The Economics of Cloud Computing

1
Ergin Bayrak
University of Southern California
John P. Conley
Vanderbilt University
and
Simon Wilkie
University of Southern California
Abstract
Cloud computing brings together several existing technologies including service oriented
architecture distributed grid computing virtuali!ation and broadband net"orking to provide
so#t"are in#rastructure and plat#orms as services. $nder the old %& model companies built their
o"n server #arms designed to meet peak demand using bundled hard"are and so#t"are solutions.
&his "as time consuming capital intensive and relatively in#lexible. $nder the cloud computing
model #irms can rent as many virtual machines as they need at any given time and then either
design or use o##'the'shel# solutions to integrate company'"ide data in order to easily distribute
access to users both "ithin and outside o# the company #ire"all. &his converts #ixed capital costs
into variable costs prevents under and over provisioning and allo"s minute by minute #lexibly.
Consumers are also increasingly turning to the cloud #or computing service through such
applications as (mail Pandora and )acebook. &he purpose o# this paper is to discuss this ne" and
trans#ormative technology survey the existing economics literature on the sub*ect and suggest
potential directions #or ne" research.
1
&he authors take #ull responsibility #or any errors and may be contacted at ebayrak+usc.edu
*.p.conley+vanderbilt.edu and s"ilkie+usc.edu respectively.
,ey"ords- Cloud Computing SaaS PaaS. %aaS Economics. %n#ormation &echnology
JE. Categories- /0 .1 /2 .2
1
1. Introduction
Cloud computing is a ne"ly emerging computing paradigm in "hich computing resources such as
so#t"are processing po"er and data storage are provisioned as on'demand services over
broadband net"orks. Cloud computing enables a shi#t a"ay #rom computing as a bundled hard"are
and so#t"are product that is ac3uired through #ixed capital investments to computing as a location
independent and highly scalable service that is ac3uired on'demand over broadband net"orks #rom
large'scale computing centers or 4clouds5 on a pay'per'use basis "ith little or no #ixed capital
investment. &he cloud approach leads to cost reductions and e##iciency gains through economies o#
scale distribution o# costs over large pools o# users centrali!ation o# in#rastructures in areas "ith
lo"er costs and improved resource utili!ation rates. &hese e##iciency improvements allo" large
savings in operational costs signi#icant reductions in the up#ront capital costs re3uired #or ne" tech'
startups. As a result many observers have characteri!ed cloud computing s as a disruptive general
purpose technology "ith potential #or enormous impacts on the economy as a "hole.
Although relatively ne" cloud computing is already a very signi#icant part o# the technology sector.
A recent report by %& research and advisory #irm (artner #orecasts "orld"ide cloud services
market6s revenue to surpass 789.: billion in ;<2< and reach 7209.9 billion by ;<20. Another
;<<= report by %& research and advisory #irm %/C predicts "orld"ide %& spending on cloud
services to reach 70; billion by ;<2;
;
. >ore broadly a recent study by Etro ?;<<=@ considers
cloud computing as a general purpose technology and concludes that it "ill result in a conservative
:
2A to 1A #ixed cost reduction across all sectors. Be estimates that the prospective medium term
macroeconomic impact o# the #ast ?slo"@ adoption o# cloud computing in ;C European countries to
be an incremental (/P gro"th o# <.:A ?<.2A@ an increase in employment on the order o# 2.1
?<.1@ million "orkers and incremental business creation on the order o# 0:<<<< ?9:<<<@ small
and medium enterprises.
2
%n (artner6s methodology 7:; billion out o# the 789.: billion is accounted under Business Process Services "hich
include online advertisingD they are likely to be overestimating the impact o# cloud computing. See (artner %nc.
?;<2<@
3
Considering the case study by ,ha*eh'Bosseini et al. ?;<2<@ "hich #ound that moving to cloud in#rastructure "ould
result in :CA cost saving over 1 years Etro6s estimates o# the cost reduction and the resulting macroeconomic impact
remain conservative.
2
/espite the social and economic signi#icance o# cloud computing very little "as been "ritten in the
economics literature that is directly on topic. >ost papers seem to appear in various parts o# the
computer science and to a lesser extent the #ormal and in#ormal business literature. Eur purpose
"ith this paper is three #old. )irst to discuss the basics o# "hat cloud computing is "ith special
attention to its economic implications. Second to survey cloud computing literature as it relates to
economic 3uestions. Since very #e" papers have appeared in economics *ournals "e extend the
survey to include some o# the more relevant CS and management literature as "ell as older
economics papers on in#ormation technology that may shed light on cloud computing. )inally to
explore open research 3uestions and discuss ho" economics might contribute to our understanding
o# this ne" and important technology. %n section t"o "e revie" various de#initions o# cloud
computing. %n section three "e contrast cloud computing "ith prior general'purpose technologies
#rom an economic perspective and identi#y characteristics that give cloud computing a distinct
economic structure. We also identi#y policy issues in the cloud computing ecosystem. Section #our
proposes open research 3uestions in the economics o# cloud computing. Section #ive concludes.
2. hat is Cloud Computing!
/espite the "ide consensus that cloud computing is a ne" and disruptive general purpose
technology there does not seem to be a comparable consensus de#ining "hat exactly cloud
computing is nor a common understanding o# ho" it a##ects economic #undamentals. &his may be
due to the scope o# this ne" technology as "ell as its complex and multi'layered technical and
economic underpinnings. Some common de#initions #ail to capture this complexity such as 4moving
computer applications and programs to the %nternet #rom the desktops5. Ether de#initions are "ell
received in the computer science literature but may be overly technical and so less use#ul to
economists and other outsiders. A collection o# t"enty t"o such de#initions are summari!ed in
Fa3uero et al. ?;<<=@
0
as-
4
Fa3uero et al. ?;<<=@ in their analysis o# ;; expert de#initions also identi#ied ten key characteristics o# cloud
computing as- user #riendliness virtuali!ation internet centric variety o# resources automatic adaptation scalability
resource optimi!ation pay per use service S.As and in#rastructure S.As. Also %yer and Benderson ?;<2<@ analy!ed
over 1< de#initions and identi#ied seven key capabilities o##ered by cloud computing to be- controlled inter#ace location
independence sourcing independence ubi3uitous access virtual business environments addressability and traceability
3
Clouds are a large pool o# easily usable and accessible virtuali!ed resources ?such as
hard"are development plat#orms andGor services@. &hese resources can be
dynamically recon#igured to ad*ust to a variable load ?scale@ allo"ing also #or an
optimum resource utili!ation. &his pool o# resources is typically exploited by a pay'
per'use model in "hich guarantees are o##ered by the %n#rastructure Provider by
means o# customi!ed Service .evel Agreements ?S.A@.
An evolving de#inition maintained by $nited States Hational %nstitute o# Standards and &echnology
?H%S&@ seems to be the most comprehensive and "idely accepted de#inition o# cloud computing
?>ell and (rance ?;<22@@
1
. &he current revision de#ines cloud computing as-
Cloud computing is a model #or enabling ubi3uitous convenient on'demand
net"ork access to a shared pool o# con#igurable computing resources ?e.g.
net"orks servers storage applications and services@ that can be rapidly
provisioned and released "ith minimal management e##ort or service provider
interaction.
At a more detailed level there are three "idely accepted primary service models. &he term
Everything as a Service ?IaaS@ has been associated "ith many core services o##ered by cloud
providers including so#t"are ?SaaS@ development plat#orms ?PaaS@ computing in#rastructure
?%aaS@ communication ?CaaS@ and data storage ?/aaS@ ho"ever the most "idely accepted
classi#ications o# service models #ocus on so#t"are plat#orm and in#rastructure layers as the primary
service models ?Creeger ;<<= /urkee ;<2< .in et al. ;<<= >ell J (rance ;<22 Faguero et al.
