Cloud Economics - when demand takes a "random walk"

My previous post was a special case comparison of Amazon's reserved IaaS versus a privately owned data center where server utilization is fixed at 100%. This is a simple comparison super easy to comprehend but also unrealistic because no business has a steady demand all the time. While researching a more generic model I came across a working paper on the economics of cloud under pretty much all conceivable type of demand situations ranging from a linear growth/decline, sawtooth, exponential and even a stochastic "Random Walk".

 The paper at first glance appeared so mathematically rigorous and intense with its use of integral calculus and Monte Carlo simulations (what Joe gracefully calls "simple maths and calculus" in the video below), that I felt compelled to go back and research the author. The author is Joe Weinman who currently leads the communications, media, and entertainment segment for Hewlett-Packard's Worldwide Industry Solutions having moved recently from being the "cloud face" of AT&T's business development initiatives. He is also a prolific inventor (14 patents), frequent global keynote speaker and also author of the pithy "10 laws of cloud computing" on his blog cloudonomics .

Here is a short interview from his AT&T days where he explains why the cloud is not a panacea but a niche solution and his view that Hybrid clouds are likely to be the end state as the market matures.

Quite interesting from a sourcing standpoint are the insights derived from his working paper, some of which co-incide with my special case scenario from my previous post. Hit the jump for these insights:

Infrastructure as a Service : Costlier than you think?

As the name suggests, Infrastructure as a service (IaaS) is raw computing resources (CPU, stoage etc.) delivered online in the form of virtual server instances that can be turned on and off within minutes at the beck and call of the enterprise customer. No provisioning, no datacenter overheads, no playing catch-up with h/w technology and most importantly - no paying for what you don’t need. In days where CapEx is a forbidden word, this feels like the CIOs dream come true. The three largest cloud service providers today are Amazon, Microsoft and Google closely followed by the IBM, Cisco, Rackspace hosting, GoGrid etc. in the IaaS space.

Here is a CIO Magazine interview with the David Smith, CIO and CTO at Fujitsu with his views on IaaS:

So IaaS seems to be the silver bullet for hardware sourcing. But is he telling you everything?

IT Sourcing from the Cloud

What can I say about sourcing from the cloud that has not been said already? Cloud Computing appears to need no introduction. But appearances, as they say, can be deceptive. This over-the-top video of Oracle CEO Larry Ellison lamenting about the amount of “vapor ware” surrounding “cloud”, pretty much sums up the designer confusion that looms large over the enterprise IT horizon. (Caveat: unless you are overly charmed by Larry’s style, you’ll get the idea about halfway through)

I do not know why Mr. Ellison goes cloud-bashing but NO, cloud computing is not old wine in a new bottle just because centralized mainframe computing and then computers hooked to the internet have been around for ever (well almost). Yes, it borrows from all of those core technologies but the business model has not been in existience in this shape and form before as Mr. Ellison seems to suggest. In fact, it is amazing that supposedly the next big thing in commercial computing  is at once the most talked about and least understood.

So what is it really and what does have to do with an IT sourcing person looking to gain cost and strategic advantage?