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
the challenges to
could be solved
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.
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.
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.
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 ( email@example.com) is a professor at the
mit sloan school and the director of the mit center for
digital business in cambridge, ma.
Paul hofmann ( firstname.lastname@example.org) is a vice
president at saP labs in Palo alto, ca.
John Jordan ( email@example.com) is a senior lecturer
in the smeal college of business at Penn state university.