MENU
n9

Understanding Cloud Computing Competition, Environment and Finance

November 24, 2011 • Climate Change, Finance & Economics, STRATEGY & MANAGEMENT, SUSTAINABILITY & ETHICS, TECHNOLOGY

By Federico Etro

Cloud computing allows firms to rent computing power and storage from cloud computing providers, and to pay on demand; this improves productivity and at the same time has a positive environmental impact, creating new businesses, investments and jobs.

Cloud computing is going to reshape business in Europe and worldwide. It has been defined by the US National Institute for Standards and Technology as “a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.” It is a general purpose technology able to improve productivity in all sectors and, at the same time, to have a positive environmental impact. Through cloud computing, firms will be able to rent computing power and storage from a service provider, and to pay on demand, as they already do for other inputs such as energy and electricity (the price of using a computer for a thousand hours is the same as that of using a thousand computers for one hour). This article examines some issues related to the diffusion of cloud computing: its general role in section 1, competition policy issues in section 2, environmental issues in section 3 and macroeconomic issues in section 4.

 

Introduction


A new general purpose technology such as cloud computing can provide huge cost savings and more efficiency in large areas of the private sector (especially in fields such as services and selected manufacturing sectors where ICT costs are relevant), and also of the public sector, including hospitals and healthcare, education and the activity of government agencies with periodic spikes in usage.

Case studies in the private and public sectors suggest that cost advantages can be substantial. A few examples from a specific sector, the health sector, can exemplify the point (let us start from the most simple applications to move toward more relevant ones). One of the leading Italian hospitals, the Children’s Hospital of Bambin Gesù in Rome, has recently switched to an online solution for the email services of its 2500 employees (the switch took place in 2010 in less than four months, created large cost savings and allowed IT specialists to focus on other more relevant tasks for the hospital). Similar experiences are planned by the USL of Asolo in Veneto, which is also trying to use cloud computing to help operative tasks. The Swedish Red Cross has improved the coordination of its intervention by adopting a cloud computing solution, which has reduced costs of about 20 % and enhanced communication in real time between its employers. A Russian cardiovascular centre, Penza, has adopted a cloud computing solution to coordinate activities, diagnosis and decisions on treatment and surgery between doctors around the country, with crucial gains for the patients. During the H1N1 pandemic, a global cloud computing tool was build and made available in a few days (based on the Microsoft’s Windows Azure platform) to centralize and provide information on the diffusion of the flu.

Cloud computing is currently developing along side few different concepts, focused on the provision of Infrastructure as a Service (IaaS: renting virtual machines), Platform as a Service (PaaS, on which software applications can run) or Software as a Service (SaaS: renting the full service, as for email). In preparation for its development, many hardware and software companies are investing to create new platforms that are able to attract customers “on the clouds”. Cloud platforms provide services to create applications in competition with or in alternative to on-premise platforms, the traditional platforms based on an operating system as a foundation, on a group of infrastructure services and on a set of packaged and custom applications. The crucial difference between the two platforms is that, while on-premises platforms are designed to support consumer-scale or enterprise-scale applications, cloud platforms can potentially support multiple users at a wider scale, namely at the Internet scale.

The introduction of cloud computing is going to be gradual. Currently, we are still in the middle of a phase of preparation with a few services that can be regarded as belonging to cloud computing, often derived from internal solutions (turning private clouds into public ones). Amazon Cloud Computing was launched in October 2006, IBM’s Blue Cloud in November 2007, followed by cloud solutions by Google and Microsoft. Meanwhile, many large high-tech companies as Amazon, Google, Microsoft, Saleforce.com, Oracle and other CCP (Cloud Computing Providers) keep building huge data centres loaded with hundreds and thousands of servers to be made available for customer needs in the near future.

 

Competition issues emerging from cloud computing


Competition between CCPs is probably going to reshape the ICT market structure as PC distribution did in the 80s, with consequences also at the downstream level, that of the ISPs (Internet Service Providers). This may raise some concern for competition and for the consequences on the users of cloud services.