;<<= Fiega ;<<= Weinhardt et al. ;<<=@. &hese service models resemble a cascading
architecture "here services on a higher level as identi#ied by Weinhardt et al. ?;<<=@D
4encapsulate #unctionality #rom the layers beneath by aggregating and extending service
components via composition and mash'up technologies5. Similarly Kouse## and /a Silva ?;<<9@
and rapid elasticity.
5
&he complete de#inition o# cloud computing according to H%S& can be #ound in the appendix.
4
use composability as the criterion to de#ine various layers in the cloud architecture and inter'
relations bet"een those layers. &hey classi#y a cloud layer to be higher in the architecture ?or at a
higher level o# abstraction@ i# its services can be composed o# services #rom the underlying layers.
&he three primary cloud computing service models are presented belo".
So#t"are as a Service ?SaaS@ is the service model in "hich the capability provided to the consumer
is the ability to use the cloud provider6s applications running on a cloud in#rastructure. Applications
are accessible #rom various client devices through a thin client inter#ace such as a "eb bro"ser.
&his highest layer in the cloud in#rastructure is called the Cloud Application .ayer in Kouse## and
/a Silva6s ?;<<9@ terminology. Applications at this layer are built #rom components at the lo"er
layers such as application programming languages operating systems net"ork servers and storage
that the end user does not need to control or manage except limited user'speci#ic application
con#iguration settings. Word processing and email applications such as (oogle/ocs and (mail or
Customer Lelationship >anagement ?CL>@ applications o# sales#orce.com are examples o# this
service model as "ell as backup recovery and to some extent content delivery and publishing
services.
Plat#orm as a Service ?PaaS@ is the service model in "hich the capability provided to the consumer
is a development or runtime environment programming languages and application programming
inter#aces ?AP%s@ to design and deploy in#rastructure consumer'created applications onto the cloud.
&his service model resides in the Cloud So#t"are Environment .ayer in Kouse## and /a Silva6s
?;<<9@ classi#ication in "hich the consumer does not manage or control the underlying cloud
in#rastructure including net"ork servers operating systems or storage but has control over the
deployed applications and possibly application hosting environment con#igurations. Examples o#
these scalable services include (oogle App Engine >icroso#t A!ure or #orce.com application
development plat#orms.
%n#rastructure as a Service ?%aaS@ is the service model in "hich the capability provided to the
consumer is processing storage net"orks and other #undamental computing resources. &his model
5
resides in the Cloud So#t"are %n#rastructure .ayer in Kouse## and /a Silva6s ?;<<9@ terminology.
&he consumer is able to bypass the plat#orm layer and the AP% restrictions therein and instead is
able to run arbitrary so#t"are operating systems and applications. &he consumer does not manage
or control the underlying cloud hard"are but has control over operating systems storage deployed
applications and possibly limited control o# select net"orking components. &hese capabilities are
delivered as a single server or as part o# a collection o# servers integrated into virtual machine
environments. %n some cases a #urther disaggregated service provision is possible "hereby
processing po"er in the #orm o# virtuali!ed machines is treated as ?%aaS@ along "ith communication
?CaaS@ data storage ?/aaS@ "hich can be rented separately ?Limal et al. ?;<<=@ Kousse## and /a
Silva ?;<<9@@. Ama!on6s Elastic Computing Cloud ?EC;@ is an example o# %aaS along "ith the
Simple Storage Service ?S:@ that can be rented separately as /aaS. >icroso#t6s Connected Service
)rame"ork ?CS)@ on the other hand accompanies its %aaS services as a CaaS component that can
be rented separately.
We "ould like to suggest that "hile these service models are use#ul in de#ining the technological
di##erences bet"een various layers o# abstraction they are not as use#ul in categori!ing their
economic impacts. %nstead "e "ould like to distinguish bet"een a retail and wholesale side o# cloud
computing and argue that these are t"o 3ualitatively di##erent uses #or the cloud. %aaS and PaaS
consumers are mostly companies using the cloud to outsource their internal %& #unctions or provide
client #acing applications including SaaS services. SaaS consumers on the other hand are mostly
individuals moving their data ?email social net"orking and backup #or example@ simple
computation needs ?"ord processing and spreadsheets@ and content and entertainment
consumption ?using Pandora Bulu and World o# Warcra#t instead o# buying C/Ms /F/Ms or
so#t"are@ to the cloud
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. Although there certainly exist some signi#icant crossovers #or example
"hen individuals use PaaS or %aaS to run "ebsites on virtuali!ed servers or large companies use
SaaS to outsource some #unctions such as CL> the 3ualitative distinction bet"een the retail and
"holesale nature o# SaaS and PaaSG%aaS remains. We "ill discuss this in more detail in subse3uent
sections.
6
E# course SaaS providers are o#ten consumers o# lo"er level PaaS and %aaS services i# not already vertically
integrated to PaaS and %aaS providers.
6
)rom the cloud providers6 perspective these three service models can be set up according to #our
ma*or deployment strategies. A private cloud in "hen the cloud in#rastructure is operated solely #or
a single organi!ation. A community cloud is similar but the cloud in#rastructure is shared by
several organi!ations and supports a speci#ic community that has shared interests. &hese cloud
in#rastructures may be managed by the organi!ations themselves or a third party and may exist on
premise or o## premise. A public cloud involves the cloud in#rastructure being made available to the
general public or a large industry group and is typically deployed by a separate organi!ation selling
cloud services. )inally a hybrid cloud is a composition o# t"o or more deployment models that are
bound together by a technology that enables data and application portability.
". # $iscussion of the %iterature &elated to the Economics of Cloud Computing.
Cloud computing started in the last decade as a result o# the convergence o# several earlier
technologies and %& operating models. )rom a technical point o# vie" cloud computing "as
enabled by a combination o# virtuali!ation
C
cluster computing grid computing broadband
net"orking and large scale data centers centrali!ed at lo" cost locations. &he development o#
service'oriented so#t"are architectures #or creating business processes packaged as services along
"ith service level agreements that contractually speci#y such things as delivery time or per#ormance
re3uirements #urther enabled the provision o# computing as a service. &he recent #inancial crisis
and recession have also contributed to the accelerating adoption o# cloud computing as companies
have been #orced to #ind cost'e##ective %& solutions. &his re#lected in a %/C ?;<<=@ survey o# 8=8
%& executives and C%Es "here 12A o# respondents report that the key driver behind adopting or
considering cloud computing is the need to cut costs "hile another ;=A report that budget issues
#orce them to #ind cheaper %& solutions.
Earlier studies in the in#ormation technology literature provide a use#ul #oundation #or
understanding "hat drives cloud computing adoption. )or example a collection o# eighteen
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Firtuali!ation re#ers to the creation o# a virtual machines that are separated #rom the underlying hard"are resources
but act like real computers. %t enables the running multiple operating systems and sets o# so#t"are on the same
hard"are.
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empirical studies on %& adoption surveyed in )ichman ?2==;@ contribute to the conclusion that %&
adoption has di##erent determinants depending on the class o# technology in 3uestion and locus o#
adoption. )ichman ?2==;@ distinguishes type 2 technologies "hich have minor user
interdependencies and relatively small kno"ledge barriers to adoption and type ; technologies in
"hich both o# these #actors are signi#icant. >ost PaaS and %aaS cloud o##ering many business
oriented SaaS cloud o##ering can be characteri!ed as type ; technologies. &he locus o# adoption
on the other hand may be either at the individual or organi!ational level. Except #or simple SaaS
applications that individuals adopt as they move to the cloud "ith most cloud computing o##erings
the locus o# adoption is organi!ational. An illustrative classi#ication cloud computing applications
according to this #rame"ork can be #ound in appendix ;.
