Are Public Cloud Services Commodities?

I’ve seen this question being asked more often lately.  I’ve even seen a few pundits, peddlers and consultants referring to public cloud services as if they are commodities, as if that’s something that everyone knows and simply accepts, so perhaps it’s time to give the question a close examination.  There are many definitions of the word “commodity,” but in the context that I’m writing about here a commodity tends to have the following attributes:

  1. It’s usually an economic good that has some value.
  2. One unit of that good has about the same value regardless of who sells it to you.
  3. It’s usually mass produced and
  4. Markets for commodities are usually driven primarily by price, with brand names being of far less value than in markets for non-commodity goods.
  5. Because of these factors commodities can usually be easily bought and sold on market exchanges.

Common examples of commodity goods are things like gold, copper, crude oil, soy beans and wheat.  An ounce of gold, a barrel of oil or a bushel of ordinary wheat have more or less universal values no matter where they come from.  They are mass produced and have a single unit price that you can look up on a commodity exchange at any point in time.

Certainly, public cloud services are not very similar to this.  Right off the bat we see that they are not goods; they are services.  How can a service be a commodity, since the quality of a service almost undoubtedly varies from one provider to the next?  Well, they can’t, but to be fair there are some services that are at least “commodity-like.”  Two that come to mind are the notary services and vehicle inspections that we all need from time to time.  Those aren’t traded on exchanges like true commodity goods would be, but they are at least similarly priced and something you can get from pretty much any provider and receive more or less the same value.  So, for the sake of argument, let’s give cloud services a pass on our first criteria above and stretch the meaning of “commodity” to include services.

On to points 2 and 3.  One could argue that public cloud services are sort of mass produced, since they are built on huge “farms” of equipment, large groups of which are identically configured, and the same menu of services is offered to every customer.  Unfortunately, however, that’s only true if you focus on one provider.  If you look across providers, you find that very different services are provided on top of equipment configurations that are very different from one another.  The prices, and what’s included in the prices, vary dramatically from one provider to the next, as we’ve discussed in-depth in my previous posts.  Support, SLAs, security, functionality, performance and other factors are all quite different from one provider to the next, and anyone who’s read The Cloud Service Evaluation Handbook appreciates the critical importance of these differences.

If that’s not enough to end any debate, it’s on point 4 that cloud services spectacularly fail the commodity test.  I would argue that the market for public cloud is in no way driven by price.  Some may be shocked to hear me say that, but a brief review of my posts on cloud pricing below show that to be true.  A market that was truly price-driven would have its major competitors much closer together on what they charge, just as you often see from two gas stations situated across the street from each other.  Brand names are, in fact, almost everything in the cloud service market, at least so far.  Amazon is seen as the inventor of this space, and they are clearly reaping the benefits of that.  Microsoft has a large mind-share among developers and Google is perceived as a pioneer for almost any type of new, automated technology.  This is why IBM isn’t crushing the rest of the market, since their brand is more associated with their leadership of the “old,” not-much-loved traditional outsourcing space.  Add the relative strengths of these important brands to the actual features and functionality of the services they sell, which are all different from each other, and you can fully explain their relative market success.

Finally, to our last criteria, there is no commodity market exchange for cloud services.  “Hold it!” you say.  What about Amazon’s “spot instances?”  Those are traded on an exchange!  Well sure, but not the kind of exchange that the meaning of the word “commodity” alludes to, and I actually think this might be where a lot of misuse of the term is coming from.  You’ve got to remember that Amazon’s “market” is only for AWS EC2 instances, traded only with Amazon customers on an exchange run by Amazon.  Microsoft can’t sell one of their instances on that exchange.  You could argue that the spot instances themselves are commodities because anyone can buy and sell them, but that’s only one type of instance from one provider.  There is no reasonable way to generalize that and infer that all public cloud services are commodities.  Nor will that happen in the future unless Amazon becomes the only public CSP and all AWS infrastructure becomes “spot” infrastructure.  Today what you have is more analogous to an equity stock market like NASDAQ,… if it only sold multiple types of stock from a single company and if NASDAQ were owned by that company.  NASDAQ doesn’t trade commodities, and there’s a reason for that – commodities and equities really are quite different things.

So, hopefully that put’s the question to rest.  Amazon did not look at IT infrastructure and decide “we can turn this into a commodity.”  If they did they would have made all of their automation open source and their APIs non-proprietary.  What they did do was look at IT infrastructure and decide “we can sell this like shrink-wrapped software or like books, and there’s nobody in the world better at doing that than us; all we need is the right automation.”  Software packages are not commodities; books are not commodities and neither is IaaS.

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