2nd UPDATE: Amazon Cloud Service Suffers Errors, Hurting Websites

Technical problems at an Amazon.com Inc. (AMZN) data center caused several websites and Internet services like Foursquare and Reddit to crash or have limited availability Thursday.

Amazon, which rents Web servers and storage to companies, said it was experiencing "instance connectivity, latency and error rates" with a data center in northern Virginia that handles operations for the U.S. The problem took down scores of websites and highlighted the risks to companies that outsource their Internet operations.

Amazon's Elastic Compute Cloud service is core to the company's cloud computing platform and is often listed as a model for other such offerings. The service allows users to run programs and store information remotely, access the applications over the Internet, and eliminate the cost of operating the equipment themselves.

In its latest update, Amazon said the company has made progress in fixing the outage, noting that all but one zone has been relaunched successfully.

Amazon didn't respond to requests for comment.

Analysts have estimated Amazon Web Services could generate more than $500 million in revenue this year. Amazon is projected to report total revenue of $44.9 billion, according to Thomson Reuters. Shares, up 27% over the past 12 months, rose 1.1% Thursday to $185.89.

Websites such as Foursquare, Quora and Reddit have cited service problems related to Amazon's outage, with user-generated news link site Reddit recently noting on its web page that Amazon is currently experiencing a "degradation" and is working on it.

"We are still waiting on them to get to our volumes. Sorry," the site said.

Netflix Inc. (NFLX) is one of Amazon's more high-profile customers for cloud computing. The online video-rental company said it was aware of the issues Amazon is currently facing.

"Netflix members have noticed no problems," said Steve Swasey, vice president of corporate communications for Neftlix.

The market for cloud services is expected to grow to $102.1 billion in 2012, up from $68.3 billion in 2010, according to research firm Gartner. Two of Amazon Web Services' biggest competitors include Microsoft Corp.'s (MSFT) Azure cloud-computing platform and Rackspace Hosting Inc. (RAX).

Lew Moorman, chief strategy officer and president of the Rackspace Cloud, said Amazon's outage represents a "speed bump" for the cloud-computing industry, but ultimately won't deter businesses from turning to the cloud.

Michael Hussey, chief executive of PeekYou, a search company whose database contains records for more than 250 million people, said his company uses Amazon for 12 servers, but it doesn't put any "mission critical" applications in the cloud. As a result, the site, which uses 30 servers owned by PeekYou, is still up and running.

He added that the company has been having latency problems with the Amazon cloud since December, forcing PeekYou to consider moving to other cloud providers such as Rackspace.

"The interesting thing about this outage is it took down massive sites, but we've been seeing problems all year long at this East Coast facility," Hussey said.

While utilizing a cloud-service provider helps companies lower data costs, it also comes with the added risk of relying on a third party to fix problems that may arise. William Marler, a lawyer for the Seattle law firm Marler Clark, said his food-safety blog and online newspaper have been down since Amazon's issues began.

"It is simply amazing how dependent we have all become on the Web--that we do not control," he said. Marler's tech team is in the process of moving operations to a server in Ireland, and he said he's going figure out if everything can be hosted on his own servers.

Simon Buckingham, chief executive of New York-based Appitalism, an apps marketplace, said his site is completely dependent on Amazon Web Services in the U.S. He said minor outages are a routine experience that most companies have to deal with, but acknowledged this is the first major outage he's dealt with on Amazon's platform.

"They've been so perfect that I was lulled into a false sense of security," Buckingham said. "I've taken the quality of service for granted. This has definitely been a wakeup call."

Amazon first acknowledged the error at 4:41 a.m. EDT on its Amazon Web Services service health dashboard, saying it was investigating the issues. The dashboard provides users details about delays or errors.

-By Shara Tibken and Steven Russolillo, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

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