Farious empirical studies seem to con#irm that the determinants o# classical innovation di##usion
dynamics carry over to the personal adoption o# type 2 technologies. )irstly a #avorable perception
o# %& innovation positively a##ects the rate and pattern o# adoption ?see /avis et. al. 2=9= and Bu##
and >unro 2=9=@. Secondly adopters are di##erentially in#luenced both by in#ormation channels
and sources at various stages o# adoption. %n particular early adopters tend to be younger highly
educated involved in mass media and interpersonal communication and more likely to be opinion
leaders ?Brancheau and Wetherbe 2==< .eonard'Barton and /eschamps 2=99@. )inally
cumulative adoption #ollo"s an S'shaped pathD starting out slo"ly among pioneering adopters
reaches Ntake'o##N as the e##ects o# peer in#luence set in and levels'o## as the population o# potential
adopters is exhausted ?Brancheau and Wetherbe 2==<@.
%n the case o# organi!ational adoption o# type 2 technologies in addition to the classical di##usion
determinants discussed above (atignon and Lobertson ?2==<@ #ound that competitive
characteristics such as high concentration high vertical integration o# the adopter industry lo"
price intensity and high incentives in the supplier industry positively correlate "ith adoption.
According to .eonard'Barton ?2=9C@ determinants o# individual adoption o# type ; technologies
include both an adopter6s ability level and his "illingness to adopt. %ndividuals experienced "ith %&
are #ound to be more likely to adopt because o# a better perception o# bene#its or their absorptive
8
capacity "ith respect to innovations. Adopter attitudes and pre#erences training accessibility o#
consulting and in#luential peers are also sho"n to contribute to individual adoption o# type ;
technologies.
)inally in terms o# the organi!ational adoption o# type ; technologies classical di##usion
determinants are again #ound to be important. &he standard S'shaped cumulative adoption pattern
"as con#irmed #or this type o# adoption by (urbaxani ?2==<@. )urthermore (urbaxani and
>endelson ?2==<@ identi#ied a pattern o# cumulative %& adoption at the national level that starts
"ith and S'shaped path but later #ollo"ed by an exponential path as a result o# price decreases. %n
particular the B%&HE& net"ork adoption case they studied is marked by subsidies to early
adopters. %B> provided #unding #or centrali!ed net"ork management until a critical mass o# ;<<
universities had adopted the net"ork and these subsidies "ere #ound to be a #undamental
determinant o# adoption.
A recent study by Benlian and Buxmann ?;<<=@ on the other hand considers the adoption o# cloud
computing by small and medium businesses ?S>B@ and speci#ically looks at adoption o# so#t"are as
a service. &hey empirically study the %& outsourcing and adoption behavior o# #irms based on a
survey o# a random selection #rom 1<<< (erman S>Bs and test 2< hypotheses regarding the
drivers o# adoption derived #rom three di##erent theoretical #oundations. &hey #irst turn to
transaction cost theory and begin by positing that transactions "ith high asset speci#icity are
managed less expensively in'house "hile the rest should be outsourced #or better e##iciency. &his
leads them to their #irst hypothesis that application speci#icity is negatively associated "ith SaaS'
adoption "hich interestingly is not con#irmed in the data. &heir second transaction cost theory
hypothesis is that adoption uncertainty is negatively associated "ith SaaS'adoption. When business
and technology driven uncertainty is high it is di##icult to en#orce and monitor per#ormance
inducing the adopter to pre#er internal governance #or highly uncertain activities. &his hypothesis
#inds support in the data and is con#irmed "ith high signi#icance.
&he second set o# hypothesis is based on the idea that #irms can be thought o# as a 4bundles o#
resources5. &hese resources ho"ever are heterogeneously distributed across #irms and this
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di##erentiates one #rom one another "hich in turn a##ects their individual economic competitiveness.
&"o hypotheses that stem #rom this vie" are that the application6s ?i@ strategic value and ?ii@
inimitability are both negatively associated "ith SaaS'adoption. /espite the correct prediction o# the
direction o# impact in both hypotheses only the #irst one #inds signi#icant support in the data.
)inally Benlian and Buxmann ?;<<=@ turn to the theory o# planned behavior "hich posits that the
cognitive process guiding individual decision making are in#luenced both by the environment and
the decision maker6s perception o# the environment. Put another "ay an individual6s intention to
per#orm a certain action is in#luenced by t"o main #actors- the attitude to"ards the behavior and
the sub*ective norm. %n the context o# SaaS adoption they de#ine the attitude to"ard SaaS'adoption
to be the overall evaluative appraisal o# an %S executive to"ard having an %& application provided
by a SaaS'provider. Sub*ective norm or social in#luence on the other hand denotes the perceived
social pressure to per#orm or not per#orm the behavior. &hey derive seven hypotheses #rom the
theory o# planned behavior and the t"o that #ind support in the data are that ?i@ Attitude to"ard
SaaS'adoption and ?ii@ Sub*ective norm ?i. e. positive opinion o# in#luential others to"ard SaaS@ are
positively associated "ith SaaS'adoption.

&he accelerating trans#ormation o# computing to a service oriented model has been envisioned since
2=8<s and has been likened to public utilities such as the electricity or telephone system
9
. )or
instance >artin (reenberger suggested as early as 2=80 thatD 4Barring un#oreseen obstacles an
on'line interactive computer service provided commercially by an in#ormation utility may be as
commonplace by ;<<< A/ as telephone service is today.5. Carr ?;<<9@ compares the emergence o#
cloud computing to the rise o# electric utilities in the early ;<th century and along "ith his vigorous
discussion o# this analogy the term 4utility computing5 has resur#aced and been championed by
many companies that support the development o# computing as a service
=
.
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John >cCarthy "as one o# the #irst computer scientists to re#er to utility computing in 2=82 by stating thatD 4%#
computers o# the kind % have advocated become the computers o# the #uture then computing may someday be
organi!ed as a public utility *ust as the telephone system is a public utilityO &he computer utility could become the
basis o# a ne" and important industry.5 Bis vie"s "ere echoed by the chie# scientist o# ALPAHE& .eonard ,leinrock
in 2=8= "ho stated thatD 4As o# no" computer net"orks are still in their in#ancy but as they gro" up and become
sophisticated "e "ill probably see the spread o# Pcomputer utilitiesM "hich like present electric and telephone utilities
"ill service individual homes and o##ices across the country5. ?Qian ?;<<=@ Buyya et. al. ?;<<9@@
9
>icroso#t Sun BP and %B> use the term utility computing in re#erence to the computing services they provide.
Hicholas Carr6s book 4&he Big S"itch5 ?;<<9@ also vigorously used the public utility analogy to cloud computing and
10
&he #irst similarity bet"een cloud computing and traditional utility models electricity or telephony
#or example is that they all have characteristics o# a disruptive general'purpose technology "hich
make a surge o# associated innovation possible. (iven the rapid development o# cloud computing
and the relatively accelerated adoption cycle "e seem to be experiencing cloud computing is likely
to have an even #aster rate o# economic impact than electri#ication or the gro"th o# telephone
net"orks had historically
A second similarity is the extensive cost savings that cloud approaches permit. Cloud providers6
cost savings result mainly #rom economies o# scale through statistical multiplexing virtuali!ation and
clustering that enable higher utili!ation rates o# centrali!ed computing resources. &his in turn is
possible because cloud provides can place their %& in#rastructure in rural areas "here both real
estate and labor are relatively cheap and close to po"er sources and internet backbone #iber
net"orks. %n addition the labor cost o# maintaining the computing in#rastructure can be distributed
across a greater number o# servers in large computing centers and this also contributes to the cost
savings and economies o# scale
2<
. Altogether this approach is much cheaper than collocating and
supporting a serving room "ith a relatively small number o# computers in a big city in prime o##ice
space.
