Monday, January 28, 2013

Who Controls the Cloud Market – Providers or Consumers?

We first went from reserving cloud capacity to securing capacity on-demand, and then we even started to bid for unused capacity in the spot market – all in an effort to decrease cost in the cloud.  Can we take this one step further?  Instead of us bidding for capacity, wouldn’t it be interesting if we can get providers to bid for our demand?

Retail Supply Chain Market Analogy

In fact, this is a common phenomena in the retail supply chain industry.  For example, Walmart has a large amount of freight that needs to be shipped between different cities over the course of the year.  So, every year an auction is conducted in which Walmart lists all their shipments, and carriers such as JB Hunt, Schneider, Yellow etc. bid for the opportunity to carry these shipments using their fleet of trucks.  The reason carriers are bidding for retailer demand is because in general, capacity exceeds demand in the retail industry.

Cloud Computing Market

Keeping this in mind, let us now take a look at the Cloud Computing Market.  Does capacity exceed demand or is it the other way around?  A quick way to find out is by observing spot prices in the cloud market.  In today’s market, Amazon’s Spot Instances are 86% cheaper than their on-demand instances, and Enomaly’s SpotCloud also shows lower spot prices across the board.  This leads us to believe that capacity exceeds demand in the cloud market as well.  A related indicator is the predominance of data center consolidation initiatives in both the commercial and government marketplaces.
Since capacity exceeds demand, consumers have an upper hand and are in control of the cloud market at the moment.  Moreover, they should be able to replicate what is being done in the retail supply chain industry.  In other words, cloud consumers should be able to auction off their demand to the best fit lowest price cloud provider.

So, …

Consumers should seize the opportunity and control the market while the odds are in their favor i.e. Demand < Capacity.  At the same time, Service Integrators and Value Added Resellers can help Enterprise IT consumers in this process by conducting Primary-Market auctions using Cloud Service Brokerage technology.

1 comment:

Emrah Zarifoglu said...


I think you are touching a really important point in this blog. The cloud capacity is continuously increasing by the ever-expanding server farms and advances in the technology along with the decrease in costs. I think utilizing spot market prices is a good approach to understand demand/supply relations. But it won't necessarily tell the best answer because spot markets are more of an indicator of demand variation rather than a stable demand. Otherwise, a large chunk of the capcity is always utilized by some solid demand. Only a relatively small portion of the capacity goes to spot markets. To me, it is more of cutting from the opportunity cost for cloud providers. So we need more explicit and solid indicators (and more importantly data) to identify capacity/demand relation structure in the cloud. Then the next step is designing pricing and auctioning mechanisms for optimization of costs and revenues for customers and suppliers.