Cloud as a Commodity

Dec 26 2014 | by Zev Schonberg

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The financial market aspects of Cloud computing and storage are developing in completely unforeseen ways. We are referring to word on the street about cloud services being traded on a commodities exchange.

At first glance this sounds like a radical way of purchasing computer services. However, the rationale is that storage or computing resources are generic and interchangeable, and companies should be able to buy their cloud requirements from an exchange where all suppliers compete on price for similar services. Once purchased, cloud resources can then be traded, hedged or re-sold.

Cloud brokers already exist, so it’s entirely possible that cloud storage and computing is moving in the direction of a dynamic financial market.

A cloud broker manages the accounts of hundreds of small clients, similar to the way in which a stock broker manages the portfolios of her clients. The broker can get better pricing (returns) due to their volume and then they allocate the resources among their clients. But due to their volume they need to predict their clients’ required resources at any given time and ensure they have the computing capacity available. So brokers buy a variety of services from primary cloud vendors, speculating on part of their purchase, and distribute the cloud resources to their clients.

Deutsche Börse and the Chicago Mercantile Exchange

The brokerage aspect and nature of the cloud business has led Deutsche Börse and Zimory, the latter a German cloud services company, to launch a joint venture with the aim of creating an active exchange market in cloud services. In the US, the Chicago Mercantile Exchange is planning to launch a similar operation. Both proposals are looking at the wider Infrastructure as a Service (IaaS) market, beyond cloud services.

Deutsche Börse has already launched a beta site where they describe in detail the advantages of standardization and how the system will work. Cloud consumers can apply to become beta testers.

Points to Ponder

From a theoretical standpoint these developments are fascinating and demonstrate how closely connected cloud computing is to the world of finance. However, there are two significant challenges to overcome and some believe that they will prove insurmountable at the current time. The challenges are both technical and business-related.

Business Challenges

By participating in a bourse-type marketplace, the big players in cloud services risk commoditization of their services, erosion in product differentiation and reduction in profit margins. Deutsche Börse list many partners but significantly Amazon Web Services, Google Cloud, Microsoft Azure and even IBM Cloud do not appear as partners. Without the cooperation of the industry heavyweights it is doubtful that the bourse initiative will gain the traction required for a long-term trading model.

That said, Deutsche Börse have invested significant resources in their exchange and it will be interesting to watch and analyze both the preliminary and short-term results. Some analysts speculate that if the likes of Deutsche Börse and the Chicago Mercantile Exchange succeed, then a two tier cloud market could develop. That is, the large players will continue to offer their innovative and differentiated services, and smaller cloud vendors will offer generic services on an exchange.

Even if the exchange idea does not succeed, many lessons will be learnt and it will be interesting to see how this affects the future of cloud computing and the wider world of Infrastructure as a Service (IaaS).

Technical Challenges

Portability: If a company’s data is stored on AWS, how easily can it be ported to Google Cloud if the latter becomes cheaper?

Interoperability: When a company is using Microsoft Azure for a myriad of computing tasks based on a variety of virtual machines and ancillary services, will it be possible to convert to IBM Cloud, when IBM’s VMs are configured differently and their ancillary products are different from Microsoft’s?

The question of cross-platform portability is known as “lift and shift” and a number of technology companies are working on solutions to this quandary. It is far from trivial and still in the initial stages. Again, it is the interest of the large cloud vendors to create barriers and thwart this option before it gains wider industry appeal.

Summary

The way in which cloud computing services are purchased are currently experiencing attempts to commoditize the market and open it up to bourse-like exchanges. There are significant challenges to this model, not least business and technical hurdles that need to be overcome.

One thing is certain, the industry’s big players will do all they can to prevent this from happening and it will be fascinating to see how this plays out in the short to medium term.

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