En the other hand Bryn*ol#sson et al. ?;<2<@ point out that cloud computing exhibits numerous
other complexities that give it a distinct economic structure "hich and "hich di##erentiate it #rom
traditional utility models. Services o##ered via cloud computing are neither relatively standardi!ed
like telephony nor highly #ungible commodities like electricity. %n addition there are no simple
mechanisms to support interoperability in the case o# cloud computing comparable to the rotary
converter technology that enabled #ungibility o# electricity or interconnection rules that en#orced
interoperability o# telephony services. Although interoperability is likely result in #aster adoption
e##iciency and social "el#are gains the possibility o# individual cloud providers losing market po"er
is likely to hinder moment to"ards interoperability.
populari!ed the term.
10
According to Bamilton ?;<<9@ one system administrator manages about 2<<< servers in a large data center
"hereas a system administrator in a medium'si!ed data center typically manages 20< servers.
11
So called 4Cloud Heutrality5 is an interesting emerging policy issue addressing this problem that in
many "ays mirrors the net"ork neutrality debate. Epen cloud mani#esto
22
is an attempt to establish
principles and standards to support an open and interoperable cloud system "hich is supported by
over 0<< companies. Bo"ever the list does not include any o# the ma*or cloud providers such as
Ama!on (oogle >icroso#t or Sales#orce.
Scalability latency and security are three signi#icant technological concerns that have the potential
to hinder the adoption o# cloud solutions by businesses. We discuss each in turn next.
Scalability "hich is one o# the main bene#its o##ered by cloud computing is neither unbounded nor
error #ree. According to the 4CAP &heorem5
2;
consistency availability and partition tolerance
cannot be achieved simultaneously in a distributed systemD there#ore as an application increases
scale in the cloud system it loses consistency and creates errors. Because o# cloud providers6
speciali!ation and expertise system #ailures and unavailability due to such errors are likely to
happen less #re3uently than in the case o# a private computing system all else e3ual. Hevertheless
i# such systems #ailures become #re3uent and public this may result is rapid abandonment o# the
cloud provider and subse3uent bankruptcy and may event result in dynamics resembling a bank
run ?"e discuss this more detail in the next section@. .imits to scalability and errors are most
disruptive to high'volume computing applications such as transaction processing or engineering
computation that rely on large relational databases and re3uire consistency. %nstead o# relying on
outside cloud providers companies "ith su##iciently large computing needs may choose to deploy
private cloud computing systems to avoid the risk o# cloud provider #ailure. As noted in
Bryn*ol#sson et al. ?;<2<@ %ntel is an example a company that chooses to deploy a private cloud to
support its mission critical engineering computations. %ntel has consolidated its data centers #rom
more than 2<< do"n to only 2< and increased their utili!ation rates "hich have resulted in
signi#icant cost savings
2:
along "ith increased control.
11
Epen cloud mani#esto and the list o# its supporters can be #ound at http-GG""".opencloudmani#esto.org
12
CAP theorem stems #rom Eric Bre"er6s ;<<< con*ecture that a distributed system can not satis#y consistency
availability and partition tolerance simultaneously later proved by .ynch and (ilbert ?;<<;@
13
Bryn*ol#sson et al. ?;<2<@ note that %ntel saved about 7=1million by consolidating its data centers #rom more than
2<< do"n to C1 "ith an eventual target o# 2<. According to %ntel6s co'C%E /iane Bryant 91A o# %ntel6s servers
12
&he problem o# latency adds a layer o# complexity to cloud systems. &he relatively lo"er cost o#
moving photons over #iber compared to the cost o# moving electricity over the grid #avors locating
computing centers a"ay #rom the clients and closer to po"er sources ho"ever the savings in
po"er cost can be out"eighed by the cost o# in#ormation latency due to distance and net"ork
congestion. )or instance the need #or instantaneous computing in the case o# #inancial services and
trading may dictate that computing be local.
/ata security is yet another concern in cloud computing systems. En the one hand consumers o#
cloud services may be apprehensive about trusting outside companies "ith their private mission'
critical data since many o# the measures taken to ensure data security on the part o# cloud providers
are obscure to the consumer. Humerous examples o# security and privacy breaches most #amously
on the )acebook plat#orm or the (mail system create grounds #or consumer concern. En the other
hand cloud providers value success#ul security implementation as one o# the most important assets
#or gaining positive reputation. &hey there#ore have a strong incentive to maintain success#ul
security practices. .arge providers can a##ord to hire experts and spread the #ixed cost o#
implementing good security protocols over a larger user base and so cloud providers may actually
have both a technological and cost advantage in this dimension.
Bo" one should design and implement systems that enable users to combine share and trade
computing resources is a 3uestion that has received signi#icant interest in the computer science
literature. &his is especially true in the (rid Computing sphere "here market mechanisms have
been proposed and implemented to trade computing resources in the #orm o# virtuali!ed server
instances. Altmann et al. ?;<2<@ #or example proposes such a market mechanism called (ridEcon
and contrast it "ith other market mechanisms such as (rid Architecture #or Computational
Economy ?(LACE@ &ycoon and Popcorn Pro*ect
20
. (ridEcon the details o# "hich are explained
support engineering computation and those servers run at =<A utili!ation.
14
(LACE is a generic #rame"orkGin#rastructure #or grid computational economy details o# "hich can be #ound at
http-GG""".buyya.comGecogridG. &ycoon is a market'based system #or managing compute resources in distributed
clusters developed by BP. >ore in#o can be #ound at http-GGtycoon.hpl.hp.comG. &he Popcorn pro*ect provides an
in#rastructure #or globally distributed computation over the "hole internet and a market'based mechanism o# trade in
CP$ time. >ore in#o can be #ound at http-GG""".cs.hu*i.ac.ilGRpopcornG.
13
in a series o# articles collected in Altmann and ,lingert ?;<2<@ employs a classic double auction
design "ith extensions that allo" extra attributes to be o##ered such as duration ?i.e. a time interval@
price urgency ?i.e. the point in time "hen the computing resource is needed@ and maximum
validity time o# the o##er. %t then matches buy and sell o##ers "ith a many'to'many approach "ith
consideration o# issues like scalability and not #avoring large providers o# computation.
%t is the relative #ungibility o# resources in the grid computing case that has allo"ed some progress
in the design o# market mechanisms to be made. Ho doubt this may prove help#ul in the design o#
lo"er level %aaS that share similarities "ith grid architecture. Bo"ever #or the "ider cloud
computing environment including higher level PaaS and SaaS non#ungibility o# service components
is likely to hinder progress in the design o# market mechanism.
&he literature directly on topic "ritten by economists is extremely small. %n addition to Etro6s
?;<<=@ discussion o# the macroeconomic impact o# cloud computing "e #ind only three papers-
(hodsi et al. ?;<2<@ )riedman et al. ?;<22@ and .ang#ord et.al. ?;<<=@ and "e conclude this
section by discussing each in turn. &hese three papers are all applications o# cooperative bargaining
theory and mechanism design to particular aspects o# cloud computing. Surprisingly there does not
seem to be any other empirical literature nor applications o# theoretical industrial organi!ation or
other methods "ritten by economists on this topic.
Cloud environments are composed o# multiple resources CP$ memory net"ork band"idth etc.
&his leads to a situation "here cloud users prioriti!e resources di##erently. An important 3uestion is
"hat constitutes an e##icient and #air allocation o# resources in such situations. (hodsi et.al. ?;<2<@
propose the dominant resource #airness ?/L)@ as a criterion to ensure #airness in resource
allocation problems and provide an e##icient algorithm that implements it. &hey de#ine dominant
resource o# a task to be the resource that it percentage'"ise demands most o# relative to the total
resource available and then provide an algorithm that aims at e3uali!ing each user6s #ractional
share o# its dominant resource. &hey prove that /L) has various desirable properties such as single
resource #airness bottleneck #airness share guarantee population monotonicity and envy'#reeness.
