ourselves. We’ve done a pretty good job with that. One example, when we first released in beta a few years ago, we had .NET but we didn’t have PHP or Java. We got feedback immediately, almost on the first day, that customers wanted those and right away. And so we turned it around and added those within three months. Our ability to turn the crank pretty quickly is there. And that is something that in the software industry and specifically Microsoft, we have to make sure we make this turn toward service delivery, where we have to innovate quickly so you can deliver services. I think we’re doing a good job, but it’s something top of mind for me.

What are they asking for now? Is there something new the customers want that they don’t have?

They’re asking for continued investment in Java. We have it now, but making it a truly first class citizen, which is what we’re focused on delivering. We also need to keep our ear to the ground around things like application frameworks, extending the modeling capabilities in Visual Studio and things like that. It’s just a matter of thinking about the developer. We need to understand what they want, that’s what we’re here for.

I learned today about a complicated five-way kidney transplant operation that took place on Friday at San Francisco’s California Pacific Medical Center involving five surgeons, four anesthesiologists, 10 nurses in the operating room, and no fewer than 40 support staff. So large a kidney swap operation is so rare that this constitutes only the second time its been done in the United States, and the first was nearly five years ago.

When you need a new kidney, finding a donor can be a complicated process. Once upon a time you needed only a willing donor of the same blood type, or to wait for one to become available from a compatible deceased person. Now the science of matching donors to recipients focuses also on matching six specific antigens. This makes the mathematical complexity of engineering swaps substantially more complicated. When a spouse or sibling needs a kidney and a compatible match isn’t readily available, spouses or family members who would otherwise donate to their loved ones in need offer instead to swap with another recipient/donor pair in a similar situation. (The image above illustrates the scenario.)

When you consider that there are more than 80,000 people in the U.S. in need of a new kidney, the complexity of engineering these swaps given all the factors involved becomes incredibly difficult. I’m no mathematician, and I don’t even know what it means, but I’m told that when a sufficiently large number of people are involved, the problem reaches a level of complexity known as “NP-hard.”

It’s the sort of problem that the software engineering minds of Silicon Valley would in theory be adept at solving. And David Jacobs would qualify as one of them. After 25 years working for companies like Microsoft, Marimba (now a unit of BMC) and Macromedia (now part of Adobe), he came down with a kidney disease that required a transplant. He spent more than three years waiting and endured more than a year of dialysis before receiving a donated kidney from a friend in 2004. After that he started exploring ways to put his software brains to work on this kidney swap problem.

The result is Silverstone Matchgrid, a cloud-based application that takes all the characteristics involved in matching willing kidney donors with potential recipients in need–all the factors including blood type as well as all those antigens. Estimates are that some 6,000 people would qualify for a Kidney Paired Donation if they knew about the option, and an efficient national exchange system could result in as many as 3,000 transplants from living donors annually.

Hospitals and transplant organizations can use the application to speed up the search to match patients in need of kidney transplants who have a qualified, incompatible donor with an alternate compatible donor. The software not only generates all the potential paired donations possible, but determines the maximum number of transplants that can happen from a pool of candidates. Not bad for an application that runs on Amazon Web Services, eh?

It’s a fascinating story that’s better demonstrated than described. Jacobs demonstrated Matchgrid at the DEMO 2009 conference. A video of that presentation is below.

While the platform is in beta, it will be working with about 50 game studios. One of the designers endorsing the platform is Jordan Weisman, who is well known for games such as Shadowrun and MechWarrior.

Zipline is also working on two games of its own: Wolf Toss, which is similar to Angry Birds, and Chronosaur, which is a more complex arcade action game. The two games will be coming out over the next couple of months.

The CEO and Founder Todd Hooper, whose background is in enterprise software, said the company is not competing against Adobe’s proprietary Air or Flash technologies, which offer some of the same promises. It’s also not competing against OpenFeint, which offers more third-party services to developers, such as leaderboards. Those services are complementary.

Rather, it’s giving studios with about 20-30 developers the tools to make 2-D games in a single development language, called Lua. The SDK will allow the games to work across both iPhone and Android. The cloud is where developers will store additional game content, store a player’s state and incorporate multi-player aspects.

The 10-person company has raised an undisclosed amount of capital from Benaroya Capital and Founder’s Co-op. It works out of an office basement in the incubator-like headquarters, just blocks from Amazon’s new HQ.

It hasn’t happened yet, but Drew Bartkiewicz read it and became rather taken by the idea–so much so that he registered the Web domain name cloudcatastrophe.com. Once a regional sales manager for Salesforce.com, he had already drunk deep of the Cloud Kool-Aid. By the time he registered the domain, though, he was working in the insurance industry underwriting insurance policies for technology companies as vice president for cyber and information security risks at The Hartford.

