The debate over “cloud computing”, “software as a service”, the “value of mashups”, and “free really isn’t free” will go on for a very long time but the reality is – sooner or later – it all comes down to money.
In a recent telephone interview with Ray Ozzie, Microsoft’s Chief Software Architect, a number of these topics were touched upon within the framework of what Microsoft may or may not be doing. There was one interesting point made in the interview “the margins will still be higher to people who build solutions”. A commenter explains this point .
… there are basically 3 tiers of service in the cloud:
- one is the underlying server farm infrastructure of hardware and bandwidth
- two is a middleware cloud utility software platform
- three are the applications that reside on the cloud platform
I think MS will get vertically integrated in all 3, as they usually do. They will have higher margins at levels 2 and especially level 3.
The more interesting point – at least to the end users – was made in the comments …
… as [we] move toward services infrastructure development, how long until we see a new utility computing cost model and standard on par with KwH (electricity) for consumption and usage? mark my words, software is headed toward the electricity industry utilities standards model …
I am not sure where the balance is between our current “flat rate” consumer models and our “usage based” consumer models. For the first 100+ years of communications, people were happy to pay for telecommunications usage. However, now more and more people opt for flat rate packages. At the other end of the spectrum, people consume electricity, water, and heat with a usage model. One model promotes “use it as much and as often as you can” while the other promotes conservation. Some places have even switched models to change user behavior – towns which charge a “fee per bag of trash” is an example.
Companies who charge a flat rate are betting that the average user will not exploit the service beyond a profitable usage rate and when all users are aggregated the result is more profit.
Flat rates work best with application services (described as tier 3 above). While usage rates are accepted for commodities where the profit margins are low and there is no tolerance for gambling on how users will use the service. The internet is struggling with this problem now. It is really a tier 1 service and it is struggling with a tier 3 pricing model. The fact that all high speed internet service providers (Cable, DSL, and cellular data) monitor usage and have legal safeguards to shut off heavy users points to the fact that the “flat rate” model is a risky one and is likely to change soon.
The challenge is to find a price-point. In most of the utility cases, there is no competition so it is not realistic to say “whatever price the market will bare”. This inevitably means regulatory boards, government involvement, and legislation. It is already starting with internet access as customers complain about service “degradations” and the debate over net neutrality. The first step will be for service providers to determine the cost of their infrastructure (something they have already done). Next is for consumers to determine their usage. Most large corporations already do this but small companies and consumers likely have no idea how much or how little they use their internet connection. (I fall into this camp).
It would be a very interesting study to find out the profitability price point. For obvious reasons, no internet provider will publish their data but its possible to get a good idea if the data of large companies- who have no vested interest in selling their network bandwidth but need to track usage in order to keep their business operational.
Could this information be gathered publicly today ? How would we go about doing it ? Who would be willing to share their cost vs usage ? What “usage model” price point would be acceptable to consumers ? businesses ? government ?
So far this has all focused on the bottom and the top of the internet food chain. There is still the middle. In some cases, it is exposed directly as in cloud computing offerings by Amazon’s AWS. In other cases it is buried within the application offering as in Gmail where users get storage as part of mail (with some restrictions). But the lines are not really as clear as all of this. For example, Amazon charges bandwidth costs for storage. However, if your applications runs in their cloud and you use their storage, then bandwidth between the application and the storage is free.
Cloud computing has a much narrower target audience than either raw internet connectivity or applications. As such, it is likely to get compressed into one or the other layers – at least as far as billing and service models. All of this predicts the “data center” will become an operating expense and will be squeezed as much as possible, just like brick and mortar businesses and office space. the more you can make that “someone else’s cost” the easier your business. And a small number of highly efficient companies will continually optimize the offering to maintain a profit margin.
Speculation: All of this could be moot. Internet connectivity has very little value. The value is in the applications, information, and services. Imagine that the internet had a usage fee but browsing Amazon.com or eBay.com were free because those companies covered the cost of internet access as an incentive to use their service. Alternately, the internet connection might be free but you pay for your email service (either directly or because you accept advertisements). This latter model is being considered for cellphone data service. There are many different business models that *might* work. In the end, I predict internet access will go the way of electricity and water but there are other ways.