&hey also sho" that ,alai'Smorodinsky ?,S@ corresponds to /L) and despite the possible
14
existence o# envy at ,S solutions depending on utility pro#iles /L) al"ays results in an envy'#ree
allocation.
)riedman et al. ?;<22@ on the other hand proves that /L) and ,S are e3uivalent and the
percentage'"ise demands on the part o# users produce a lexicographic pre#erence pro#ile that
results is envy'#ree allocations. )urthermore )riedman et al. ?;<22@ studies allocation problems in
cases "here users demand a minimum number o# virtuali!ed servers above "hich they are
indi##erent to the allocation. &hey sho" that this demand structure results in a resource allocation
problem over a polymatroid bargaining set. )inally they sho" that the Hash bargaining solution can
be achieved "ith an additional continuity axiom and making use o# homotopies o# the polymatroid
bargaining set.
Band"idth is another essential cloud resource and tra##ic management is there#ore an important
problem in cloud architecture. .ang#ord et.al. ?;<<=@ develop an admission control ?AC@
mechanism in an intranet tra##ic management context "here urgent and delayable tra##ic coexist
and occupy net"ork capacity. &hey design an admission control mechanism that collects #eedback
on utili!ation o# communication links and allocates band"idth to competing ?but delayable@ net"ork
tra##ic "hereas urgent tra##ic automatically bypasses the AC mechanism. %n their model sources
re3uest AC #or permission to send bits and the AC mechanism grants a nonexclusive lease o#
band"idth "ith a rate limit and a time limit e3ual to or less than the time interval "ith "hich
utili!ation #eedback is collected. By in*ecting delayable tra##ic into the net"ork "ith an ob*ective to
maintain a uni#orm #lo" and maximi!e net"ork utili!ation they sho" that their admission control
mechanism achieves a reduction in capacity that is close to #irst best. &hey also run simulations "ith
real "orld net"ork tra##ic data and con#irm the capacity reducing impact o# AC.
'. #n Economic (erspective
As "e suggest above "e see retailG"holesale as a better "ay to organi!e an economic analysis o#
cloud computing than the IaaS structure prevalent in the %& and CS literatures. %n this section "e
15
outline some o# the economic 3uestions that cloud computing raises and suggest ho" economic
analysis might contribute to our understanding this ne" technology.
En the retail side o# cloud computing "e can begin by looking at the problem #rom the perspective
o# consumer theory. &he development o# an e##ective technology to make micro'payments #or
content and services has the potential to revolutioni!e the "eb. %n practice ho"ever consumers
already do make micro'payments indirectly ?and in a second best "ay@ by giving up personal
in#ormation to providers o# cloud services in exchange #or access. )or example )acebook is an
SaaS that provides storage and net"orking services to its users. $sers have a choice o# ho" much
in#ormation to give to the site such as oneMs email address physical address religion age
relationship status pictures o# oneMs sel# and #riends links to content one likes content that one has
created etc. &he #urther a user reveals in#ormation the more sharing he can do "ith his #riends.
Similarly "hen "e use (oogle our searches are tracked and indexed Bulu and Het#lix create
records o# our vie"ing habits Fisa and >asterCard kno" ho" much li3uor "e buy Ebay Expedia
and especially Ama!on kno" a great deal about our consumption habits and many other sites
deposit tracking cookies. Content and service providers moneti!e this data directly by serving ads to
users based on this data or by selling or renting the accumulated in#ormation on a user to third
parties.
&his already active exchange provides a basis #or developing a theory o# the 4economics o#
privacy5. As a currency that can be exchanged #or services privacy has some interesting #eatures.
)irst the property rights are not clearly de#ined. What can be done "ith in#ormation "e post or
give to a site depends both on regulations and the terms o# service. Since many providers o# cloud
services especially social net"orking sites have signi#icant net"ork externalities and lock'in e##ects
consumers are not in a good position to the resist changes in the terms o# service "hich e##ectively
raise the privacy cost o# using the service. &hus there is a case to use regulation to prevent such
abusive monopoly practices. Hote ho"ever that even though )acebook can sell a user6s
in#ormation that user can also choose to give the same in#ormation to another provider. &hus
)acebook does not 4o"n5 our in#ormation in a conventional sense. Privacy is like a ten dollar bill
that "e can use again and again. Economists "ould say that private in#ormation is excludable ' %
16
can re#use to give it to site but also non'rivalrous ' % can give it again and again to many sites.
Bo"ever a user may think that once he has spent 4ten dollars5 "orth o# privacy at one site he
might as "ell spend the same ten dollars "ith anyone "ho o##ers anything use#ul to us. Bo"ever i#
the privacy price is t"enty dollars ?meaning "e have to give up additional in#ormation@ he "ould
have to think again. Ence the in#ormation is released it can never be called back. &he cloud never
#orgets.
A theory o# privacy might include the #ollo"ing #actors. Hot all privacy is e3ually valuable to service
providers. Advertisers "ould pre#er to market to richer people all else e3ual. &his means that the
rich are being underpaid and the poor overpaid #or their private in#ormation. Providers may try to
enrich the 3uality o# the user'base by o##ering services that selectively appeal to valuable
demographics but in general "e "ould expect to see the rich under'participating in the cloud. %# it
"ere possible to certi#y that certain users "ere #rom a valuable demographic providers could o##er
them 4gold memberships5 "ith enhanced services in exchange #or their in#ormation. )or no" this
is a market #ailure. Ene might also think about time inconsistent pre#erences. )or example young
people value social net"orking and other cloud services more than older people and also value
their privacy less. Who cares i# an 29 year old posts something stupid or a ;; year old shares an
embarrassing pictureS Ho harm done. Ebviously as one gets into oneMs thirties these things have
more serious conse3uences but old postings cannot be called back. &hus one can think o#
)acebook as buying lo" and selling high. Koung people "ho revealed a lot o# data later on are
older and *oin a more valuable demographic #rom "hom is harder to get private in#ormation.
Cloud technologies also open many 3uestions in labor economics. >ainly these stem #rom large
scale data integration "ithin #irms that cloud in#rastructure make possible and the conse3uent
ability to interact "ith this data through clients ranging #rom desktop computers to mobile devices.
>any "orkers can no" "ork at home or on the road. &his reduces the capital needs o# companies
to provide o##ice space. %t is even possible #or companies to #urther reduce capital needs by
leveraging the use o# the employeesM computers cell'phones cars and other e3uipment. >any
*obs customer support #or example donMt need to be done in continuous blocks o# time but
"orkers are needed or can be used at all times o# day. &his capacity creates #lexibility that makes it
17
more #easible #or the physically disabled and those "ith #amily responsibilities to participate in the
labor #orce. At least #or some types o# "ork the allocation o# tasks and monitoring o# productivity
can be largely automated by integrated business systems. &here is little need to have an employee
supervised at a central location by a physical person. &hus one might empirically study "hether "e
see greater "ork #orce participation especially by "omen and the disabled in certain industries as
cloud technologies get more ubi3uitous. )rom a theoretical standpoint one could explore "hat
kinds o# *obs lend themselves to this sort o# decentrali!ed system o# labor "hat kind o# incentive
and monitoring schemes "ill be e##icient and "hat types o# "orkers and businesses "ill be
attracted to these ne" models. &hese issues are driven by individual interaction "ith SaaS #or the
most part and thus are part o# the retail e##ects o# cloud computing.
