The Cloud Computing Monopoly Debate - InformationWeek

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11/5/2008
08:52 PM
Roger Smith
Roger Smith
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The Cloud Computing Monopoly Debate

I've been following with interest a cloud computing debate that's been going on the past week or so between O'Reilly Media founder Tim O'Reilly and technology writer Nicholas Carr about the potential for a single company to achieve monopoly control of the world of cloud computing.

I've been following with interest a cloud computing debate that's been going on the past week or so between O'Reilly Media founder Tim O'Reilly and technology writer Nicholas Carr about the potential for a single company to achieve monopoly control of the world of cloud computing.The back-and-forth began with Hugh Macleod's crystal ball blog post The Cloud's Best Kept Secret: "The way I'm seeing the future commonly talked about, is all this data and programs spread all over the networks of all these companies, relatively proportional to their current market caps. Some folk have their stuff with Sun, some with Amazon, etc. But nobody seems to be talking about Power Laws. Nobody's saying that one day a single company may possibly emerge to dominate The Cloud, the way Google came to dominate Search, the way Microsoft came to dominate Software."

O'Reilly disagrees with Macleod's analysis, since he thinks network effects instead of power laws ultimately determines the winner in any and all Web marketplaces. (A network effect is the phenomenon where a service becomes more valuable as more people use it, thereby encouraging ever-increasing numbers of adopters.) O'Reilly discounts the possibility for network effects in the cloud infrastructure space:

"Understanding the dynamics of increasing returns on the web is the essence of what I called Web 2.0. Ultimately, on the network, applications win if they get better the more people use them. As I pointed out back in 2005, Google, Amazon, ebay, Craigslist, Wikipedia, and all other other Web 2.0 superstar applications have this in common.

"Cloud computing, at least in the sense that Hugh seems to be using the term, as a synonym for the infrastructure level of the cloud as best exemplified by Amazon S3 and EC2, doesn't have this kind of dynamic. ... The cloud computing business will be huge, but it may be more similar to the Web hosting and ISP markets, which are also huge, but not hugely profitable."

Nick Carr counters O'Reilly's argument by quoting some of his own words back at him that seem to negate one of his original premises, that is, denying that Google's success is based on network effects: "Let's stop here, and take a look at the big kahuna on the Net, Google, which O'Reilly lists as the first example of a business that has grown to dominance thanks to the network effect. Is the network effect really the main engine fueling Google's dominance of the search market? I would argue that it certainly is not. And in fact, if you look back at that 2005 O'Reilly article, What Is Web 2.0?, you'll find that O'Reilly makes a very different point about Google's success. Here's what he [O'Reilly] says, in a section of the article titled "Harnessing Collective Intelligence":

"Google's breakthrough in search, which quickly made it the undisputed search market leader, was PageRank, a method of using the link structure of the Web rather than just the characteristics of documents to provide better search results."

Carr adds, "This has nothing to do with the network effect as O'Reilly defines it. What Google did was to successfully mine the 'intelligence' that lies throughout the public Web (not just within its own particular network or user group). The intelligence embedded in a link is equally valuable to Google whether the person who wrote the link is a Google user or not." In subsequent rebuttal posts, both O'Reilly and Carr take each other to task for interpreting "network effects" and/or "cloud computing" either too narrowly or too broadly. Without getting into an arcane discussion of what does or doesn't constitute network effects, I'm inclined to agree with O'Reilly for a couple of reasons. The first reason is that neither O'Reilly or Carr bothered to mention any of the major enterprise software vendors like HP, IBM, Oracle, and SAP, who are all ramping up to provide cloud services -- not to mention a slew of cloud computing startups -- all of whom ought to prevent any one cloud vendor monopolizing the market for the foreseeable future. The second reason I agree with O'Reilly and disagree with Macleod's original speculation about the possibility of one company achieving monopoly control of cloud computing is Oracle's Larry Ellison's recent statement that he thinks no one will make much money in cloud computing. If a master monopolist like Ellison can't see a path to control or dominance, there just might not be one.

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