IT in house: reliability, strategic advantage, or cost visibility.

Latency: Distance is Not Dead. One of the few immutable laws of physics is the speed of light. As a result, latency remains a formidable challenge. In the network realm, the demands for nearly instantaneous execution of machine-to-machine stock trades has led financial services firms to locate their data centers as physically close to stock exchanges as possible. The read/write limits of magnetic disks can only drop so far, but increased speed comes at the cost of capacity: big disks are slow, and fast disks are small. For many classes of applications, performance, convenience, and security considerations will dictate that computing be local. Moving data centers away from their customers may save on electricity costs, but those savings are often outweighed by the costs of latency.

Beyond electricity: the
Business model of the cloud

Important as the technical differences are between electricity and cloud computing, the business model differences are even more profound.

Complementarities and Co-invention. Like electricity, IT is a general-purpose technology. This means that critical benefits come from the co-inventions that the basic technology makes possible. It took 30 to 40 years for the full benefits of electricity to redound to America’s factories. 5 Initially, assembly lines and production processes were not redesigned to take advantages of electricity: large central steam engines were simply replaced with large electric motors, and then hooked up to the same old crankshafts and cogs. Only with the reinvention of the production process was the potential of electrification realized. Today, electricity has matured to become a relative commodity. In contrast, computing is still in the midst of an explosion of innovation and co-invention. 2 Firms that simply replace corporate resources with cloud computing, while changing nothing else, are doomed to miss the full benefits of the new technology.

The opportunities, and risks, from IT-enabled business model innovation and organizational redesigns are reshaping entire industries. 3 For instance, Apple’s transition from a perpetual license model to the pay-per-use

if the utility model
were adequate,
the challenges to
cloud computing
could be solved
with electricity-like
solutions—but
they cannot.

i Tunes store helped it quadruple revenues in four years. The tight integration between Apple’s ERP system and the billing engine handling some 10 million sales per day would have been difficult, if not impossible, in the cloud.

Lock-in and Interoperability. Lock-in issues with electricity were addressed long ago by regulation of monopolies, then later by legal separation of generation from transmission and the creation of market structures. Markets work because electrons are fungible. The rotary converter that enabled interconnection of different generating technologies in the 1890s has no analog for the customer of multiple cloud vendors, and won’t anytime soon. For enterprise computing to behave like line voltage will require radically different management of data than what is on anyone’s technology roadmap.

Perhaps most critically, bits of information are not electrons. Depending on the application, its engineering, and its intended use, cloud offerings will not be interchangeable across cloud providers. Put more simply, the business processes supported by enterprise computing are not motors or light bulbs.

Security. The security concerns with
cloud computing have no electricity
analog. No regulatory or law enforce-
ment body will audit a company’s
electrons, but processes related to
customer data, trade secrets, and clas-
sified government information are all
subject to stringent requirements and
standards of auditability. The typically
shared and dynamic resources of cloud
computing (including CPU, network-
ing, and so forth) reduce control for
the user and pose severe new security
issues not encountered by on-premise
computing behind firewalls.

conclusion

If the utility model were adequate, the challenges to cloud computing could be solved with electricity-like solutions—but they cannot. The reality is that cloud computing cannot achieve the plug-and-play simplicity of electricity, at least, not as long as the pace of innovation, both within cloud computing itself, and in the myriad applications and business models it enables, continues at such a rapid pace. While electric utilities are held up as models of simplicity and stability, even this industry is not immune from the transformative power of IT. 8, 9 Innovations like the “smart grid” are triggering fundamental changes at a pace not seen since the early days of electrification.

The real strength of cloud computing is that it is a catalyst for more innovation. In fact, as cloud computing continues to become cheaper and more ubiquitous, the opportunities for combinatorial innovation will only grow. It is true that this inevitably requires more creativity and skill from IT and business executives. In the end, this not something to be avoided. It should be welcomed and embraced.

 

References

1. armbrust, m. et al. a view of cloud computing.

Commun. ACM 53, 4 (apr. 2010), 50–58.

2. bresnahan, t., greenstein, s., brownstone, d. and flamm, k. technical progress and co-invention in computing and in the uses of computers. Brookings Papers on Economic Activity—Microeconomics (1996), 1–83.

3. brynjolfsson, e. and saunders, a. Wired for Innovation: How I T is Reshaping the Economy. mit Press, cambridge, ma, 2010.

4. carr, n. The Big Switch: Rewiring the World, from Edison to Google. norton, new york, 2008.

5. david, P. the dynamo and the computer: an historical
perspective on the modern productivity paradox.
American Economic Review 80, 2 (1990), 355–361.

6. foley, J. Plug into the cloud. Information Week (sept. 28, 2008).

7. hamilton, J. internet-scale service efficiency. in Proceedings of the Large-Scale Distributed Systems and Middleware (LADIS) Workshop, (sept. 2008).

8. hughes, t. Networks of Power: Electrification in Western Society, 1880–1930. Johns hopkins university Press, baltimore, md, 1983.

9. Waltz, d. and king, J. Information Technology and America’s Energy Future. computing research association White Paper, Washington, d.c., 2009.

 

Erik Brynjolfsson ( [e-mail]) is a professor at the mit sloan school and the director of the mit center for digital business in cambridge, ma.

Paul hofmann ( [e-mail]) is a vice president at saP labs in Palo alto, ca.

John Jordan ( [e-mail]) is a senior lecturer in the smeal college of business at Penn state university.