A phenomenon that SaaS in the cloud greatly #acilitates is the collection o# #ree labor that many
people provide to all sorts o# activities through 4cro"d sourcing5. People "rite revie"s o# products
at Ama!on Cho"hound and &ripAdvisior post blogs and comments on blogs volunteer to be
moderators at sites they like add bookmarks to Leddit and Stumbleupon add content to
Wikipedia contribute code to .inux and other open source so#t"are pro*ects. &hese contributions
are valuable and in many cases the cloud service providers moneti!e them in various "ays
21
. Why
and ho" people make these contributions "hether due to altruism a desire #or reputation pleasure
or other re"ard is not "ell explored in the context cloud computing. See Conley and ,ung ?;<2<@
and re#erences therein #or a theoretical discussion o# these motivations #or )ESS pro*ects like
.inux Archak and Sundarara*an ?;<<=@ and .eimeister Buber and Bretschneider ?;<<=@ #or a
discussion o# e##icient cro"d sourcing mechanisms and ,ittur Chi and Suh ?;<<9@ #or an example
o# research on Ama!on6s >echanical &urk micro'task markets
&urning to the "holesale side o# cloud computing consider that be#ore cloud services "ere
available businesses had to build private server capacity to be able to meet peak user demand.
Ene o# the ma*or reasons cloud service provider can o##er a cheaper alternative is that the peak
demands o# di##erent companies are not per#ectly correlated. &hus private servers typically run at
an average o# ;<A capacity and only rarely hit their peak. .arge cloud providers on the other
15
&hink o# the recent sale o# the Bu##ington Post as an example o# ho" this #ree labor #rom bloggers is moneti!ed.
18
hand can provision servers to run at 9<A capacity and still provide the needed peak load capacity
to the #raction o# their customers experiencing demand spikes. &o an economist this is *ust a
version o# port#olio optimi!ation. %nstead o# the classic #inance problem o# choosing a bundle o#
stocks based on the price covariance matrix to maximi!e expected return #or any given risk level
one "ants to choose customers based on the capacity demand covariance in order to maximi!e
revenue #or any given probability o# not having su##icient capacity. &hought o# in this "ay
customers "ith correlated demand spikes ?such as retailers "ho expect "eb tra##ic to peak in
/ecember@ are less desirable unless they can be o##set "ith customers "hose peaks are negatively
correlated. Customers "ith high variance are no problem provided the port#olio o# such customers
is large and so aggregate variance is small. ,no"ing ho" to solve this problem "ould tell cloud
companies "hich customers are cheap and "hich are expensive ?in terms o# the percentage o#
excess capacity needed to serve them at the level speci#ied in any given Service .evel Agreement@.
&his might lead to cloud companies attempting to price discriminate in #avor o# directly advertising
to or o##ering value added services o# interest only to customer types "ho are cheap to serve.
Cloud computing resources also make #easible large'scale data integration pro*ects. &his involves
putting together the data and so#t"are systems #or a companyMs payroll sales purchasing shipping
customer support and other #unctions in one uni#ied package. &he goal is to create one
interoperable system to better manage and control inventory "ork #lo" and 3uality human
resources management and so on. $n#ortunately implementing such >aster /ata >anagement
?>/>@ and Enterprise Systems >anagement ?ES>@ solutions is 3uite di##icult. >ost go over budget
take longer than anticipated and do not meet expectations. %n #act estimates based on surveys o#
enterprises suggest that :<'C<A o# in#ormation technology pro*ects are *udged internally to be
#ailures
28
. &hese #ailures extend #rom a variety o# sources but lack o# executive leadership #ailure
to get buy'in #rom stakeholders lack o# technological expertise under#unding and the existence o#
too many legacy systems are o#ten highlighted.
16
&his data comes #rom a variety o# sources most o# "hich seem to be reports #rom consulting companies. See
,rigsman ?;<2<@ or (olorath ?;<<C@ #or more discussion.
19
&he re"ards to success#ully implementing ES> pro*ects in the cloud are signi#icant though some
are hard to document. .o"er operating costs due to better management o# inventory and human
resources better sales through use o# Customer Lelations >anagement ?CL>@ so#t"are and the
uses o# data mining and business intelligence systems and especially the #lexibility and scalability
that such cloud based solutions provide are most o#ten cited.
Clearly undertaking an ES> pro*ect is risky but also has signi#icant re"ards. &he degree o# risk
relates to 3uality o# management the company culture the level o# technical expertise and the
state o# existing data systems. &hus one can think o# this as a 4signaling game5 in "hich a company
undertakes a pro*ect to sho" that it has agile management a high level o# technical expertise or
ne" product lines or marketing ideas that "ill re3uire rapid expansion. Bene#its o# such signaling
might includeD causing less "ell'placed competitors to exit or sell'out at reduced prices inducing
venture capitalists to invest or raise the companyMs value at an %PE. Since ES> is scalable it
makes rapid company expansion much easier and cheaper. &hus it is very similar to installing
excess but unused capacity in an oligopoly game. Since legacy systems and employees used to the
current "ay o# doing things are an impediment to success#ul deployment o# ES> ne" companies
"ho can build both systems and company culture #rom the ground up have an inherent advantage
over incumbents. &his suggests that there might be more churning o# companies as the cycle o#
technological advance speeds up or that incumbent companies "ould do "ell to continuously spin
o## ne" product and business lines to independent subsidiaries.
En the other hand "e can imagine that companies might #ollo" the strategy o# secretly undertaking
ES> pro*ects. Since these can take one to t"o years to complete a company can steal the march on
its competitors. %# the pro*ect is success#ul a company has as many as t"o years to en*oy production
"ith lo"er operating costs and cheap and easy expandability. An aggressive company might be able
to achieve a scale that "ould make it hard #or competitors to survive especially in sectors that en*oy
net"ork externalities. &hus "e might see innovation races "here the #irst across the post gets the
net"ork externality and thus monopoly. Ene can also imagine companies heading #or bankruptcy
going all in on ES> pro*ects. %# they #ail they are out o# business any"ay i# they succeed the
company might be saved. We might see more ES> pro*ects in recessions than in boom years
20
because the opportunity cost o# disruption to business and o# employee time are lo"er ceteris
paribus and because the advantages o# being able to cheaply scale up as the business cycle turns
positive again are greater.
Ene big problem "ith ES> is that one si!e does not #it all. Hot only do di##erent industries have
di##erent needs but each company has its o"n management culture legacy systems solvency and
so on. Especially #or companies "ith older cultures and less technological savvy deciding ho" to
move #or"ard is di##icult. A common strategy is to look #or examples o# success#ul implementations
and copy these solutions. &his tends to create a second'mover advantage. &he #irst innovator takes
signi#icant risks but i# he is success#ul his competitors can simply copy him. &hus the advantages
to taking the risk are temporary. &his implies that innovation might be slo"er in sectors "here there
are no net"ork externalities or other #actors that "ould allo" a lo" cost #irm to rapidly expand its
market share. We might also expect that the most success#ul incumbent in a sector "ould have little
incentive to rock the boat and risk teaching his competitors ho" to innovate.
Companies starting big ES> pro*ects can proceed in a variety o# "ays. &he cheapest and #astest
"ay is to put together o##'the'shel# solutions and do as little customi!ation as possible. &his might
mean using SaaS such as Sales#orce.com #or CL> and Work#orce.com #or BL #unctions and Eracle
Web Services #or data integration #or example. Putting these together "ith legacy systems may
re3uire building applications using PaaS so as to #ocus on the direct so#t"are needs rather than
"orrying about the details o# the in#rastructure. &he alternative is to build a customi!ed system #rom
scratch using %aaS "hich is more expensive time consuming and re3uires greater technical
kno"ho".
Aside #rom the obvious advantage that custom systems can be tailored to the exact needs o# the
company there are several reasons #or companies to choose this path. Perhaps the most important is
that 4lock'in5 is a big concern "hen you use SaaS and PaaS. So#t"are service providers each store
data in their o"n proprietary "ay
2C
. Extracting such data and building a ne" so#t"are system
around it is an expensive and di##icult task. %n addition employees get used to the "ork #lo" and
17
.ock'in is a has been extensively studied in economics. See )arrell and ,lemperer ?;<<C@ #or a recent survey.
