federated clouds

I have long been talking about Federated Clouds and how it plays a significant role in meeting the needs of the market, especially enterprise customers. It not only meets the diverse needs of global users and regulatory requirements imposed by their local governments, it also acts as an antidote for natural market monopoly. This brief post will take a look into how federated cloud ecosystems change the economics of the cloud marketplace.

Conventional wisdom, mainly in the western nations, is based on the economics of scarcity which leads to the assumptions about consolidation in the market. Based on this conventional wisdom, pundits are busy predicting a consolidation in the cloud infrastructure market dominated by handful of players like AWS, Google, Microsoft, etc.. They usually quote electricity industry as an example and argue that we will see a similar pattern emerging in the IT services. However, the core unit of electrical power is the electron and it has fixed core attributes and it is not regulated by any government. Since electron is a fundamental particle, it was relatively easy to standardize in the electricity sector. The core unit of IT services is data and it doesn’t have a small set of fixed attributes like electron and, more importantly, it is governed by regulations of various types. This important difference makes the comparison with electricity industry a first order approximation and fails big when applied in the enterprise context. Another reason why consolidation was easy in non software sectors and early days of software industry was the lack of a concept like open source that lowered the barriers to entry and opened up the market for competition. With the advent and maturity of open source software in the last two decades, the underlying dynamics has shifted completely (in the software market) and we cannot apply the outdated economic models of pre-open source era any more. We need a new model based on the economics of abundance. Unlike the technology industry of the past (including traditional software industry), open source is part of the market from the very beginning of cloud computing. This opens up several interesting possibilities and the idea of federated clouds is one such possibility.

The natural question in the minds of industry watchers is the scaling ability of small service providers. If cloud is about elasticity, how can small providers meet the scaling needs of their customers. Let us be realistic here. At this point in time, there are very few users (like Netflix) who will need the scale offered by AWS or Google. The scaling needs of most of the workloads (especially in the enterprise) are limited and can be easily met by any provider of reasonable size. Also, most of the cloud platforms these days support interoperability and workload portability. Smaller providers can take advantage of this defining characteristic of cloud federation to offer the much needed elasticity for their users. This is not something new and this idea was put to use by the now defunct European cloud provider, ScaleUp technologies, few years back. There are other smaller cloud providers who are taking advantage of this ability to scale with cloud federation. This is the core of my federated cloud thesis and this brings into focus the economics of federated clouds.

As I previously mentioned, the economics of abundance brings in a completely different set of economic principles to the market. Unlike in the other model, we may not see the emergence of multi-billion dollar marketshare with one player having monopoly domination. Rather, we will see a more competitive market with varying levels of marketshare. Also, unlike in the case of handful of cloud providers thesis, the monetization is through multiple channels. In a consolidated cloud infrastructure market, service provider sell directly to the end customers needing access to their infrastructure whereas, in a federated cloud ecosystem, service providers not only sell to the end users but also to other service providers. This opens up more opportunities for higher order services like cloud brokers or marketplaces shifting the entire dynamics of the market. This idea has been emphasized by Antonio Celesti, et. al. in their paper Toward Cloud Federation: Concept and Challenges. Their paper also highlight another interesting aspect of the changed economics in federated clouds. Cloud federation, along with other advantages, helps service providers save their costs significantly by optimizing their operations by effectively taking advantage of federation during their lean times. Instead of keeping lights on in their datacenter to handle handful of workloads during their lean times, they can federate out to their partners in the federated cloud ecosystem and, thus, save considerable money in the process.

In short, the economics of federated cloud ecosystems are completely different from what we expect in a market driven by traditional economic forces. The changed economics levels the playing field for service providers by opening up newer opportunities and helps keep the market competitive (ultimately empowering the end users). In order to understand the idea of cloud federation, it is critical to understand how the economics of the market shifts with this model.

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