I find it hilarious that people offer up "Shelve the idea" as the most obvious response when AWS (or Microsoft or Google or Oracle or Twitter or Facebook or Yahoo or $OTHER_BIG_CO) launch something like their project. Why would you do that? Do you expect AWS to achieve 100% market dominance and leave literally 0 customers who might prefer your thing? Can you not see any way to segment the market and identify a segment where you can make your product a better fit? Or how about not trying to compete on product attributes at all, but rather compete on another basis like customer intimacy or service, etc? Or even compete simply by having a better sales process?

I'd say take a little time out, read The Discipline of Market Leaders, Mastering The Complex Sale, and Differentiate or Die and think about ways you can compete with them. IF your analyzes leaves you with the conclusion that the best thing to do is to drop your idea, then fine. But don't just randomly decide to drop it because AWS is going to be competing with you.

Also, just a random thought that I recently had, given that I'm in the exact same boat (trying to compete with stuff AWS is doing).. read up on the old "Embrace and Extend" idea. I think there may be a kernel of something there, in terms of using that to compete against larger players. It's a half-formed / half-baked thought right now, but it might be worth chewing on a bit.

If you're interested in continuing this discussion outside of HN, feel free to drop me an email. prhodes@fogbeam.com