21
inter#aces o# these proprietary systems. &his also makes it costly to s"itch systems. %n a similar "ay
the greater the degree o# abstraction in the PaaS plat#orm T #or example special AP%Ms #or
interactions bet"een components like databases and email proprietary libraries o# code that the
users can build applications "ith the more di##icult it is to move to a ne" provider. &hus building
ES> on more abstracted layers o# IaaS makes users o# cloud services more vulnerable to price
increases. %n addition users are not in a good position to en#orce high service 3uality. >ore
speci#ically as technology and markets change cloud providers may choose not to continue to
support #unctions or #eatures o# their services that are highly valued by a subset o# customers.
$pdates to cloud systems may a##ect the "ay that they interact "ith the rest o# a companyMs ES>
solution and so crashes may result that re3uire time to #ix.
E# course the possibilities o# lock'in makes such cobbled together systems less valuable to users
and so less pro#itable to providers. &hus "e might consider a game bet"een cloud providers in
"hich they choose ho" easy to make it #or customers to cleanly move to another provider. While
this "ould decrease their market po"er it "ould increase their value and thus the price they could
charge #or services. Especially i# service providers do not plan to take advantage o# lock'in by
suddenly s"itching #rom a lo" priceGcustomer'base building phase to a high priceGrent extraction
phase it "ould seem to be a dominant strategy to make it easy #or customers to leave. &hese same
considerations give an advantage to rapidly gro"ing companies and very large companies like
(oogle Eracle and Ama!on. Such companies are less likely to s"itch to a rent extraction phase
since this "ould deter #uture customers. (ro"ing companies get more bene#it #rom maintaining a
good customer reputation "hile large companies su##er more damage i# they try to extract rent #rom
a subset o# customers.
&he in#ormation technology revolution o# the 9<Ms and =<Ms in part replaced human "orkers "ith
computers and automated systems. As such it tended to convert variable costs into #ixed costs. &his
made entry by poorly capitali!ed challengers more di##icult. &he cloud computing revolution has the
opposite e##ect. Companies no longer need to build server #arms and computing services become
pay'as'you'go. &his is especially signi#icant in sectors "here most costs are computing services such
as content delivery "eb based gaming and entertainment social net"orking and so on. Since
22
companies are not saddled "ith legacy systems they can build integrated cloud applications #rom
the ground up. &hese #actors make it easier #or entrants to o##er entertainment and other services
that compete "ith incumbents like big television net"orks Bolly"ood studios and music
companies. Since scale increases both revenue and costs at the same time pro#itability can be
maintained at variety o# scales. &his in turn allo"s ne" companies to o##er services o# particular
interest to relatively small groups and also to scale up rapidly to take advantage o# net"ork
externalities i# they exist. &hus the value o# the intellectual property o# large incumbents is
reduced. &he democrati!ing e##ect o# the cloud on entrepreneurship means that more options
available that compete #or consumer interest "ith existing content. &he claims that piracy #acilitated
by P;P net"orks built on cloud in#rastructure is the primary cause o# the decline o# these
incumbents must there#ore be taken "ith a grain o# salt.
%ndustry lobbying to protect their position has led to the passage o# such measures as the Sonny
Bono Copyright &erm Extension Act and the /igital >illennium Copyright Act ?/>CA@ "hich
extend copyright terms and increase penalties #or piracy. &he *usti#ication is that artists "ill not
produce art i# it is not protected. %t "ould be interesting to see reliable estimates o# ho" much %P
"ould be lost i# copyright protection "ere reduced. >usicians make most o# their money #rom
per#ormances and touring plenty o# people "rite blogs and post their #iction and poetry Kou&ube
posts millions o# both user and company created video even textbooks and lectures are posted #or
#ree.
Ene may argue that a large part o# the reason #or this is that many artists and other content creators
are not primarily motivated to produce by prospect o# monetary re"ard. Content creators ho"ever
are generally not in a position to spend much to distribute their "orks and thus access the non'
monetary bene#its o# reputation praise #ame etc. %n the old days the only "ay to distribute "orks
"as to publish books records tapes movies and so on. &hese "ere expensive both to produce and
to distribute and as such content creators had no alternative but to go through company gate"ays
to get their products to the public. With ne" technologies many cloud based it is cheap both to
produce and distribute content. &hus moneti!ing content might have been necessary to give
incentives to publishers to distribute ne" "orks but not get artists to create them. Ho" that artists
23
can distribute their o"n "orks the policy *usti#ication #or extensive copyright protection may be
much "eaker. E# course one si!e does not #it all. Big expensive productions like ma*or Bolly"ood
movies "ould not be made "ithout copyright protection. &his suggests that the solution might be to
make copyright costly ?perhaps 72<<<@. &his "ould mean that #or "orks that are expensive to
produce and re3uire payback copyright protection "ould be available and "ould be purchased. En
the other hand #or "orks o# small commercial value "here money is not the primary motivating
#actor creators "ould choose not to copyright and the creative commons "ould be enriched as a
result.
Another important 3uestion is ho" to price and allocate resources over customers. At any given
time a cloud provider has #ixed physical resources. &he installed servers provide a certain amount
o# storage net"ork connectivity and CP$ cycles. &hus there is a signi#icant #ixed cost o# providing
capacity that must someho" be shared over users. $sers on the other hand have variable
demands. Some o# this is beyond the userMs control such as page accesses by customers but
others such as database updates payroll processing are more #lexible. $sers also have di##ering
costs o# latency. /elaying the completion o# a task by several seconds may cost a provider o# real
time customer oriented applications lost sales "hile it might not make much di##erence to a #irm
that creates architectural renderings or animations.
Cooperative game theory can provide some guidance here. )or example one could use the Shapley
value to allocate the #ixed costs. &he basic idea is to choose a customer and then consider every
possible subset o# the remaining customers. )or each o# these subsets #ind the additional #ixed cost
expenditure re3uired to meet the chosen customerMs Service level agreement ?S.A@. &ake the
average o# these and this is in a sense the average #ixed cost expenditure re3uired to serve a given
customer i# "e are agnostic about the order o# customer arrival. &his "ay o# allocating costs satis#ies
appealing sets o# axioms. See Chun ?2==9@ and re#erences therein. Alternatively S.AMs can be
vie"ed as a 4claim5 on CP$ band"idth and storage that cannot be met at every instant by the
cloud provider. &hus "e might allocate the shortage using a bargaining "ith claims approach. See
Aumann and >aschler ?2=91@ and Chun and &homson ?2==;@ #or example. &his "ould re3uire
using either a loss #unction to aggregate the #ailures to meet claims in the three dimensions o# CP$
24
band"idth and storage into one dimension or more interestingly to expand the bargaining "ith
claims approach to three dimensions. Similar extensions o# other axiomatic bargaining solutions
"ould #urther in#orm this problem. As "e mention above (hodsi et.al. ?;<2<@ and )riedman et al.
?;<22@ are the only papers o# "hich "e are a"are that use such techni3ues #or cloud computing
applications.

S.As ho"ever are very crude instruments and donMt give users an incentive to internali!e the
costs that their momentary demands impose on other users. Baving users and providers bid #or and
o##er services should make the allocation more e##icient i# correctly implemented. &his suggests that
auction theory may also provide an approach to allocate and price cloud services. Ene o# the key
problems is getting agents to reveal ho" valuable services are and ho" costly latency is. E# course
there is a large auction literature in economics ?see ,lemperer 2=== #or a survey@ but it does not
seem to have been directly applied to cloud computing. &he computer science literature is much
more active in this area. See Buyya Keo and Fenugopal ?;<<9@ and re#erences therein. A
signi#icant real "orld challenge is to come up "ith real time automatic bidding programs to
participate in these markets. .ang#ord et al. ?;<22@ is the only paper "ritten by economists along
these lines o# "hich "e are a"are.
