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There Appears to Be a Future in Cloud Futures

Last week we held the first of what is likely to be many discussions in the IT industry on the topic of IT infrastructure marketplaces and cloud futures. Building on the discussions at Cloud2020 and the blogsphere (here, here, here, and here, among others), we structured this as an open debate among those who believe a true commodity marketplace for IT infrastructure will develop and those who don’t. For those that weren’t able to attend, I’ll try to capture the essence of the discussion here by setting the stage and sharing some quotes pulled from the raw video from the event. The full video is in production now, so that should be available very soon, so we’ll share the link as soon as that’s available.

Joe Weinman started the day with an analogy of the meetings in the late 1700’s in lower Manhattan that lead to the Buttonwood Agreement and the formation of what is now the New York Stock Exchange. These are the early stages of the formation of an exchange for IT infrastructure, so the analogy is interesting on many levels, but what was originally thought to be a debate quickly turned into a fascinating discussion on when and how IT infrastructure markets will develop. To quote Ben Kepes “this started off as a debate, but unusually both sides actually agreed.” Mark Thiele, who along with Randy Bias provided the perspective of those somewhat skeptical of the notion of a near-term IT infrastructure marketplace, noted “we largely agree that the opportunity and need for a marketplace is there. Where we might differ is whether or not the market is ready today.”

The discussion then turned to the open questions about how a market would develop and the underlying challenges. Here are some of the highlights of that discussion:

  • “I believe there will be a market. It’s just a question of when. The biggest impediments to these markets developing are 1) measurability and 2) it’s fundamentally a different kind of market unlike anything we bought, traded and exchanged in the past. There’s all kinds of things there that we don’t understand yet and we won’t understand until we start to experiment, so thank you for starting the experimentation.” – Randy Bias

  • “The value measurement is something we’re not paying enough attention to. A GB is easy. A VM is a real freakin’ problem. If I go out to market and I want to get X thousands of TPS from a relational database with a million rows the problem is bounded down to where you can actually measure the value and you can actually measure what you get from the provider, but if it’s just VM’s it’s highly problematic…in order to resolve it, we’ve got to figure out what are the workloads people are using, can they be chunked into groups and classifications, such that we can actually do value measurement on the buyer and supplier side.” – Randy Bias

  • “This is all about benchmarking, not standardization…Things do not have to be standardized to be a commodity.” – James Mitchell

  • “The majority of this has absolutely nothing to do with technology. It’s totally irrelevant. (From the financial market perspective) I just want someone to tell me how much of something, what it is so I know its the same thing being delivered, when they want it, and what price will work. That’s all I care about.” – James Mitchell

  • “I agree the commoditization doesn’t have to be perfect. The interesting thing about a market is the dynamics of a market means that the better quality supply will be charged at a higher rate than the poorer quality. But the ultimate limitation of the spot market right now is whether or not there really is a buy side opportunity today. I agree it will happen, there’s just a lot of unanswered questions.” – Ruv Cohen

  • “What is the commodity? Quite frankly we are talking about doing commodity trading on a very complex system. It’s not one thing – it’s a bunch of things that are interrelated with each other that don’t operate unless all the other agents are in place and communicating to each other the way they need to in order to execute.” – James Urquhart

  • “We have real needs and let me explain a situation we have right now. The government is shifting to a model of ‘no guarantees’ so we have to come up with about $100 million of upfront cash investment. The government will not guarantee any portion of that, nor any usage of that. So we’re sitting there with $100 million of investment with the government saying ‘we’ll pay you this price per GB of storage’, but they won’t guarantee that. Now take that analogy and think about a farm I own in Georgia. I sell every bit of corn that farm produces before any seeds are in the ground. I know what price I’m going to get. It would help us in the IT markets, if there was a way to have a future price and it would guarantee me certain revenue, our future would be different. We know what we have to pay and we’re afraid of the decreasing model too, so we’ve been selling our storage at flat rates for specific timeframes, but if you do that and the price of storage drops significantly, they’re going to want a futures market. The second challenge we have is that all commodities markets have been drivers of capital and allow people to hedge their risk. Our next project is likely going to require around $300 million so I need an even bigger investor. At that point you begin to get out of the range of the JP Morgan’s, the Bank of America’s, you’re way beyond the VC groups at that point. We would want a commodities market not to drive down prices, but we think we can compete if prices are stable in the market. What frightens us is not having that market after you’ve invested $50 million. You can write that much off.” – Mike Dillard

  • “I’m on the buyers side saying I wish I had more options available to me from a futures standpoint and an option standpoint because we have a lot of uncertainty in our future needs. The government is saying we’ll give you this, but you have to triple your compute capacity in 2 weeks and sorry if you can’t, you’re off the planet. I have a one in five chance in winning, with 4 other universities bidding, at least we could exchange an option to the winner.” – Vince Kellen

  • “Is there a market? Yes, but I think what we see in the near term is a better opportunity to get access to a market of cloud resources, but whether it’s a commodities-type market, a hedging-type market, that has all the complexities of a modern day stock exchange, that is something, while it may occur, we see as something years down the road. Is it an opportunity? Absolutely, but years down the road.” – Mark Thiele

  • “No market develops overnight. There has to be a robust underlying cash market – willing buyers and sellers – in what the industry refers to as an over the counter market. There are a few things required to make that happen: standardization of contracts, a delivery mechanism that is wholly agnostic, and a legitimate financial exchange has to be involved at the front and center.” – John Cowan

  • “Given that you have risk volatility, unpredictability, and moreover that hedging or managing that risk is absolutely essential to customers, which may or may not be the IT shop, it may be the CFO organization…given that the basic conditions are there and given there are market participants already there, I would say this train has already left the station.” – Joe Weinman

So there appears to be consensus that there is future in cloud futures – the open questions are around how and when. More on that coming soon.

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