In response to “No Future for cloud Futures”

Written October 8, 2014 by
Jack Bouroudjian
Chief Economist

I enjoyed reading Jonathan Murray’s blog post; it was well written and will most likely spark a lot of reaction, which I believe he was intending.  Playing devil’s advocate always elicits more dialogue and thought, creating greater visibility and validity to the proposition of a cloud marketplace, and for this reason, I thank him for his post (http://www.adamalthus.com/blog/2013/05/11/why-theres-no-future-in-cloud-futures/)

 

Jonathan’s definitions and examples make his argument easy to understand yet I believe he has missed the mark on several of his assumptions.  Below I have provided some information and opinions that refute his assumptions and begin to provide an argument for why a centralized marketplace for compute processing will exist.

 

Assumption: “Accessing cloud services requires little expenditure of energy on the part of the consumer… very little effort is required to find multiple suppliers…Google cloud hosting services”.   I agree with Jonathan that the Internet does provide access to a tremendous amount of information and if given enough time and effort a person might be able to find the required information one at a time. But there’s the rub, just having access to information is not enough. In order for information to be meaningful, it has to be quickly and efficiently retrieved in a format that makes it easy for consumers to analyze, understand and compare, in order to make an informed decision.  For fun I searched “Cloud Hosting Services”, yes multiple cloud hosting services appeared by name, some local and some national, but only a few for both. This demonstrates that one search query does not provide a true market sample of the 1000’s of cloud hosting service providers that exist in the market today.  What also didn’t appear were their offers in a clear and concise manner so I could compare which offer and price worked best for me.  A centralized market place would provide market transparency for suppliers and consumers, enabling them to access standardized contracts and engage in price discovery of those contracts.

 

Assumption: “The energy expenditure by consumers to compare costs [of cloud providers] is just not that great.”  I totally disagree with this assumption.  Most cloud providers only quote two of the six-compute resources, usually RAM and CPU.  And these resources are usually quoted by size – small, medium, and large, making it difficult for a consumer to understand what he is being quoted, without further investigation. The other resources are then priced as additions to the original quote, i.e. data transfers, which again adds complexity.  Comparing these resources across five suppliers can be very difficult, let alone trying to do this across thousands of suppliers.

 

Assumption:  3rd party market makers are non-essential and provide little value to the consumer.  For this to be true, every organization would already have to have a full understanding of the cloud, the different type of cloud service offerings, comparable costs of those offerings, and which type of offering is best for their application and business.   They would need to understand their internal cost of consumption and if there is a cost benefit for moving their applications into the cloud.  3rd party market makers, broker/dealers, resellers, and VARs will play an important role for enterprise organizations by providing advisory, educational and consultative services, helping organizations understand their consumption needs, forecasting and predicting future consumption needs as well as helping them hedge their IT risk.

 

Assumption: “Cloud providers as well as consumers will not permit 3rd party market makers to insert themselves into the supply chain because it reduces margins for the suppliers and raises prices for the consumers.”   False, 3rd party market makers will play a vital role in providing liquidity to a marketplace.  Just one example of this would be for a 3rd party market maker to purchase large amounts of future processing power at a discounted rate and then resell smaller quantities of that processing power to consumers at below spot prices, making this attractive to both the supplier and the consumer.

 

Assumption: “Where is the volatility?”  Volatility will be driven by seasonal demand, fluctuation in power pricing, government regulations, international policy, creation of new technologies, hardware manufacturer’s supply output, economic conditions, weather conditions, as well as regional and geographical locations of data centers.

 

An example of governmental regulation that could cause volatility here is a recent opinion that was given from the Southern District of New York.  The opinion, which interprets the “means of interstate commerce” under the Foreign Corrupt Practices Act (FCPA), has opened the door for the United States federal judiciary to exercise jurisdiction over virtually any internet communication, even when the communication both originates and terminates outside the physical jurisdiction of the U.S.  Specifically, the SEC claimed that the court had jurisdiction because communications were “routed through or [had] been stored on network servers located within the United States”.  This opinion would likely cause hesitation on the part of some consumers causing them to pay a premium to ensure that the cloud supplier they used was physically located outside of the United States. http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202600886876&Cloud_Computing_and_Unexpected_FCPA_Jurisdiction&slreturn=20130421082834

Others examples of what could cause volatility could include:  massive increases in power pricing due to an unseasonably hot summer, the introduction of a new core processor, or even instability in a region of the world causing mass movement of processing to others parts of the world, as well as terrorist attacks, hurricanes, tornados and floods.  All of these could cause volatility in a cloud marketplace.

 

Lastly Jonathan touched on the “viability of a secondary – derivatives – futures market.”  A secondary market will not emerge until the foundation and formation of a primary cloud marketplace exists. The foundation will include a recognized standard unit of measure, contract specifications, participation by a major exchange, admission criteria, and the willingness of supply and demand to participate in the trading of compute.  Once a primary market (OTC, Spot market) has been established and the underlying cash market has reached a critical mass, then a secondary, derivatives market will emerge, enabling both suppliers and consumers to trade, forecast, speculate, hedge and consume future compute-processing power.