The Economics Of Cloud Computing

A special report on Cloud Computing in a recent Economist says that the current economic malaise should speed up the adoption of cloud computing since it will increase the pressure on companies to become more efficient.In an online audio interview, the report's author, Ludwig Siegele, the Economist's technology correspondent, further explained his line of thought. "One of the big promises of cloud computing is to do more with less. You don't have to have your own IT infrastructure . . . It should help you to save money. It may be counter-intuitive but the current economic crisis will probably speed up the adoption of cloud computing because companies, and especially banks, they'll put more computing out into the cloud and they cannot afford not to use information technology because it makes them less competitive."

I'm more inclined to go with intuitive rather than counter-intuitive reasoning when it comes to the economics of cloud computing. As I see it, the greatest value proposition for cloud computing is with startups, which can use cloud services to attain infrastructure of the same quality as large companies. During an economic downturn, and especially during a time when there are increased restrictions on credit, there is less of an impetus to start new businesses and hence there should be less overall demand for cloud services. I also think that companies with established IT infrastructure are less likely to 'rock the boat' by greatly changing their IT strategy during a recession and will have heightened concerns about security, regulatory compliance, etc. In his report, Siegele admits that the cloud craze may indeed have peaked already, based on Google's weekly searches for the term "cloud computing," which reached a high point in mid-July before falling precipitously.

In several areas, though, I'm in complete agreement with Siegele. First and foremost, I agree with him that the cloud itself is here to stay and to grow.

"It follows naturally from the combination of ever cheaper and more powerful processors with ever faster and more ubiquitous networks. As a result, data centres are becoming factories for computing services on an industrial scale; software is increasingly being delivered as an online service; and wireless networks connect more and more devices to such offerings."

I also think Siegele is on the right track in saying that he expects there will be both winners and losers in the cloud and the biggest initial winners are likely to be hardware makers, at least until large cloud providers like Amazon, Google and Microsoft steal a page from Walmart and begin dictating how to build servers and at what price.

Siegele is refreshingly modest when it comes to crystal ball gazing about cloud computing: "What shape will the software cloud take, other than being a vast collection of services? In one way it will look much like the old software world. There will be a few big platforms, akin to today's operating systems, and most applications will be written to one of these platforms."

"What is less clear is just how much of business and consumer software will migrate into the cloud, and how fast. The answer depends on whom you ask. …But people are not about to throw out their powerful PCs or other "client" devices, if only because many of them still work offline at times. Similarly, companies will always want to keep some applications in-house, for reasons of security, regulation or simply to maintain control. Ray Ozzie, Microsoft's chief software architect, promotes something called "software plus services", meaning that customers will settle on "the right mix of old and new stuff".

"If history is any guide, Mr Ozzie is more on the mark. Even the biggest changes in IT have never spelt the death of anything . . . IBM, for instance, is still making money with mainframes."

This suggests to me, for all the hype about cloud computing being a disruptive technology, that the adoption of cloud computing within most IT shops will be an evolutionary rather than a revolutionary process. Until the current economic climate improves, most enterprises--start-ups, aside--will likely move cautiously when it comes to adopting cloud computing.

For More Information: see InformationWeek's Guide To Cloud Computing