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Dion Hinchcliffe's Next-Generation Enterprises

Dion Hinchcliffe

How Cloud Commoditization Will Transform Enterprise Computing

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The announcement last week of Amazon's new EC2 Spot Instances was more than just another move considerably ahead of the rest of the industry by that forward-looking cloud computing leader. Spot Instances also heralds the beginnings of a real trading market for cloud computing resources of all kinds, whether that is storage, support services, real compute power, or even human capital (as in on-demand crowdsourcing.)

Up until now -- indeed, still today except for Amazon -- you basically had to pay fixed "retail" amounts according to the publicly posted prices from a bulk vendor or refer to the the rates listed in your negotiated contract with a private supplier. Now in the new spot market (live price ticker here) you can just look at the current price of unused cloud capacity and if your bid is the highest, it's all yours. Of course, this is only available in Amazon's cloud at the moment and it's just for EC2, their compute cloud. But you can count on this expanding to their other services as well and for competitors to respond, which is where it gets a lot more interesting.

Admittedly, the days of the fixed price retail cloud are far from over. It will take a while to grow broader interest in treating the unused and available portions of the cloud as a commodity. It might even take longer for buyers to start thinking of compute resources in all its forms as an instantaneous product to consume, something that up until now still looked more like long-term fixed investments in 3rd party pooled resources than rapidly fluctuating units of exchange with highly dynamic value and price.

Cloud Computing Cost Models: Long Term Contract, Retail, and Spot Market (Commodity)

But if the long history of markets for in-demand items is any indicator -- and make no mistake, the endless need for additional compute resources by businesses certainly qualifies -- it won't take long for customers to catch-on that real value is to be had when pricing is tied more closely to what cloud resources are actually worth at any given time.

A related question to commodity cloud pricing is whether this is just an accounting novelty, likely to appeal to the corporate balance sheet alone, or whether the push to commoditize the pricing of cloud computing resources is itself fundamentally strategic to enterprise computing. Can a true cloud computing market also enable technical innovations and new approaches to business for example? I currently believe that all of this is the case, for reasons that we'll explore shortly.

Thus spot pricing and soon, inevitably, true commodities trading in cloud computing itself will create new opportunities for those that can see the fuller implications. More significantly, use of market forces in this way can enable the conditions for both fruitful experimentation as well as new activities that were not previously cost effective . Businesses can then -- if suitably situated -- take advantage of the considerably collapsed cost structures and real-time conditions of a cloud commodities market to formulate competitive new products and services or simply improve existing ones.

3 Ways Cloud Commoditization Will Transform Enterprise Computing

  1. Creating cost structures more directly tied to value. IT departments will certainly need new governance tools that can acquire and provision spot cloud capacity on-demand to capture the value in rapidly fluctuating commodity market. However, the potential is there for those that are comfortable with and capable of utilizing the cloud in this manner. Commodity models can therefore greatly reduce the cost of computing and consequently decrease the costs of goods sold, creating more value for the market and themselves. This will also allow the business to take on tasks that they couldn't tackle before due to cost.
  2. Building an agile supply chain. There are strategic advantages to having multiple suppliers as well, particularly once the issues with cloud computing standards are resolved. For businesses where computing is a non-trivial cost component to their operations -- which in today's rapidly growing knowledge economy, is a great many -- the cloud becoming a commodity directly drives business down the road of not being tied to a single vendor. They will also begin thinking of their entire IT infrastructure as more flexible, elastic, and adaptable, an agent of opportunity of you will. This will lead to business towards innovative new possibilities combined with entirely new (shorter) timeframes.
  3. Developing innovations to support dynamic cloud environments. The ability to easily transfer work between public and private clouds is one of the top use cases for enterprise-class cloud computing today. This technology, once developed and matured, will begin to enable near real-time switching between commodity cloud resources to capture the best overall value available at the time. While data transform and loading is still a challenge today, the continued expansion of Guilder's Law (which says that network bandwidth triples every 18 months) and other related forces, means that most of the obstacles to true dynamic clouds, across public and private clouds and between two public clouds, will continue to fade.

Cloud computing expert David Linthicum noted back in August when I explored the current market costs of cloud computing that price alone can be an obfuscator of value. Focusing on per-hour fees or getting locked into cell phone like long-term contracts prevents more important strategic discussions from taking place. Intriguingly, the spot market approach may address many of these issues by allowing companies to focus on agility, lowering switching costs, standards support while still achieving maximum value.

It will also be interesting to see if and when the other major cloud vendors will join in with Amazon's spot market pricing. Many of the large cloud computing suppliers today are currently focusing on differentiation in other areas including enterprise-specific features, new application architectures, or support for legacy environments. These are all good bets in their own right but cost and flexibility is almost certainly the high road to marketshare and largest overall value.

There will be a window of opportunity for suppliers to decide whether they want to compete here while there is still margins, or go up against the emerging cloud behemoths that have already achieved their economies of scale and network effects. The good news is that almost all of this is ultimately good for customers that understand the forces at work here and can take advantage of them.

Where do you think the biggest value in cloud computing will come from? Please leave your comments below.

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Some analysts are predicting Amazon.com’s spot pricing initiative for cloud computing will making services more affordable for enterprises. But what will trading and speculation of cloud pricing affect the value of the cloud to solution providers? Read More


Thanks Dion, great post as always and you open the door to an even bigger dialogue.

Once cloud resources are standardized we might see transformation not to stop at computing but to include all resources of organizations. You correctly point out human resources in the form of crowdsourcing.

I believe the biggest value of cloud computing will be the eye-opening change that will with it. And will open the door to a much more flexible, yet competitive way we deal with resources that fuel our digital economy: knowledge & computing.

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This really is a totally new sector in IT which is going to shift the workforce. I dont think it's going to reduce the workforce, just shift it.

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Dion Hinchcliffe

Dion Hinchcliffe is an internationally recognized business strategist and enterprise architect View more

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