His unique job history has led him to start asking fundamental questions about cloud computing and its business models that should if nothing else give some potential cloud customers pause and nudge cloud service providers–as varied as Salesforce, Amazon Web Services, Microsoft Azure and the like–to think about something they rarely talk about: Risk.

Don’t confuse this with security. Talk to the executive of any cloud provider, as I did recently with Adam Selipsky of Amazon, and you quickly find out that cloud providers take security seriously and they mean it, because without it they’re out of business.

Rather, the question is this: If a cloud catastrophe happens–critical, financially valuable data is breached or exposed or destroyed on a large scale–who’s financially liable for the damage to the customer’s business? Is it the cloud provider, who agreed to manage the data on behalf of the customer? Or is cloud computing still a use-at-your-own-risk sort of thing? The answer is, there is no clear answer. Bartkiewicz thinks the cloud computing industry will have to start answering it, and soon.

Bartkiewicz recently launched a new company called CyberFactors that aims to do two things. First it evaluates cloud providers for the risk they assume based on the amount of data they manage. Second, the firm helps develop warranties that cloud providers can offer to their customers and cloud policies for insurers so that both sides of the cloud relationship can be prepared for the worst. I caught up with him last week after he spoke at the Cloud Connect conference in Santa Clara, CA.

NewEnterprise: In a nutshell, what do you think is wrong with the cloud computing business models that are so popular and winning over so many customers?

Bartkiewicz: I’m an old Salesforce guy, so I was a big believer in the cloud, and then I got involved underwriting technology risk for insurance companies. I started to see some very interesting patterns emerge. The cost of failure is going up. So are the number of data breaches, and so are the laws imposing regulation on companies that handle data. Cloud computing companies are not being required to address in their models the implied financial liabilities they have on their balance sheet.

So where’s the implied risk you’re talking about?

If you take 100,000 customers of cloud computing companies, each is going to value their data in very different ways. Some use the cloud merely to track sales leads, others use it for trade secrets. Still others have identifying information on their customers. If a cloud company were to wind up suffering a catastrophic breach it would be in the long-term position of arguing with the customer over the value of the data compromised. The end result is a tremendous off-balance sheet liability, and shareholders and analysts who follow these companies aren’t connecting the dots. They need to be asking tough questions about this.

So where do you come into the picture?

Right now the thinking among the cloud companies is that any problem created by technology can be solved by more technology. They talk a lot about security, and they’re serious, but this isn’t a security issue. There’s not an industry in the world that doesn’t disperse risk through the means of insurance. I don’t mean to suggest that the cloud companies need to get insurance. What I mean is that they need to make insurance easy to get and affordable for their customers.

Wouldn’t something like risk be covered in a service-level agreement?

Right now the norm is that cloud companies cap their indemnification at the value of the contract. So if you spend $10,000 a year on a cloud application, the maximum you can get in the case of a breach is $10,000. But the data in question could be worth many times that. The average cyber-incident in our models costs $4.5 million.

And what does Cyberfactors actually do?

It’s a risk quantification tool. Companies that have cyber risk on their books today, whether or not it’s in the cloud, can make better informed transactions with cloud companies. Companies who use cloud computing need to know who absorbs the cost to fail, given the cost to fail is going up. There is a record number of class action lawsuits over privacy breaches, and regulators are imposing a lot of costs that result from a breach that have to be absorbed. This is a global problem in terms of data liability. Second, we have a platform called Cloudinsure.com that tries to “mash” cloud computing with insurance. Cloud computing needs massive risk transfer in order to save itself from itself.

So what companies are you working with?

I can’t say, but I can say we’re working with two cloud companies right now to help them design warranties. We just launched the company. And if a cloud has too much risk, and the warranty approach doesn’t make sense, we can also design insurance policies and then bring in the insurance companies to help back it.

What do the cloud companies think of this? Have you taken the idea to them?

I brought this concept to a cloud company. When I told them they need to disperse their risk, they said it would slow down the sales cycle. It was quite telling because the number one growth pattern for companies right now is denial.

Companies who are initially wary of the whole cloud computing thing, but eager to take advantage of the cost savings it enables, often first move into Amazon’s Virtual Private Cloud, or VPC, a secure portion of Amazon Web Services, or AWS. Today, Amazon said it has extended the capabilities of its virtual private network so that you don’t have to use an annoying VPN to take advantage of it.

