There are reports that Amazon’s Simple Storage Service – called S3 – suffered a “massive” outage this morning, beginning at about 7:30 am eastern time. At 9:03, an Amazon official posted a note in the service’s customer forum, saying, “We can confirm the high error rate you’re experiencing. While we don’t have an ETA at this point, we’re working as quickly as possible to restore performance. We’ll provide updates as soon as we have them.” A poster at Hacker News reports that the service is now “back up,” but another poster says that service remains “spotty.”

The outage, which may have spread to other Amazon web services, appears to be affecting many web businesses, including prominent ones like Twitter, which uses the service to store the images that appear on its site. Writes one blogger: “Amazon S3 goes down … panic ensues.” But another S3 customer, also posting in the service’s forum, is more sanguine: “This is the first outage I have experienced since I joined the service nearly a year ago. Yes it sucks, yes I hope they get it fixed very soon… but, the sky is not in fact falling at the moment.”

As someone who believes in the growth of the utility mode of computing, I feel compelled to point out the inevitable glitches that are going to happen along the way. How the supplier responds – in keeping customers apprised of the situation and explaining precisely what went wrong and how the source of the problem is being addressed – is crucial to building the trust of current and would-be users. When Salesforce.com suffered a big outage two years ago, it was justly criticized for an incomplete explanation; the company subsequently became much more forthright about the status of its services and the reasons behind outages. Given that entire businesses run on S3 and related services, Amazon has a particularly heavy responsibility not only to fix the problem quickly but to explain it fully.

UPDATE: As of 10:17, Amazon reports, “We’ve resolved this issue, and performance is returning to normal levels for all Amazon Web Services that were impacted. We apologize for the inconvenience. Please stay tuned to this thread for more information about this issue.” An S3 user suggests: “A health monitor would be useful – something to show what amazon thinks the status of the services are and to post official information. Maybe even proactive alerts or something I could tie our other infrastructure notifications into so I could be proactive in alerting our downstream affected users.” Another complains: “Amazon’s response was substandard in this case. I should, minimally, see a message on the front page at aws.amazon.com when there’s a complete outage.” I would expect that Amazon will roll out additional tools for monitoring service status and alerting users about problems in fairly short order.

If over the last decade you have read any of the many books and articles promoting the Net as a new world where people are able to form self-regulating, super-democratic communities, you have no doubt come across glowing descriptions of eBay’s feedback system. By providing buyers and sellers with a simple means for rating one another, eBay has been able, we’ve been told, to avoid lots of rules and regulations and other top-down controls. The community, built on trust and fellow-feeling, essentially manages itself. Tom Friedman, in his book The World Is Flat, voiced the common opinion when he called eBay a “self-governing nation-state.”

Nice story. Too bad it didn’t work out.

EBay has been struggling for some time with growing discontent among its members, and it has rolled out a series of new controls and regulations to try to stem the erosion of trust in its market. At the end of last month, it announced sweeping changes to its feedback system, setting up more “non-public” communication channels and, most dramatically, curtailing the ability of sellers to leave negative feedback on buyers. It turns out that feedback ratings were being used as weapons to deter buyers from leaving negative feedback about sellers.

When Bill Cobb, the president of the company’s North American operations, announced the changes, he underscored just how broken the feedback system had become:

To give you some background, the original intent of eBay’s public feedback system was to provide an honest, accurate record of member experiences. Over the years, we’ve adjusted the system to add non-public means of providing feedback to try to improve its accuracy. For example, we instituted Unpaid Item Reports in 2006, and that has helped us to hold buyers accountable.

But overall, the current feedback system isn’t where it should be. Today, the biggest issue with the system is that buyers are more afraid than ever to leave honest, accurate feedback because of the threat of retaliation. In fact, when buyers have a bad experience on eBay, the final straw for many of them is getting a negative feedback, especially of a retaliatory nature.

Now, we realize that feedback has been a two-way street, but our data shows a disturbing trend, which is that sellers leave retaliatory feedback eight times more frequently than buyers do … and this figure is up dramatically from only a few years ago.

So we have to put a stop to this and put trust back into the system.

But I think – and I’m sure you’ll agree – that the most compelling reason we need to change feedback is so that buyers will regain their confidence on eBay and they will bid and buy more often.

We explored a number of solutions, and talked to eBay’s founder Pierre Omidyar, who created the Feedback system. He agrees that bold changes are required to fix Feedback. And that’s exactly what we’re going to do … here’s the biggest change, starting in May:

Sellers may only leave positive feedback for buyers (at the seller’s option).

