This is Part Two of Two in this series. My intent is to provide a more socio-economic view of the cloud computing impact across business, government, and society. I hope it promotes deeper thought around the societal and economic impacts of this exciting new IT service delivery model that we call cloud computing.

Benefits to Government

Over the past ten years, the number of federal data centers has grown from 498 to more than 1,200. Earlier this year the Federal Government launched their Data Center Consolidation Initiative, the cornerstone of which is cloud computing. The Federal Government understands the efficiencies and transformative benefits of cloud computing, like:

  • Reducing data center carbon footprints.
  • Reducing wasted real estate.
  • Improving data center energy efficiency.
  • Improving inter- and intra-agency communication.
  • Improving outward-facing public services by consolidating data and enabling browser access.

The Federal Government not only “gets it” but is an early adopter. In his February 2010 memo, Vivek Kundra, Federal Chief Information Officer, explained:

The Data Center Consolidation Initiative is broken down into 6 key phases and is designed to first assess and inventory the current agency environment and then establish a plan for achieving significant reductions in data center built through the use of server virtualization and Cloud Computing technologies.  Additionally, this initiative aims to reduce overall energy consumption by data centers across the Federal Government, while reducing the physical real estate and other key costs drivers associated with data centers.

Benefits to Society

According to Bill Drayton, CEO, and Valeria Budinich, founder, of Ashoka, a global association of leading social entrepreneurs:

The time is ripe for collaboration between for-profit businesses and mission-driven individuals and organizations, or citizen-sector organizations (CSOs). Collaborations between corporations and CSOs (many of whom are entrepreneurs) can create and expand markets on a scale not seen since the Industrial Revolution. These markets will reach everyone, but especially the 4 billion people who are not yet part of the world’s formal economy. Since the 1980s, for example, the citizen sector has been creating jobs about three times as fast as have other employers in the Organization for Economic Co-operation and Development countries. In Brazil, the number of CSOs rose from about 36,000 to nearly a million over the past 20 years. In the United States, their number has grown by more than 300% since 1982.

By making it easier and less costly for CSOs to access computer resources and to collaborate with for-profit businesses or corporations, it stands to reason that free market clouds should help to fuel positive, collaborative results (e.g., job creation) between people in need and private business.

Threats to a Thriving Cloud Computing Ecosystem

The two most obvious threats to a thriving cloud ecosystem are:

  1. Natural monopolies occurring within cloud service providers.
  2. Too much government regulation.

Among cloud computing service providers today, there is intense competition. The players can be described as being fragmented. Inevitably, there will be a shake-out as the business matures, which can lead to the “winners” being only the largest cloud service providers.

The reason for this is that there are profound financial and operational economies of scale for cloud service providers as they build out their infrastructure for clients — efficiency improvements of 5-10X have been estimated for large, well-run cloud data centers vs. traditional on-premise data centers.

For example, Amazon Web Services, which just celebrated its fourth anniversary,  broke through the $500 million revenue threshold in 2010. UBS estimates that Amazon Web Services’ net income will expand roughly 50-70% each year through 2014, a truly incredible business model. The point is that Amazon Web Services has become a powerful engine for profit and cash generation due to its large scale.

Other competitors, such as Level 3 Communications, IBM, CA, HP, Rackspace, CenturyLink/Savvis, and Verizon/Terremark are trying to catch-up to Amazon Web Services’ scale (perhaps some have already), and they should be able to compete toe-to-toe successfully into the future. Smaller cloud service providers, however, are likely to disappear over the next decade. Less competition in any business leads to less choice and higher prices for clients, so this could become a threat when the cloud service provider industry undergoes consolidation in the future.

History has proven that too much government regulation in any business sector is damaging to its growth and continued success. On government regulations in a free market economy, Friedrich Hayek, the renowned economist argued that:

Government regulations will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or, what amounts to the same thing, reduce over-all productivity.http://ow.ly/5PTSD

Hayek, therefore, prescribed the avoidance of “factory legislation” whenever possible.

Similarly, Alfred Chandler and Richard Tedlow, business historians at Harvard, reaffirmed Hayek’s thinking:

Most regulation occurs at the borderlands of politics, law, and economics, and those who have shaped its evolution have come from these three fields. Of the three, the first two have tended to overshadow the third, and considerations of politics and legal process have customarily triumphed over those of economic efficiency.

The bottom line: Government shouldn’t regulate free market clouds much.

Wrap-Up

Time will tell whether free market clouds will reinvigorate the beneficial, pro-growth economic forces of capitalism, which began in England around 1760 with the invention of the steam engine for coal mining. For skeptical readers who doubt the merits of capitalism, please remember these historical facts:

  • Per capita income in the West was flat for 1,000 years prior to industrialization and market economies.
  • Per capita income in the West rose by 20% in the 1700s.
  • Per capita income in the West rose by 200% in the 1800s.
  • Per capita income in the West rose by 740% in the 1900s.

My hope is that business, government, and society will continue to create fertile ecosystems for cloud computing to thrive, just as many Western market economies have done for capitalism for 250 years.

Take a look at Part I of the series.

So what do you think?  Let us know how you see Cloud Computing spurring growth for organizations from private companies to government organizations.  What has been your experience?  We look forward to getting your comments on this important topic.