The Economist is hosting a cloud computing debate. Their opening position is “the cloud can’t be entirely trusted”. Parsing the sentence down to “entirely trusted”, taking a position of “complete disagreement” is unreasonable. Semantics aside, the debate has some good contributions.
George Gilbert, of TechAlpha, offered a guest commentary on Friday. Gilbert’s commentary speaks to the necessary industry transition for widespread cloud computing adoption, focusing on security issues, and relinquishing management control. Gilbert then speaks to the economic implications for organizations adopting cloud computing, and the vendors currently supplying those organizations.
“Adding to the challenges of the industry transition, some vendors just don’t want it to happen—and none with more intransigence than Oracle. The implications for business models are cautionary.
In an on-demand world, customers will be able to buy and deploy capacity "just in time" instead of "just in case". This has potentially profound effects on both hardware infrastructure vendors and server software vendors such as IBM, Microsoft and Oracle. In essence, even when customers choose to own their hardware infrastructure and software in the future, there will be tremendous pressure on vendors to price in the same on-demand way that customers will consume it.
Today, infrastructure hardware and server software capacity is consumed in a chunky manner because the software licences are typically allocated and bound to a physical box in perpetuity. To compensate for a lack of flexibility in provisioning, it is not uncommon for customers to purchase three years of capacity upfront. In IBM’s published explanation of its cloud-friendly pricing for its database which enables the use of incremental capacity, it claims average database server utilisation in its customer base of 5-20%.
As one Fortune 100 CIO put it succinctly, "Buying minutes of capacity that can float across different physical machines fits the current economic constraints a lot better than buying perpetual capacity tied to a specific physical box." Software vendors are already adopting this pricing model on public clouds like Amazon Web Services.
The transition to a pricing model where customers are able to pay for smaller increments of capacity in smaller increments of time will be highly disruptive to current vendor business models. The change pushes vendors to move closer to a utility-like subscription pricing model. For software companies in particular, having upfront recognition of perpetual licences give way to subscriptions would have a material impact on recognised revenues and reported earnings. Even if vendors were able to bill one or two years upfront, the cash flow and reporting of non-GAAP earnings would still not make up the difference.
Is there any wonder why Oracle’s CEO, Larry Ellison, dismisses cloud computing as nothing more than "water vapour"?”