Let us look at the upstream level. Notice that here, antitrust evaluation may concern a market definition ranging from the three separate aspects of cloud computing (IaaS, PaaS or SaaS) at national levels up to the general market for IT services at the global level, but we believe that the most relevant market definition would probably include the three forms of clouds at a sovra-national level. Notice however, that in case of antitrust issues involving downstream companies, namely ISPs, market definition could be restricted to the national level, which is still the relevant one in each EU country for competition between telecommunication providers – see Sluijs, Larouche and Sauter (2011) for a detailed discussion.

On one side, the strength of competition for the provision of cloud services suggests that multiple players (as those mentioned above and, possibly, others) would probably share the market for a while, avoiding excessive concentration. The importance of cloud computing in changing the prevailing business model in ICT is determining wide investments in innovation by these same players, therefore the ultimate success in the cloud business will be associated with the creation of superior technologies rather than with the exploitation of network effects or barriers to entry.

On the other side, the development of alternative cloud computing solutions could create the risk of being locked-in for potential customers. To avoid this, it is important to promote, especially in this initial phase, agreements between public authorities and industry leaders on a minimum set of technological standards and process standards to be respected in the provision of cloud services to guarantee data security, privacy and portability. However, the lack of scenarios with low concentration or dominance by a single CCP makes it difficult for interoperability problems to become crucial: a CCP offering services that have limited interoperability with the services of other CCPs would easily lose market shares.

 

The environmental impact of cloud computing

Besides economic gains, substantial positive externalities are expected from cloud computing because of energy savings: the improvement of energy efficiency may contribute to the reduction of total carbon emissions in a substantial way (currently, ICT contributes to 2 % of global CO2 emissions).

The costs savings associated with the new technology can improve the PUE (power usage effectiveness) of the datacenters, which is the ratio between the power drawn by the datacenter facility and the power delivered to hardware (the difference being used for cooling the IT equipment). This ratio is around PUE = 2 in the average datacenters (for every kWh of energy which is used to operate hardware, there is another kWh of energy used to cool the same hardware)1, but it could go down to PUE = 1.1/1.2 with the outsourcing of certain activities to cloud computing solutions in separate datacenters, which can be built in colder regions (as they currently are in Ireland, Scotland and other cold EU regions) and with more efficient cooling systems (as in the Google’s project of a submarine datacenter). In a recent study on the environmental aspects of the move to cloud computing, Accenture (2010) estimates energy savings that are variable with the size of the organizations: up to 90 % for small ones with less than 100 users, between 60 % and 90 % for medium size organizations with up to 1000 users and 30-60 % for larger organizations with up to 10 thousand users: clearly this corresponds to large reductions in carbon emissions (by a third on average).

Larger cost savings and environmental gains are expected from the adoption of cloud computing in SMEs.

Beyond this, datacenters can be located in regions with low carbon emission factors. The gains can be larger (in terms of per-user energy use and carbon footprint) in case of small deployments, since these currently operate at low utilization levels (being idle during most of the day).

Of course, cloud computing can also contribute to reduce the emissions of non-ICT processes through its indirect impact. Therefore, larger cost savings and environmental gains are expected from the adoption of cloud computing in SMEs, and the coordination of policies for accelerating its adoption could be fruitful.2

 

The macroeconomic impact of cloud computing

The first and most relevant benefit of cloud computing is associated with a generalized reduction of the fixed costs of entry and production, in terms of shifting fixed capital expenditure from IT into operative costs depending on the size of demand and production. This contributes to reducing the barriers to entry especially for SMEs, as the provider owns infrastructure, it does not need to be purchased for one-time or infrequent intensive computing tasks, and it generates quick scalability and growth. The consequences on the endogenous structure of the markets with largest cost savings will be wide, with entry of new companies, a reduction of the mark ups, and an increase in average and total production. In recent research (Etro 2009; Etro and Colciago, 2010), we have adopted a macroeconomic approach emphasizing the effects that this innovation has on the cost structure of the firms investing in IT and consequently the incentives to create and expand new businesses, on the market structure, on the level of competition in their sectors, and ultimately on the effects for aggregate production, employment and other macroeconomic variables.3

The diffusion of cloud computing could provide a substantial contribution to the annual growth rate, helping to create more than a million new permanent jobs.

