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September 22, 2010

Free Market Clouds: Why Cloud Computing Will Reinvigorate Capitalism

Ed Lucente

I believe that the impact of cloud computing to the IT industry and to society at-large will be as significant as the Industrial Revolution was to market economies, otherwise known as capitalism. I’d like to explore the benefits of cloud computing, along with some potential threats. Incidentally, I refer to cloud computing in market economies as free market clouds. By this, I mean the coexistence of cloud computing and capitalism. Free market clouds, I predict, will unleash a wave of economic growth and opportunity, creating new benefits for individuals and firms by facilitating access to massive amounts of IT resources and services.

After a brief history on capitalism, I’ll consider how free market clouds can impact business, government, and society, including:

• Who will be the early adopters?

• How will free market clouds deliver benefits to business, government, and society?

• What will be some threats to a thriving cloud computing ecosystem?

Finally, I’ve provided footnotes to reference sources at the end of this essay in case readers wish to dig deeper.

On Capitalism

I think it’s important to provide some history on the origins of free markets (a.k.a., capitalism). Here are two definitions by two respected business historians, Thomas K. McCraw and David S. Landes:

What exactly does “capitalism” mean? At a minimum, a capitalistic system is organized around a market economy that emphasizes private property, entrepreneurial opportunity, technological innovation, the sanctity of contracts, payment of wages in money, and the ready availability of credit. Under capitalism, property must be “alienable,” that is, freely bought and sold. The “value” of a good or service means whatever price someone will pay for it…“Capitalists,” then, are people who make bets on the future. The essence of capitalism is a psychological orientation toward the pursuit of future wealth and property. It’s all about aspiration and striving, measured by gains and losses in wealth and income. It rests on the belief that economic growth, even substantial growth, is possible and desirable — for an individual, a family, a business firm, an industry, even an entire country.¹

The decisive and most distinctive American innovation, though, was not any particular device, however important, but a mode of production — what came to be called the American system of manufactures. This was a creative response to (1) a market free of the local and regional preferences and the class and status distinctions that prevailed in Europe, hence ready to accept standardized articles; and (2) the scarcity of labor relative to materials. The two were related. In a labor-scarce economy, standardization was a way of dividing, hence of simplifying, tasks and making them repetitive, thus substantially enhancing productivity.²

So then, capitalism is a combination of economic and cultural principles based on free markets, private property, freedom to take risks, access to wages and credit, the right to accumulate wealth, specialization of labor, and deep-seated values among individuals and firms to strive for their full potential and growth.

Early Adopters

According to David Linthicum, a recognized IT industry expert, areas where cloud computing might be a fit are:

• When the processes, applications, and data are largely independent (loosely coupled).

• When the points of integration are well-defined.

• When a lower level of security will work just fine.

• When the core internal enterprise architecture is healthy.

• When the browser is the desired interface.

• When money is tight.

• When the applications and/or services are new.³

I can’t argue with these technical postulates since they make good sense, but I’d also add other profiles:

• Early adopters will include businesses that need to improve communication with their customers and business partners. (This does not rule out many.)

• Early adopters will include innovative, small businesses that need ready access to IT and global markets in order to grow and compete against incumbent corporations. (The surrealistic ideal of David beating Goliath can become a reality for start-ups.)

• Early adopters will include industry verticals that have been served poorly by traditional client/server computing models.

• Early adopters will include businesses within a common industry that have much to gain by centralizing data in order to share information better with their customers, like healthcare.

• Early adopters will include research entities — such as engineering and research labs at universities or pharmaceuticals — that require analysis of massive amounts of data and access to high performance computing resources.

Free Market Clouds Will Deliver Benefits To Business, Government, And Society

Benefits to Business

It’s easy to create a quick (though incomplete) laundry list of potential business benefits if we assume the following positive impacts of free market clouds:

• Self-service (no third-party intervention needed to access IT services).

• Metered access to IT resources and services (pay-as-you-go).

• Scale up, scale down capability.

• IT standardization, including widely accepted APIs to prevent cloud service provider lock-in.

• Dramatically lower upfront cash outlays (CapEx) for on-premises IT equipment.

• Easier broadband access to compute, data, and networking resources.

• Less expensive broadband access to compute, data, and networking resources.

• Ubiquitous, mobile access to reams of compute, data, and networking resources.

• Customer and product focus vs. “on-premise technology distraction.”

• Easier market analytics (i.e., consumer behavior metrics).

• Intense competition among cloud service providers.

• Free and easier information sharing.

• Lower IT labor costs for firms.

I anticipate that these free market cloud impacts will then benefit business in many areas, including:

• Increased product innovation.

• Increased research and engineering effectiveness.

• Net job creation as innovative ideas turn into new businesses.

• Improved employee productivity.

• More customer choice.

• Lower supply chain costs.

• Lower customer prices.

Benefits to Government

Over the past ten years, the number of federal data centers has grown from 498 to more than 1,200. Earlier this year the Federal Government launched their Data Center Consolidation Initiative, the cornerstone of which is cloud computing. The Federal Government understands the efficiencies and transformative benefits of cloud computing, like:

• Reducing data center carbon footprints.

• Reducing wasted real estate.

• Improving data center energy efficiency.

• Improving inter- and intra-agency communication.

• Improving outward-facing public services by consolidating data and enabling browser access.

