SES: The Cloud And The New Utility Companies

NEW YORK — Exciting times we live in.

In a keynote address here at the Search Engine Strategies conference, journalist and author Nicholas Carr outlined a vision of an IT economy that stands on the cusp of a transformation more sweeping than the introduction of the mainframe or even the personal computer.

“I think we are at a major turning point in the history of computing,” Carr said. “The change we’re starting with today is even broader than the PC revolution.”

That change, Carr said, is the fundamental redefinition of computing power as a utility, rather than as an asset that companies produce and manage internally. Utility, or cloud, computing is about much more than technological capabilities. Technology is the mechanism, but, as in any shift in business, the driver is economics.

Carr, the journalist who earned a reputation as an iconoclast for his article “IT Doesn’t Matter” in the Harvard Business Review, likened the pattern and impact of the rise of utility computing to the emergence of another transformative utility: electricity.

Before companies were wired into the electric grid, they producing their own energy at great cost and with tremendous inefficiency. Then the utility companies began wiring up the country, and by 1930, 80 percent of U.S. electricity was produced through central supply.

The result was an explosion of innovation and affordable consumer goods. Henry Ford designed an electric assembly line and began producing cars that people could buy for $200. The chain is an easy one to follow, if a little broadly drawn: The mass production of cars gave rise to the uniquely suburban mode of living, the economic explosion built out a middle class that quickly settled into a life of TV sets, home stereo equipment and so on.

Fast-forward half a century, and we have an IT industry that, Carr argued, is poised to undergo a similar transformation, with some potentially troubling economic implications.

Just as the companies of yesteryear used waterwheels and such to produce their own energy, Carr argued that companies today are doing the same with their datacenters.

IT workforces devote as much as 80 percent of their time to fixing and maintaining in-house datacenters, Carr said. Aside from the exorbitant labor cost sunk into this model of information production, Carr said that IT staffs have little variance from one company to the next.

He said small armies of troubleshooters are conducting the same tests on the same equipment to produce the same results all across the country, everyday.

Computing power, like electricity, is virtually unique in its ability to be transmitted over a grid, Carr said. And just as businesses realized the competitive imperative of hooking up to the electrical grid when they saw their rivals do so with considerable savings, so too will modern companies abandon their private supply of computing power when paying for a monthly service from Google (NASDAQ: GOOG), (NASDAQ: AMZN) or Hewlett-Packard (NYSE: HPQ) provides the needed storage and processing power with none of the cost of producing or managing it.

Fundamentally, Carr argued, the rise of computing utilities similar to electric companies would allow businesses to concentrate resources on the reason they’re in business in the first place.

“Companies, instead of investing in what is peripheral to their business, could invest in that business itself,” he said.

Who, then, would become the new computing utilities? Google is a prime candidate, of course, with massive buildouts like its new complex on the banks of the Columbia River in The Dalles, Ore., where river water channels through the facility to cool a bank of servers the size of a football field.

Companies such as Microsoft (NASDAQ: MSFT) are playing catch-up, Carr said, and Amazon, with its Web Services initiative, has positioned itself as an important player in renting out computing resources.

Enterprise heavy hitters such as IBM (NYSE: IBM) and Oracle (NASDAQ: ORCL) aren’t standing on the sidelines; just yesterday HP made a big announcement regarding the streamlining of its datacenter operations.

From a technological standpoint, the industry maxim born from Intel founder Gordon Moore is at work in this transformation, Carr said. Moore’s Law is the uncannily durable precept that computing power roughly doubles every 18 months, while costs hold steady.

Alive and well, Moore’s Law is at work in the virtualization technologies offered by companies such as VMware (NYSE: VMW), where the functions of a piece of hardware become software, and the functions of many computers can be performed inside one.

Then there is the massive buildout of broadband networks over the last several years, finally achieving a capacity where elemental computing resources such as raw processing power, storage and rich media can be deployed over a network.

Carr was quick to remind the audience that this idea is not a new one. While serving as CTO of Sun Microsystems in 1993, Google CEO Eric Schmidt presciently wrote, “When the network becomes as fast as the processor, the computer hollows out and spreads across the network.” Hence, Sun’s motto for a time, “The network is the computer.”

From a dripping faucet to a fire hose

So where does all of this lead?

“Just like the electrical socket brought a wave of change to the way we live and work,” Carr said a “similar effect will come out of the utility model of computing.”

Admitting that future changes of the magnitude he was describing are inherently difficult to predict, Carr nevertheless indulged the audience and peered into the tea leaves.

With their datacenters sent up to the cloud, corporations will rethink the interface of enterprise computing systems and move toward a more customizable workflow, he suggested. Then, also, the old talk of firewalls and isolated systems will become outmoded, for “the essential quality of utility, or cloud, computing is that it’s built on the assumption that applications and data want to be shared.”

“The World Wide Web is turning into the World Wide Computer, a shared processing machine that all of us can tap into for our own purposes,” Carr proclaimed.

For much of Carr’s address, he talked of the effect cloud computing and virtualization would have on innovation as something like a dripping faucet turning into a fire hose, but he left the audience with a few sober warnings about where the revolution was leading.

One byproduct is what he referred to “with a little exaggeration” as the “workerless company.” It is the same concern the trade unionists warn of when they discuss offshoring, only instead of American jobs going to India or China, utility computing will send human jobs to the cloud.

Whereas the electrification of industry led to a boom in industry that created a huge and prosperous middle class, utility computing threatens to reverse that demographic transformation by hollowing out the mid-section of the technology economy, creating a “digital elite.”

By way of example, Carr mentioned British Telecom, the telephone company, which had about the same number of subscribers as VoIP provider Skype did at the time of its acquisition by eBay (NASDAQ: EBAY) two and a half years ago. The difference, Carr said, was that British Telecom had about 100,000 employees, and Skype had 200.

Then consider a site like Craigslist, which for years has been steadily chipping away at the classified business of the newspaper industry, with a workforce of about 20.

Then there is the story of Marcus Frind, the one-man force behind, the world’s fifth most popular dating site, and one of the most popular 100 sites in any category. Through a remarkably savvy use of Google’s AdWords program, Frind built and maintains the site by himself, raking in between $5 million and $10 million annually from ad revenue.

“The cost of creating and distributing a product are basically zero, because it’s all done with digits,” Carr said.

Finally, talking directly to the assembly of search engine marketers who turned out for his keynote, Carr turned to privacy. He recalled the AOL debacle of 2006, when the search histories of more than 600,000 people were posted on the Web, and it didn’t take more than a couple days’ detective work by The New York Times to match the anonymized search queries to real people.

“People’s entire lives are laid out in their search terms,” Carr said, philosophically musing that computing technology is at once dazzling for the innovation and services it delivers, and supremely unsettling for how much of people’s lives are given over to machines.

“Computer systems have always been characterized by their liberating nature on the one hand, and their controlling nature on the other hand,” he said. “I’ll leave you with a question: Which side are you on?”

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