The Harsh Economics of Cloud Computing

With every major vendor lining up to provide cloud computing services, the feeding frenzy is well under way. The only question is how many of them will survive what promises to be a rapid vetting process that should lead to another major round of industry consolidation.

For all the talk about hybrid computing models where cloud computing services augment on-premise applications, the economic reality of this model likely will drive many of the providers of cloud computing services out of business. Thanks to advances in virtualization, customers are starting to think of cloud computing services as an on-demand source of underused compute resources. This means that rather than building out their own IT infrastructure to handle maximum capacity loads that might only happen a few days or month or even a couple of months a year, customers can build out just enough IT infrastructure to handle their average loads and then count on cloud computing services whenever they reach a certain threshold of performance capacity.

And the way they are going to go about doing that is asking the cloud computing service providers to dynamically bid on providing those services through what will amount to a reverse auction. In all likelihood, about a half-dozen cloud computing providers will be on the approved list based on their ability to meet guaranteed service performance levels. Then on a monthly, maybe even weekly basis, they will be asked to bid on fulfilling the excess compute resource requirements of the customer. It won’t take long for that process to consolidate a cloud computing service industry that now includes Amazon, all the major systems vendors, all the major telecommunications companies, every hosting vendor and a raft of startup companies.

While this bodes well for the customer, you can envision a world where the vast majority of the compute cycles in aggregate are being consumed in the cloud as customers come to rely on these services to augment their existing IT infrastructure. The cloud computing service providers hope that customers will move their entire infrastructure into the cloud. But that’s not likely to happen. But as cloud computing quickly becomes a commodity, you can be certain that at least half or more of the players in this space won’t be around to see how it all turns out.