Instead, companies can now set up their virtual networks on Amazon and make them look just like they did before the move to the cloud. Customers have total control over the networking environment, including assigning IP address and other critical settings, including deep control over who can access the data, how, and under what conditions. For example, you can store data in S3, the storage portion of Amazon’s cloud, and set detailed permissions so that only people first signed in to your VPC instance can access it. The new features are enabled today.

Given how much people talk about cloud computing and the number of companies that use it, you’d think the cloud was a huge business for Amazon Web Services–or AWS for short. It’s not. Amazon doesn’t break the units results out specifically, and instead lumps it into the “other” category for financial reporting purposes, which amounted to $953 million in 2010, or about three percent of Amazon’s total sales. But you can get sense of its growing importance elsewhere within its financial reports: Capital expenditures in 2010 were $979 million, more than 2.5 times the amount it spent in 2009. Amazon didn’t detail exactly how it spent that money–some went to offices, some to infrastructure for AWS–but it did say this: “We expect this trend to continue over time.”

Next week, Amazon Web Services will hit its five-year mark, so with that milestone in mind, I took the opportunity to ask Selipsky first about its beginnings, before diving into its future.

NewEnterprise: Adam, I remember vaguely the day that Amazon announced it was getting into the vaguely worded “Web Services” business, and really scratching my head at it. How did all this start?

Adam Selipsky: We built it out of necessity. We wondered why projects were taking longer than it seemed they should, and so we did a study and found that our engineering teams were spending about 70 percent of their time on non-value-add work like provisioning and managing their server and IT infrastructure, and not innovating on behalf of customers. That was a big aha moment. We got a blinding glimpse of the obvious, we realized we were not the only ones with this problem. We figured out there was a broad need for these basic technology infrastructure services.

When I think of all the companies that I know have started out using AWS, my head spins. Who’s your biggest customer?

We wouldn’t break that out. Zynga is one the biggest, obviously. Look at their growth. They couldn’t have grown the way they did without AWS. Netflix is another highly significant one. They said they have moved most of their infrastructure to AWS. They have a talented set of engineers who could build and manage their own infrastructure if they wanted to, but the point is that they don’t want to. They’d rather work on Netflix rather than the underlying infrastructure.

You’ve recently added a service called Elastic Beanstalk. Are you going to continue to add services like that through the year?

As fast as we knock out new services and features, the list of what our customers want from us continues to grow. I think that’s because this is so new, and since we’re replacing the data center, there’s a lot of things built up over the decades that run in those data centers. There’s going to be a long list of mission critical services that we need to bring up.

What’s the big one that people are asking for?

More flavors of databases. We have RDS, the relational database, and we’ve said we’re going to do an Oracle engine. So there’s more to do on databases, not only adding new flavors, but also just being more scalable. There’s big demand for really highly scalable, high-performance databases, and I think we’ll continue to work on that. And I think that there will be more stuff around ease of use. There’s going to be more features to help you figure out and deploy whatever you need.

We’re starting to see a lot of talk from other companies like Google and Microsoft and IBM who want to get into the cloud services business. What kind of competitive threat to see coming at you?

We’ve been in business for five years with real paying customers, with large companies down to guys in basements, and I think we were lucky enough to have a real first-mover advantage. A lot of technology companies have not followed quickly in part because they haven’t wanted to follow quickly. They make money by getting seven-figure purchase orders, which is good for them, but not so good for their customers, so they have a real dilemma about making the transition.

Another thing I’m hearing a lot of these days is talk of private clouds. Companies are wondering why they can’t build their own clouds themselves, and still maintain the on-premise control of their data. Do you sense any threat from that?

There are a lot of companies with large sales forces who are banging the private cloud drum very loudly. When they all do that in concert, some customers are going to listen. But you have to parse that talk from the reality. I think some customers have to be very careful because they lack some fundamental characteristics of the cloud. If you’re still writing a very large check, and not operating in a pay-as-you-go fashion, you’re losing one of the key advantages of the cloud. If you just bought machines that had to appear on a loading dock somewhere, then what you have isn’t instantly scalable. Most importantly, it doesn’t take the heavy lifting out of your hands so you can focus on the things that your customers care about and instead focus on things that are really just table ante at the end of the day. CFOs and CIO are going to have look really closely at the benefits that are being advertised to them. A lot of those models look like yesterday’s economic model.

What about hybrid models? Along with private clouds I hear a lot about mixing cloud and on-premise.

I don’t want to come across as some kind of religious zealot for the cloud. We’ll live in some kind of hybrid world for many years to come. But I think that what hybrid principally means is when there’s cases where there’s applications that can’t move because of government regulations or it was just built in 1978 and it’s just not conducive to moving–you see that a lot actually–but you want to run other things in the cloud. One of our jobs is to make it really easy for enterprises to live in that hybrid environment.