cloud computing and the rise of a fungible, elastic computing infrastructure
Over the last few days I’ve attended a couple of events here in San Francisco discussing the promise of cloud computing. I believe there are several reasons why this technology represents a paradigm shift (and one that does justice to Kuhn’s original meaning).
First, what is cloud computing? From the ten-thousand foot view, it is technology that uncouples web servers from their underlying hardware; it re-conceives them from being physical machines with plugs into “instances” running on top of the hardware, bundles of bits that can be moved and multiplied as easily as the software on our desktops. The “cloud”, like the “web” , is an abstraction whose physical reality — data centers with thousands of softly humming servers — we need not care about.
This shift has far-reaching consequences for the economics of computing, among them:
- Fungibility of computing power. When the hardware that powers servers is indistinguishable and interchangeable, it becomes a fungible commodity. It binds together the entire market for computing infrastructure into one of massive scale (an estimated 1.5% of all energy use in the U.S. is due to servers). Servers can now run on hardware the way cars run on gasoline. It creates competition and market opportunities that didn’t previously exist. companies like Amazon and Google are recognizing the opportunity to become the dominant providers of this new commodity.
- Computing power as a leasable (and releasable) commodity. As Werner Vogels, the CTO of Amazon.com, has observed, cloud computing allows firms to shift infrastructure costs from being capital expenditures (owned) to operating costs (leased). Most servers are idle most of the time — this is because firms have traditionally invested in computing infrastructure to meet their peak capacity needs. Leasing computing power allows firms to more efficiently fit their demand, leasing more capacity on the cloud when needed, and releasing it when a peak period has passed.
Given these two features of the cloud computing marketplace, one might wonder where the competitive advantages lie for firms in this space outside of cost competition. In other words, what’s to stop users from seeking only the lowest prices? There is room for differentiation in service offerings, most notably in terms of reliability and security.
But a less conspicuous competitive edge that accrues to the first-movers in this space owes to the weight of data. Because of the relatively high cost of bandwidth, data needs to live close to the computing power that operates on it. But this same high cost of bandwidth makes moving data warehouses from one cloud provider to another — unlike migrating servers “instances” — an expensive proposition. Indeed, one of the feature requests for the Amazon Web Services folks at June 24th’s CloudCamp was to accept data uploads mailed in on optical disks — showing that snail mail still lives as a cheap, fast way to move data.
For data analytics applications, many of which require short-lived but intense bursts of computation (performing daily or monthly trend analysis, for example), cloud computing offers cheap access to vast CPU power. It also provides a compelling incentive to parallelize these analytics algorithms - as leasing 100 servers for one hour is cost equivalent to having one server for 100 hours.
Cloud computing promises to elevate our computing infrastructure to the level of a utility, like water, gas, and electricity: something we take for granted in best sense.
Information is more valuable than what it describes
“Information about money has become almost as important as money itself.” — Walter Wriston, former Chairman of Citicorp
“Some firms believe that in 10 years half their business will come from moving information about goods, rather than moving the goods themselves.” — The 20-Ton Packet, Wired 7.10
Information has always been valuable, but it’s only in the last decade that has it become so dramatically cheap — to store, to move, and to process. But it’s still not “too cheap to meter” (Stewart Brand’s phrase) and probably never will be.
Yet despite this dramatic drop in cost, the real value of information, by any measure, has not diminished. And because the costs of other goods — whether shipping containers, materials, or home furnishings — have fallen more slowly, information contributes an ever larger fraction of a firm’s profits.
A corollary to the falling cost of information, and its persistent value, is that as more kinds of information comes online, more of this data is worth keeping. Even data whose value is metered in cents per terabyte is increasingly worth storing, and eventually analyzing, as it may yield several cents profit.
As industries evolve and their products become commodities, raw goods prices are driven down, tipping the balance further in favor of information as a source of profit. Firms become information enterprises first, with actual goods being only ancillary.
Nowhere is this more apparent than with the evolution of Amazon.com in the last decade. Amazon began as a retailer of books, became a retailer of consumer goods (abstracting away books), then expanded to be a retailer of retailers (abstracting away goods), and now with its S3 initiative, Amazon is attempting to become a seller of information services (abstracting away retailing at all). Perhaps Amazon’s goal is to become a purely abstract entity, managing information (software) about information (marketplaces) for retailers who sell goods.
Wriston’s quote was prescient because he foresaw this change occurring in the consumer banking and finance world, long before Capital One took advantage of vast troves of consumer credit information to individually tailor its credit cards for maximum profit. But his observation is true today in its more general form: information about goods is almost as important as goods themselves.