The Federal Government not only “gets it” but is an early adopter. In his February 2010 memo, Vivek Kundra, Federal Chief Information Officer, explained:

The Data Center Consolidation Initiative is broken down into 6 key phases and is designed to first assess and inventory the current agency environment and then establish a plan for achieving significant reductions in data center build through the use of server virtualization and Cloud Computing technologies.  Additionally, this initiative aims to reduce overall energy consumption by data centers across the Federal Government, while reducing the physical real estate and other key costs drivers associated with data centers.⁴

Benefits to Society

According to Bill Drayton, CEO, and Valeria Budinich, founder, of Ashoka, a global association of leading social entrepreneurs:

The time is ripe for collaboration between for-profit businesses and mission-driven individuals and organizations, or citizen-sector organizations (CSOs). Collaborations between corporations and CSOs (many of whom are entrepreneurs) can create and expand markets on a scale not seen since the Industrial Revolution. These markets will reach everyone, but especially the 4 billion people who are not yet part of the world’s formal economy. Since the 1980s, for example, the citizen sector has been creating jobs about three times as fast as have other employers in the Organisation for Economic Co-operation and Development countries. In Brazil, the number of CSOs rose from about 36,000 to nearly a million over the past 20 years. In the United States, their number has grown by more than 300% since 1982.⁵

By making it easier and less costly for CSOs to access to computer resources and to collaborate with for-profit businesses or corporations, it stands to reason that free market clouds should help to fuel positive, collaborative results (e.g., job creation) between people in need and private business.

Threats To A Thriving Cloud Computing Ecosystem

It seems to me that the two most obvious threats to a thriving cloud ecosystem are:

• Natural monopolies occurring within cloud service providers.

• Too much government regulation.

Among cloud computing service providers today, there is intense competition; the players can be described as being fragmented. Inevitably, there will be a shake-out as the business matures, which can lead to the “winners” being only the largest cloud service providers. The reason for this is that there are profound financial and operational economies of scale for cloud service providers as they build out their infrastructure for clients — efficiency improvements of 5-10X have been estimated for large, well-run cloud data centers vs. traditional on-premise data centers. For example, Amazon Web Services, which just celebrated its fourth anniversary, is about to break through the $500 million revenue threshold in 2010. UBS estimates that Amazon Web Services’ net income will expand roughly 50-70% each year through 2014, a truly incredible business model. The point is that Amazon Web Services has become a powerful engine for profit and cash generation due to its large scale.

Other competitors, such as ATT, Level 3 Communications, IBM, CA, HP, Rackspace, Savvis, and Terremark are trying to catch-up to Amazon Web Services’ scale (perhaps some have already), and they should be able to compete toe-to-toe successfully into the future. Smaller cloud service providers, however, are likely to disappear over the next decade. Less competition in any business leads to less choice and higher prices for clients, so this could become a threat when the cloud service provider industry undergoes consolidation in the future.

Also, history has proven that too much government regulation in any business sector is damaging to its growth and continued success. On government regulations in a free market economy, Friedrich Hayek, the renowned economist argued that:

Government regulations will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or, what amounts to the same thing, reduce over-all productivity.⁶

Hayek, therefore, prescribed the avoidance of “factory legislation” whenever possible.

Similarly, Alfred Chandler and Richard Tedlow, business historians at Harvard, reaffirmed Hayek’s thinking:

Most regulation occurs at the borderlands of politics, law, and economics, and those who have shaped its evolution have come from these three fields. Of the three, the first two have tended to overshadow the third, and considerations of politics and legal process have customarily triumphed over those of economic efficiency.⁷

The bottom line: Government shouldn’t regulate free market clouds much.

Wrap-Up

Time will tell whether free market clouds will reinvigorate the beneficial, pro-growth economic forces of capitalism, which began in England around 1760 with the invention of the steam engine for coal mining. For skeptical readers who doubt the merits of capitalism, please remember these historical facts:

• Per capita income in the West was flat for 1,000 years prior to industrialization and market economies.

• Then per capita income in the West rose by 20% in the 1700s.

• Then per capita income in the West rose by 200% in the 1800s.

• Then per capita income in the West rose by 740% in the 1900s.⁸

My hope is that business, government, and society will continue to create fertile ecosystems for cloud computing to thrive, just as many Western market economies have done for capitalism for 250 years.

Footnotes

1. Thomas K. McCraw, Creating Modern Capitalism: how entrepreneurs, companies, and countries triumphed in three industrial revolutions (Cambridge, Massachusetts, and London, England: Harvard University Press, 1997), 3-4.

2. David S. Landes, The Wealth and Poverty of Nations: Why some are so rich and some so poor, (New York:  W. W. Norton & Company, Inc., 1998), 301.

3. David S. Linthicum, Cloud Computing and SOA Convergence in Your Enterprise: (Upper Saddle River: Addison-Wesley/Pearson Education, 2010), 186.

4. Vivek Kundra, State of Public Sector Cloud Computing: (Washington, D.C.: CIO Council Paper from the Federal Chief Information Officer, May 20, 2010).

5. Bill Drayton & Valeria Budinich, Can Entrepreneurs Save the World? (Boston: Harvard Business School Publishing Corporation, 2010), 58-59.

6. Friedrich A. Hayek, The Constitution of Liberty, (Chicago, The University of Chicago Press, 1960), 61.

7. Alfred D. Chandler, Jr. & Richard S. Tedlow, The Coming of Managerial Capitalism: A Casebook on the History of American Economic Institutions, (Homewood, Illinois: Richard D. Irwin, 1985), 9.

8. Bill Drayton & Valeria Budinich, Can Entrepreneurs Save the World? (Boston: Harvard Business School Publishing Corporation, 2010), 58.

About the Author
Edward J. Lucente is V.P. of Business Development at Data Center Rebates, Inc., an IT efficiency consultancy based in Carlsbad, CA, whose professional services focus on data center energy efficiency (DCEE), leasing integrated with technology refreshes, and negotiation of IT energy rebates. Please feel free to email comments to ed.lucente@datacenterrebates.com.
 

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