Our methodology is based on a DSGE calibrated model augmented with endogenous market structures in line with recent developments in the macroeconomic literature. This model includes a realistic structural change to the cost structure with the purpose of studying the short- and long-term reactions of the economy. Starting from conservative assumptions on the cost reduction process associated with the diffusion of cloud computing over five years, we have estimated that the diffusion of cloud computing could provide a positive and substantial additional contribution to the annual growth rate (up to a few decimal points), helping to create more than a million new permanent jobs through the development of a few hundred thousand new small- and medium-sized enterprises across the EU. Empirical exercises under different scenarios show a strong impact on the creation of new businesses, in the magnitude of a few hundred thousand within the EU. Moreover, the effect is expected to be deeper in countries where the diffusion of smaller companies is particularly strong or where IT adoption has been generally rapid.

Part of the positive effects of cloud computing will depend on the speed of its adoption, so policymakers should promote rapid adoption. Concrete interventions include:

• Expansion of the broadband capacity, especially in countries where this capacity is lower, as in Italy and other Mediterranean countries;
International agreements in favor of unrestricted flow of data across borders (since data centers are located in different countries with different privacy laws, data portability remains a key issue for the diffusion of cloud computing);
Agreements between EU authorities and industry leaders on a minimum set of technological standards and process standards to be respected in the provision of cloud computing services to guarantee data security and privacy and promote a healthy diffusion of the new technology;
Introduction of fiscal incentives for the adoption of cloud computing and a specific promotion in particular dynamic sectors (for instance, governments could finance, up to a limit, the variable costs of computing for all the domestic and foreign firms that decide to adopt a cloud computing solution).

This article was originally prepared for the ICTNET Workshop on ICT Enabled Innovation, Productivity and Growth (Mannheim, October 24-25, 2011).

About the author

Federico Etro (federico.etro@unive.it) is Full Professor of Economics at the University of Venice, Ca’ Foscari, where he teaches Macroeconomics. He previously taught at the University of Edinburgh and the University of Milan, Bicocca. Etro has published numerous articles in journals such as the American Economic Review, European Economic Review, International Economic Review, Economic Journal, Rand Journal of Economics and others. He has written three  books: “Competition, Innovation, and Antitrust” (2007, Springer), “Endogenous Market Structures and the Macroeconomy” (2009, Springer) and Competition Law and the Enforcement of Art. 102” (2011, with I. Kokkoris, Oxford University Press).

Reference

- Accenture, 2010, Cloud Computing and Sustainability: The Environmental Benefits of Moving to the Cloud, London


- Carraro, C. and D. Siniscalco, 1993, Strategies for the international protection of the environment, Journal of Public Economics, 52, 3, 309-28


- Center for Economic and Business Research, 2010, The Cloud Dividend. The economic benefits of cloud computing to business and the wider EMEA economy, London


- Etro, F., 2009, The Economic Impact of Cloud Computing on Business Creation, Employment and Output in the E.U., Review of Business and Economics, 54, 2, 179-208


- Etro, F. and A. Colciago, 2010, Endogenous Market Structure and the Business Cycle, The Economic Journal, Vol 120, 549, 1201-33
- Lanvin, B. and P. Passman, 2008, Building E

-skills for the Information Age, Chapter 1.6 in Global Information technology Report 2007-2008, WEF


- Sluijs, J., P. Larouche and W. Sauter, 2011, Cloud Computing in the EU Policy Sphere, mimeo, Tilec, Tilburg University

 

Notes

1.The US Agency for Environmental Protection has calculated a average PUE of 1,91 for US companies in 2007.


2.See Carraro and Siniscalco (1993) for a classic analysis on coordination of environmental policy.


3.See Center for Economic and Business Research (2010) for an application of our study, which confirms similar results.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

« »