A #inal economic issue o# concern is that bankruptcy reorgani!ations or even changes in business
#ocus on the part o# cloud service provides pose signi#icant risks #or users. %n the "orst case users
may lose data stored in the cloud. At a less catastrophic level #eatures and #unctionality may be
dropped or no longer supported service levels o# companies distracted by internal problems may
decline. Seeing this users "ho can may "ithdra" their data and #ind ne" providers o# services.
&his #urther "eakens the company and induces more customers to leave. &he dynamics are very
much like a bank'run. &here may be a role #or regulations and standards to give users some
assurance o# stability. &his also may provide a strategic advantage #or established #irms "ith a long
run reputation #or reliability.
25
). Conclusion
Cloud computing is the next step in the on'going evolution o# %n#ormation &echnology. )rom a
technical standpoint very little that currently is done on cloud plat#orms could not have been done
"ith previously available technology. Bo"ever the cost'reductions rapid scalability and #lexibility o#
cloud solutions give them a revolutionary potential in many economic sectors. &hese #actors also
open many signi#icant economic 3uestions in industrial organi!ation labor economics and other
areas on both the theoretical and empirical side. /espite this the economics literature is exceeding
thin. >ost o# "ork is con#ined to #e" papers in cooperative and non'cooperative game theory. We
survey this literature as "ell as the more relevant parts o# the much larger computer science and
business literature on this topic. We argue that the technological categori!ations used in these #ields
?So#t"are Plat#orm and %n#rastructure as a Service@ do not correlate "ell to the economic impacts
cloud technologies. %nstead "e propose that it is more use#ul #or economists to think about
4"holesale5 and 4retail5 cloud applications. Wholesale cloud applications are primarily aimed at
businesses. &hey #acilitate large'scale data integration pro*ects rapid lo"'#ixed cost entry and
expansion o# ne" start'ups and the outsourcing o# many non'core aspects o# a given #irmMs
activities. Letail cloud applications on the other hand are primarily aimed at consumers. &hey
move applications and content o## personal computers to various types o# cloud plat#orms and make
both consumer produced and purchased content available in increasingly device and location
agnostic "ays. %n addition retail applications trans#orm the "ay the consumers sociali!e
communicate and consume entertainment. We conclude by suggesting several directions #or ne"
research.
26
#ppendi*
#1. The +IST $efinition of Cloud Computing
Cloud computing is a model #or enabling convenient on'demand net"ork access to a shared pool o#
con#igurable computing resources ?e.g. net"orks servers storage applications and services@ that
can be rapidly provisioned and released "ith minimal management e##ort or service provider
interaction. &his cloud model promotes availability and is composed o# #ive essential characteristics
three service models and #our deployment models.
Essential Characteristics-
On-demand self-service. A consumer can unilaterally provision computing capabilities such
as server time and net"ork storage as needed automatically "ithout re3uiring
human interaction "ith each service6s provider.
Broad network access. Capabilities are available over the net"ork and accessed through
standard mechanisms that promote use by heterogeneous thin or thick client
plat#orms ?e.g.mobile phones laptops and P/As@.
Resource pooling. &he provider6s computing resources are pooled to serve multiple
consumers using a multi'tenant model "ith di##erent physical and virtual resources
dynamically assigned and reassigned according to consumer demand. &here is a
sense o# location independence in that the customer generally has no control or
kno"ledge over the exact location o# the provided resources but may be able to
speci#y location at a higher level o# abstraction ?e.g. country state or datacenter@.
Examples o# resources include storage processing memory net"ork band"idth
and virtual machines.
Rapid elasticity. Capabilities can be rapidly and elastically provisioned in some cases
automatically to 3uickly scale out and rapidly released to 3uickly scale in. &o the
consumer the capabilities available #or provisioning o#ten appear to be unlimited
and can be purchased in any 3uantity at any time.
Measured Service. Cloud systems automatically control and optimi!e resource use by
leveraging a metering capability
27
Service >odels-
Cloud Software as a Service (SaaS. &he capability provided to the consumer is to use the
provider6s applications running on a cloud in#rastructure. &he applications are
accessible #rom various client devices through a thin client inter#ace such as a "eb
bro"ser ?e.g. "eb'based email@. &he consumer does not manage or control the
underlying cloud in#rastructure including net"ork servers operating systems
storage or even individual application capabilities "ith the possible exception o#
limited user'speci#ic application con#iguration settings.
Cloud !latform as a Service (!aaS. &he capability provided to the consumer is to deploy
onto the cloud in#rastructure consumer'created or ac3uired applications created
using programming languages and tools supported by the provider. &he consumer
does not manage or control the underlying cloud in#rastructure including net"ork
servers operating systems or storage but has control over the deployed
applications and possibly application hosting environment con#igurations.
Cloud "nfrastructure as a Service ("aaS. &he capability provided to the consumer is to
provision processing storage net"orks and other #undamental computing resources
"here the consumer is able to deploy and run arbitrary so#t"are "hich can include
operating systems and applications. &he consumer does not manage or control the
underlying cloud in#rastructure but has control over operating systems storage
deployed applications and possibly limited control o# select net"orking components
?e.g. host #ire"alls@.
/eployment >odels-
!rivate cloud. &he cloud in#rastructure is operated solely #or an organi!ation. %t may be
managed by the organi!ation or a third party and may exist on premise or o##
premise.
Community cloud. &he cloud in#rastructure is shared by several organi!ations and supports
a speci#ic community that has shared concerns ?e.g. mission security re3uirements
28
policy and compliance considerations@. %t may be managed by the organi!ations or
a third party and may exist on premise or o## premise.
!u#lic cloud. &he cloud in#rastructure is made available to the general public or a large
industry group and is o"ned by an organi!ation selling cloud services.
$y#rid cloud. &he cloud in#rastructure is a composition o# t"o or more clouds ?private
community or public@ that remain uni3ue entities but are bound together by
standardi!ed or proprietary technology that enables data and application portability
?e.g. cloud bursting #or load'balancing bet"een clouds@.
#.2.1.Classification of Cloud Computing #pplications via ,ichman-s ,rame.or/
.ocus o# Adoption
%ndividual Ergani!ational
Class o#
&echnology
&ype 2 ?lo" user
interdependencies and
kno"ledge barriers@
Personal adoption o#
simple SaaS
applications such as
email "ord
processing data
management
Ergani!ational adoption
o# SaaS applications such
as CL> or enterprise
email.
&ype ; ?high user
interdependencies and
kno"ledge barriers@
Personal adoption o#
PaaS #or "eb
development and
%aaS #or hosting
Ergani!ational adoption
o# PaaS #or application
development and %aaS
#or high volume
computing
29
#.2.2.$eterminants of #doption via ,ichman-s ,rame.or/
.ocus o# Adoption
%ndividual Ergani!ational
Class o#
&echnology
&ype 2 ?lo" user
interdependencies
and kno"ledge
barriers@
Classical di##usion variables- Classical di##usion variables
Perceived %nnovation Characteristics Ergani!ational characteristics
Adopter Characteristics Ergani!ational decision processes
%n#ormation Sources and Stage o# implementation
Communication Channels Competitive e##ects ?adopter industry@
Change Agents and Epinion .eaders Supply side #actors
Economic #actors ?price@
%& group characteristics
&ype ; ?high user
interdependencies
and kno"ledge
barriers@
Classical di##usion variables
>anagerial in#luences
Critical mass
Absorptive capacity Combination o# variables
%mplementation characteristics
%nstitutions lo"ering kno"ledge barriers

30
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