I know this is a huge change, but we’re also putting into place protections that sellers have wanted for years. In addition to holding buyers accountable via non-public seller reporting tools, such as Unpaid Item reports, we are planning a number of other Seller Protections against inaccurate feedback.

He goes on to list seven new “protections,” including more aggressive central monitoring of members’ behavior and various restrictions on buyers’ ability to leave feedback about sellers.

Patti Waldmeir, in a column in the Financial Times today titled “The death of self-rule on the internet,” writes, “For those who were there from the start of this experiment in digitising utopia, including me, this is very disillusioning.” By “radically rewriting the constitution of the democratic republic of Ebay,” she says, the company has closed the book on a certain brand of internet idealism:

For most of [its] 13 years, Ebay has been run largely as a self-policed island, a place where order was preserved less by real world laws than by norms and customs and expectations and reputations that were almost entirely virtual. Ebayers governed themselves by rating each transaction using the site’s “feedback” system, where they could report crooks, not to the state but to each other. The theory was that, as in a medieval souk in which everyone knew everyone, everyone on Ebay would know who the crooks were by reading their feedback. Now the company has basically admitted that the cybersouk model does not work: buyers did not tell the truth about sellers, and sellers did not tell the truth about buyers. And in a market where traders lie, the trust that is so central to online commerce cannot flourish.

This isn’t unusual. It follows a common pattern that we’ve seen play out in other “social production” sites like Digg and Wikipedia. (Disclosure: I’m on the editorial advisory board of the Encyclopaedia Britannica.) As these sites grow, keeping them in line requires more rules and regulations, greater exercise of central control. The digital world, it seems, is not so different from the real world.

In a new post about how “bottom-up” communities need “top-down” controls to work successfully, Kevin Kelly notes that “the supposed paragon of adhocracy – the Wikipedia itself – is itself far from strictly bottom-up. In fact a close inspection of Wikipedia’s process reveals that it has an elite at its center (and that it does have an elite center is news to most). Turns out there is far more deliberate top-down design management going on than first appears.”

Kelly argues that “the reason every bottom-up crowd-source hive-mind needs some top-down control is because of time. The bottom runs on a different time scale than our instant culture.” He’s implying that, if you gave them enough time, self-governing communities would eventually work out their problems and run just fine – like happy beehives. But that’s contradicted by experience. What we’ve seen happen with self-regulating communities, both real and virtual, is that they go through a brief initial period during which their performance improves – a kind of honeymoon period, when people are on their best behavior and rascals are quickly exposed and put to rout – but then, at some point, their performance turns downward. They begin, naturally, to decay. Leave them alone long enough, and they’re far more likely to collapse than to reach perfection.

Kelly confuses human with nonhuman systems. He writes: “The main drawback to pure unadulterated darwinism is that it takes place in biological time – eons. Who has eons to wait during internet time? Nobody.” But darwinism has little to do with the development of human systems like eBay or Wikipedia or Digg. People aren’t genes (or bees). You can build a good emergent system out of genes because genes are dumb – they don’t make their own decisions, they don’t consider what other genes are doing, they don’t think. People, in contrast, actually do think. Sometimes, we’re inspired by fellow-feeling. Other times, we act selfishly or with prejudice or we try to game whatever system we’re part of. And the more times we’re confronted with other people acting selfishly, or fraudulently, the more we retreat into self-interest ourselves. Trust, a fragile thing, breaks down.

And that’s why eBay’s feedback system decayed. Time was its enemy, not its friend.

Since its launch more than a decade ago, Amazon.com has served as an interface between the digital and the physical worlds, providing an easy and efficient way to shop online for an ever expanding array of material goods. As the first widely successful Internet retailer, its business has been as much about the old-fashioned craft of logistics – warehousing, picking, shipping – as the newfangled arts of web design, online merchandising, and algorithm wrangling.

But the company’s recent moves show that a transformation, or at least a refocusing, may be in the works. Amazon may be signaling that it sees its future more as a river of bits than as a river of goods. Over the last year, the company has greatly expanded its “digital downloads” business, launching its Unbox digital movie service and its mp3 music store and unveiling its Kindle ebook reader. At the end of January, it announced it would buy Audible, the largest seller of downloadable audiobooks and other digital spoken-word products. Most audacious of all, Amazon has begun selling computer processing and data storage in purely digital form through its Amazon Web Services unit. Whether it’s books or music, movies or servers, the company is aggressively trying to substitute virtual goods for physical ones.

Amazon isn’t about to close down its physical warehouses, of course. But its digital warehouses could eventually become the center of its business. That may be good news from a financial perspective. Amazon has invested a great deal of money and ingenuity into fine-tuning its physical logistics operation, and that operation has given it an edge in online retailing, but the cost of storing, handling, and shipping physical goods has always been a drag on its profitability. That cost largely disappears when customers buy products as bits rather than atoms.

