|By Sunil Pathak||
|May 26, 2014 12:00 PM EDT||
Commodities are usually produced and/or sold by different companies with no perceived difference in quality and product / service offering. This is true for any commodity - wheat, oil or electricity - at least in an ideal world.
Commodities are also full or partially fungible. Fungibility means all instances are considered equal. Okay.
Now let's take IaaS which provides raw compute power. Compute power is a function of multiple factors - data center, processor configuration, CPU speed, compiler, kernel, file system, os, RAM, Disk, etc. On top of that providers create multiple configuration of these. The permutations and combinations are multiple and so we have multiple variations.
As an Example - Amazon uses what it calls "EC2 Compute Units" or ECUs, as a measure of virtual CPU power. Amazon ECU is also referred to as a 2006 Xeon running at 1.7 GHz. Amazon treats the two as equivalent. Microsoft uses a different standard CPU as the measure of its virtual CPUs--designating the Intel Xeon 1.6 GHz CPU as its standard. This is a slightly newer chip with a stepped up clock speed, CPU specs differ.
Purists argue that precisely because of the above reason, IaaS cannot be a commodity as the instances are not equal..... Fair assumption. But now Let's go 1 step further...
Consider a perfect Soft Commodity - Wheat which is graded on multiple parameters - Foreign matter(organic and inorganic), country of origin, damaged grains, grain size, Immature/Shriveled grain, moisture content, Poisonous/ heavy metals, microbial load, sweet, hardness, cleanliness, smell etc. Each attribute has to be measured and graded.
Now Consider Oil - which is graded on benchmark Crude or marker crude index. There are typically three primary benchmarks - WTI, Brent Blend, and Dubai. Other well-known blends include the Opec basket, Tapis Crude (Singapore), Bonny Light (Nigeria) and Isthmus (Mexico). As a matter of fact, there are close to 200 major crude streams or blends.
So, the argument around fungibility and uniformity across instances doesn't hold good.
Takeaway #1 - The whole point around fungibility, uniform quality around IaaS is a fallacy. It is no different than established commodities as far as uniformity and fungibility across instances are considered. Only missing link is a grading system of calculating the compute unit.
- Fallacy - There is considerable ‘Real' Value-add / product feature differentiation in IaaS market.
Commoditization occurs as goods or services market lose differentiation. IaaS in current market have no real product / service differentiation. What differs is the spread, price points, and product / service packaging.
The product differentiation delusion created by most companies is more of a marketing strategy.
We all know that there are differences in underlying technology and hardware specs these are often hidden....... and this underlying fact is the recipe for commoditization. The race to communization is synonymous with the "Me Too strategy with a different packaging / price point but no transparency." This is done to so that users can not differentiate. What a paradox - Commoditization due to differentiation (albeit false).
Fact is that aall IaaS services perform similar functions, but it's hard to compare the value of one cloud infrastructure service with another? I would have argued otherwise if service providers would actually provide detailed hardware specs / performance of their service on a common base where they can be compared apples -to- apples and lemons -to- lemons. This would create ‘real' differentiation with no marketing gimmick.
A Benchmark IaaS Grade/ Index is what is needed and each service be rated on well-defined hard parameters.... (like benchmark Oil Index, or Wheat / Corn grade).
Takeaway #2 - Marketing and packaging differentiation cannot replace ‘real' product differentaition. This kind of product differentiation is a transient phenomenon until the market gets a proper compute unit grading system. That is when IaaS will be easy to compare. And at that point - commodity players will state that it is a commodity service and niche players can charge a premium for higher compute grade - which is measurable.
- Fact: Storage, perishable nature and Demand / supply driven attributes of IaaS makes it a commodity candidate.
Electricity under normal operating conditions cannot be stored, has to be rationed or have customers queue for it and its demand and supply can vary continuously. It has to be consumed as soon as it is created.
IaaS is a perfect match on these commodity attributes. It cannot be stored but can be rationed, metered and billed, consumed and very much dependent on demand and supply factors.
Takeaway #3: Attributes and nature of IaaS match that of a true commodity candidate.
- Fact - Pricing Trends
When there is little or no real difference in products / services, consumers shop on price. Producers of commodities are driven to compete on low price and high volume. This is the trend in IaaS space and price wares on. Wait for hard data in my next article.
The product life cycle is at a point where significant customer education is now not required and cloud is generally accepted and adopted. The market has matured enough to have attracted multiple competitors, and the market is expanding. Prices are declining to gain market share as there is no value play.
Takeaway #4 - IaaS Price trends are perfect indicators for IaaS becoming a commodity.
- Fact: Commodities are used in production of other goods and services.... Value play is up in chain
Commodities are most often used as inputs in the production of other goods or services. The shades and grades of a given commodity may differ slightly, but it is essentially uniform across producers - in terms of basic purpose and use. Point is value play is up in the value chain.
‘IaaS' is the ‘crude oil' that is used to create ‘Software / Platforms' like ‘Gasoline and Kerosene'.
This is what Larry Ellison - who built the kingdom of oracle on high-margin products, said - "We intend to compete aggressively in ... the commodity infrastructure as a service marketplace. We are going to be cost competitive and price competitive at the infrastructure level while being highly differentiated at both the platform level and the application level".
Takeaway #5 - IaaS is a mere enabler to create other services and from that perspective - a perfect commodity candidate. The real value play is in Applications and Platforms - up in value chain - where there is unlimited ‘real' differentiation / customization based on user needs and requirements.
- Fact - Evolution of IaaS Trading Exchanges
Commodities are usually sold on exchanges that standardize the quantity and minimum quality of the commodity being traded. We have already seen multiple attempts being made on IaaS on an exchange trading path.
Chicago Mercantile Exchange (CME), a global derivatives marketplace, recently to develop and market an IaaS spot exchange that will list financial products based upon propriety workload definition.
And not to mention Amazon's EC2 spot pricing.
Takeaway #6 - IaaS Commoditization has already begin and accepted. Commoditization in the form of exchange trading platforms are starting to sprout. The IaaS market spectrum is going to shrink. Future of IaaS will be all about low cost, low margin, high volume and a high efficiency game unless some player can clearly differentiate (not ‘Market') and set itself apart to be able to charge a premium.
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