I have been struggling for sometime now to understand why cloud computing and cloud storage have suddenly become so popular. We have previously discussed some of cloud problems (here and here) but we have never touched on why cloud has become so popular.
In my view, SaaS or ASPs and MSPs have been around for a decade or more now and have been renamed cloud computing and storage but they have rapidly taken over the IT discussion. Why now?
At first I thought this new popularity was due to the prevalence of higher bandwidth today. But later I determined that this was too simplistic. Now I would say the reasons cloud services have become so popular, include
- Bandwidth costs have decreased substantially
- Hardware costs have decreased substantially
- Software costs remain flat
Given the above one would think that non-cloud computing/storage would also be more popular today and you would be right. But, there is something about the pricing reduction available from cloud services which substantially increases interest.
For example, at $10,000 per widget, a market size may be ok, at $100/widget the market becomes larger still, and at $1/widget the market can be huge. This is what seems to have happened to Cloud services. Pricing has gradually decreased, brought about through hardware and bandwidth cost reductions and has finally reached a point where the market has grown significantly.
Take email for example:
- Microsoft Exchange costs $67/CAL (client access license) and a Standard Edition Exchange 2010 server license costs $699 (Enterprise Edition is $3999). BTW, these are the same prices as Exchange 2007 and as far as I can tell similar to Exchange 2003 pricing.
- Google gmail enterprise license costs $50/user and Microsoft Exchange Online costs $5/user month ($60/year) with a 5 user minimum.
Now with Google or Exchange Online you have to supply internet access or the bandwidth required to access the email account. For Exchange, you would also need to provide the internet access to get email in and out of your environment, servers and storage to run Exchange server, and would use internal LAN resources to distribute that email to internally attached clients. I would venture to say the similar pricing differences applies to CRM, ERP, storage etc. which could be hosted in your data center or used as a cloud service. Also, over the last decade these prices have been coming down for cloud services but have remained (relatively) flat for on premises services.
How does such pricing affect market size?
Well, when it costs ~$1034 (+ server costs + admin time) to field 5 Exchange email accounts vs. $250 for 5 Gmail ($300 for 5 Exchange Online) accounts the assumption is that the market will increase, maybe not ~12X but certainly 3X or more. At ~$3000 or more, I need a substantially larger justification to introduce enterprise email services but at $250, justification becomes much simpler.
Moreover, the fact that the entry pricing is substantially smaller, i.e., $~2800 for one Exchange Standard Edition account vs $50 for one (Gmail) email account, justification becomes almost a non-issue and the market size grows geometrically. In the past, pricing for such services may have prohibited small business use, but today cloud pricing makes them very affordable and as such, more widely adopted.
I suppose there is another inflection point at $0.50/mail user that would increase market size even more. However, at some point anybody in the world with internet access could afford enterprise email services and I don’t think the market could grow much larger.
So there you have it. Why cloud, why now – the reasons are hardware and bandwidth pricing have come down giving rise to much more affordable cloud services opening up more market participants at the low end. But it’s not just SMB customers that can now take advantage of these lower priced services, large companies can also now afford to implement applications which were too costly to introduce before.
Yes, cloud services can be slow and yes, cloud services can be insecure but, the price can’t be beat.
As to why software pricing has remained flat must remain a mystery for now but may be treated in some future post.
Any other thoughts as to why cloud’s popularity has increased so much?
Great post Ray and you are on to something with the software.
Funny how most discussions are centered on hardware costs or facility costs or even people, yet as you point out software is an opportunity.
Anyway, groups such as CWBA (Common Wealth Bank of Australia), BoA (Bank of America) and others are banding together to do something about the continued high software costs citing companies such as HP, IBM and Oracle among others. (Read more here: http://idc-insights-community.com/posts/4de2f642c… )
However, in the quest to escape the clutches of say Oracle or HP or IBM or Microsoft or CA or Symantec, whose arms do you run into that currently appears as the white knight only to find out later how sticky their arms or reach become. Im not convinced that there is an easy answer and thus are the open cloud service provider arms today the arms dealers of the future or do they shift the point of vendor lock in? Of course that begs the question of if vendor lock in is good or bad which is probably an it depends answer.
Anyway, great post!
Cheers gs
Greg, thanks for your insight as always.As I got into the post more and more the surprising stability of software pricing kept coming out. I think open source (and their brothers in open cloud providers) is one answer to the software pricing problem. The other longer term potential for software price reduction is in how enterprise class software is developed and supported. I am convinced that if someone could reduce the effort in developing software/supporting software, say by a factor of 2 every 18 to 24 months we would see a sea change in IT.However, the one thing holding back software is the very availability of ever cheaper hardware and bandwidth, obviating the need to produce better software. When yesterday's application can be 2X faster every 2 years without a rewrite, why spend the time and effort to redo it. If the software industry were required to rewrite an application from scratch every 18 to 24 months just so it would perform better we all might get better at it.Someday when Moore's law hits the wall we may see a return into better software development but until then we have stable software pricing.Ray
Ray granted HW is cheaper than it was, and you can pack more resources into a denser power/cooling/physical footprint and manage more people to support demand etc..
However, sw development costs are not coming down even with the current rage of sending off shore where on a line of code per person per day basis it looks cheap until you look at the actual defect and rework expense that happens in some cases. Sure open source can help, however there is still sw development time/cost associated and we have been hearing on the sw engineering front for decades how automation tools will help.
Guess what, the tools do help in that more code, some of it perhaps not optimized are able to be produced and deployed faster onto or into virtual environments that in turn help speed deployment on lower cost hardware.
Anyway getting back to SW pricing, sure customers are held captive by the vendors, sure the customers have choices including open source or creating initiatives, and however those are also all business tradeoff or risk decisions to be made.
Cheers
gs
Greg, thanks again for your comments.The lock-in factor is inherent in IT software packages. If it's not the data formats, it's the administration panel, if not that, then it's the user interface. Virtualization can certainly help in deployment, test, and administration but the lock-in is mostly at the VM level.As for offshoring and automation tools, these are just incremental improvements. Nothing approaching a 2X productivity improvement in 18-24 months yet.Regards,Ray