There are risks, too. Many of these digital markets, particularly ebooks, are small, and their prospects are uncertain. And as Amazon moves more into the digital media business, it will have to fight tough rivals like Apple as well as an implacable new foe: free stuff. Amazon will have to succeed in holding the line on prices or else figure out how to earn revenues through complementary services and products or other indirect means.

If the company meets those challenges, what might it look like in the long run? It may end up looking more like Amazon Web Services than like the Amazon.com we’re used to. Just as AWS currently supplies virtual servers and storage drives to companies, Amazon could become the preferred supplier of virtual media servers to individuals. You store all your media on your own virtual machine in Amazon’s data centers, and Amazon serves up your audio and video seamlessly to whatever device you happen to be using at any given moment. Everything’s automatically synced, cached, and backed up, without you having to worry about it, and you use one web interface to control it all.

I’ve long thought that the AWS business and the retailing business were fated to come into conflict. But maybe they’re the same business after all.

Henry Blodget offers an interesting analysis of Microsoft’s future business prospects today. He argues that the company is making a colossal mistake in trying to compete for the online consumer applications market, an error in judgment that, he says, dooms its proposed acquisition of Yahoo to be “a disaster.” Microsoft should not be worried about competing with Google and others for free, ad-supported consumer software served up from the cloud, he argues, because the consumer software market is trivial to its business:

In short, the threat to Microsoft from Google et al is not “free software.” Consumer software is going free, but Microsoft doesn’t make much money from consumers.

Rather, argues Blodget, Microsoft should focus wholly on the business market, in particular on shifting to supplying web apps to corporations for a subscription fee as Salesforce.com does and as Google does with its premium edition of Google Apps. For Microsoft, cloud computing is all about “paid desktop licenses giving way to paid web-based licenses.” In the future, “today’s stark differentiation between the ‘Corporate’ and ‘Consumer’ markets doesn’t change. ‘Advertising,’ moreover, has nothing to do with it – except on the Consumer side, which is far less important a market to Microsoft than it is to Google and Yahoo.”

Blodget is right to point out the big differences between supplying consumer applications and supplying business apps. But he’s very much mistaken in dismissing the importance of the consumer market to Microsoft.

For one thing, Blodget is wrong to say that Microsoft “doesn’t make much money from consumers.” The company makes a whole lot of money from consumers. Microsoft’s largest single business unit, in terms of sales, is what it calls, somewhat misleadingly, “Microsoft Business Division,” which is essentially the Microsoft Office business. MBD took in $16.4 billion in sales in fiscal 2007, compared with $14.8 billion for the Windows PC business and $11.2 billion for the “server and tools” business, the other two largest units. Fully 25% of the MBD revenues – about $4 billion – came from sales of Office to consumers. That means that consumer sales of Office alone represent about 8% of the company’s overall revenues (and that doesn’t include the significant revenues from consumer sales of Windows or other consumer software.)

The revenues from consumer sales of Office are not only substantial; they also help provide stability to the division’s, and the company’s, income and earnings. In the past, cyclical weaknesses in the business market have been tempered by strength in the consumer market.

But the importance of the consumer market to Microsoft goes well beyond money. There is no bright line between the use of Office in businesses and the use of Office in homes and schools. People’s use of Office in their personal lives reinforces their use of Office in their professional lives, and vice versa. If people move away from using the Office programs at home and, particularly, at school, and instead adopt free alternatives like Google Apps or Zoho or Adobe’s Buzzword, they also become less likely to require Office when at work. Lose the student, and eventually you may lose the professional worker that the student becomes.

In an article on the rise of web apps in today’s New York Times (in which I’m quoted), Matt Richtel tells a story that is sure to send at least a small chill down Microsoft’s spine:

Kevin Twohy, 20, a mathematics student at U.C.L.A., uses a free service on Facebook to store and share photos, a program called Picnik to edit the images, and Gmail.

For his English class last semester, he wrote a term paper about William Blake using Google’s free word processing software, even though Microsoft Office had come loaded on his personal computer.

The advantage of the Google program, he said, was that it allowed him to keep his information on Google’s servers so that it was accessible at any computer, whether he was working at his fraternity, a coffee shop, a campus computer bank or the library. The experience, he said, has persuaded him not to pay money for software.

“I don’t ever see myself buying a copy of Office,” he said.

Blodget is correct in saying that “cloud computing appears to be a classic disruptive technology.” What he misses is that such disruptions start at the low end of the market – in this case with the individuals, sole proprietors, colleges, and small businesses that find free web apps an attractive alternative to Office and aren’t averse to the ads that go along with those apps.

