While there are a multitude of opinions on the web about what motivates Amazon to offer their S3 and recently released EC2 infrastructure and whether they can hope to make any margins from their service, I think there is a bigger gameplay involved.
The Amazon S3 and EC2 infrastructure offers a unique opportunity to small and medium sized businesses. By almost commoditizing infrastructure, Amazon is effectively telling ISVs 'Use our network to offer anything to anyone' at scalability,performance and speed levels that rival the best of best infrastructures like those hosted by Google.
Amazon started with S3, which offered affordable storage space with carrier class redundancy followed by EC2 which offered affordable computing space with massive redundancy and reliability. In other words, an effective cluster of computers ready to run your software, with huge storage for data. All over a high performance network.
Amazon, according to me have struck at the 'root', which is an affordable and powerful infrastructure, that will let anyone deploy services such as email, VoD, conferencing and whatever else without the performance bottlenecks of the 'open internet' . If Amazon started this as an 'application' like mail, it would be only for a niche market. Instead, Amazon is 'long-tailing' the applications - and letting the software vendors decide the killer application and their target audience.Whatever is hosted, its their servers and network.
By making the infrastructure available before the applications, Amazon has effectively moved the ‘innovation’ part to the community. Compare this to companies such as google, which launch several innovative applications and are parallely building their own grid network which will one day be released to the world for ‘fast and effective computing’.
I think Amazon got it right over google this time. Commoditize infrastructure, long-tail application hosting. Let the ISVs create millions of niche markets and bring in business for themselves.
Added bonus: imagine the amount of content that will incrementally be made available to Amazon for personalized services. Afterall, one of the most important requirements of personalized services is availability of multiple content streams for users.