As Richtel points out, Microsoft has been slashing the price that it charges home users and, in particular, students for Office. Companies don’t cut prices for no reason, and the Office cuts are driven at least in part by Microsoft’s recognition that individuals have new, free options when it comes to word processing, spreadsheets, calendars, and other such popular programs. Microsoft knows it has to keep a grip on the consumer market even as it builds up its capacity to serve business apps from the cloud. To take Blodget’s advice and ignore the consumer market would be, well, a disaster.

Ford Madox Ford once said, in discussing how to choose whether or not to read a book, “Open the book to page ninety-nine and read, and the quality of the whole will be revealed to you.” Marshal Zeringue took Ford’s advice to heart and launched his most excellent blog, The Page 99 Test, which features excerpts from the ninety-ninth page of newly published books. Zeringue asked me to send in something from The Big Switch, and this morning he posted my contribution.

We all deserve our four minutes of YouTube fame, and mine arrives today with this video, in which I discuss some of the themes of The Big Switch with Greg Jarboe of Search Engine Strategies:

Now that I’ve boiled the book down for YouTube, my next challenge will be to Twitter it.

There are two ways that big advances happen in business IT. One way is top down: the powers that be – IT departments and corporate executives – make a decision to bring a new system into a company, and employees are required, either happily or unhappily, to use the system. Think, for instance, of the installation of a big ERP system from SAP or Oracle. The other way is bottom up: individual employees or business units begin using a new technology, without any formal imprimatur from higher-ups, and it proves so valuable that IT departments and corporate execs have no choice but to embrace it. Think of instant messaging or, on a much larger scale, the PC revolution. Top-down technologies tend to be expensive (requiring their own line in a corporate budget), while the bottom-up ones tend to be fairly cheap (a person can put it on a credit card).

Web apps – the ones that run in the “cloud” rather than from your hard drive or from the server room down the hall – are mainly taking the bottom up route. The early adopters of Salesforce.com’s CRM service tended to be the salespeople in smaller companies or in individual business units. Because adopting Salesforce didn’t require a capital outlay – it was just a monthly expense – it didn’t require a lot of formal approvals from higher-ups. IT departments weren’t always happy, but they had little choice but to adapt as the service took hold. In most companies, after all, business units have more power than IT units.

Google’s announcement yesterday of a new “team edition” of its Apps suite of personal productivity programs is an effort to spur the bottom-up adoption of the programs in companies and other organizations. Up to now, there have been two ways to use Google Apps. You could sign up for a Google account and use the separate programs – Docs, Spreadsheets, etc. – as an individual. That’s free and easy, but it has some limitations when it comes to business use. For one thing, it lacks security controls – documents can be shared easily with anyone, whether inside or outside a company. More important, there’s no easy way to see who else in your company or your unit is using the programs, so setting up collaborative efforts is a bit cumbersome.

The second, more formal way is to have your company set up a formal Google Apps account linked to its Internet domain. This method provides a lot more security and eases collaboration, but it requires the involvement of IT staff. Your company has to formally approve Apps before you can use it – and that approval can be hard to come by, particularly in a large company with all its bureaucratic rigamarole.

The team edition offers a third route. It’s basically the Facebook model: your email address is your personal identifier and, because it’s tied to your company’s domain, provides an easy way to define the company you’re associated with. So if you sign up for a team account, you can immediately see who else in your company has signed up and, for security purposes, you can easily restrict access to just your coworkers. You can, in other words, gain most of the advantages of the formal Google Apps system without having to get approval or assistance from your IT department. As Google’s Rajen Seth told Dan Farber, “In previous versions of Google Apps … the IT department had to get involved in verifying domains and centrally managing users. With the Team Edition a project group can use Google Docs on a project or the Calendar, and individuals on a team can sign up just using their email address.” And the team edition is free, so you don’t even need a credit card.

By easing the grassroots adoption of Apps, Google hopes to begin reshaping the way employees – and then employers – think about personal productivity apps. The idea isn’t to displace, say, Microsoft Office, but to complement it, providing a simple way to collaborate on documents and other files. As the use of Apps becomes more established, it becomes natural for companies to formally adopt the programs to gain further capabilities and controls. In the process, they’ll probably also sign up for the premium edition, which requires a $50 per user subscription. And then, in the long run, people start realizing that they’re doing pretty much everything they need to do within the web apps, and they start asking themselves: why exactly are we still licensing the old-fashioned versions of these programs and suffering the expense and nuisance of installing and running them on all our PCs?

And then the bottom-up revolution is complete. Or so Google hopes – and Microsoft fears.