Could A Cloud Computing Exchange Work?

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cloudsAmazon’s announcement last month of spot pricing for cloud computing services has prompted some cloud experts to begin discussing the potential for a public cloud exchange. Cloud technologists are intrigued by the potential applications for commodity-style trading of compute capacity, but say a cloud exchange would require the right model and market maker to succeed.

In December, Amazon Web Services introduced Spot Instances, a pricing approach which allows customers to bid on unused Amazon EC2 capacity and run those instances for as long as their maximum bid exceeds the current spot price, which changes periodically based on supply and demand.

A day before Amazon’s announcement, Joe Weinman, strategy and business development VP for AT&T Business Solutions wrote an opinion piece for GigaOm in which he describes similar pricing possibilities for the cloud computing market. Weinman notes that cloud computing shares similarities with other on-demand, pay-per-use offerings such as airlines or car rental.

“Microseconds Could Mean Millions”
Among Weinman’s suggestions was the notion of “time-based pricing” in which computing cycles at 2 a.m. should be priced lower than prices at 2 p.m.; and even pricing based on location: just as hotels would put a premium on ocean-view rooms, cloud suppliers offering capacity located near stock exchanges could charge more because “microseconds might mean millions.”

Other suggestions include dynamic pricing, similar to the way airlines and hotels use “sophisticated yield management algorithms to maximize revenue, reducing prices to increase demand when utilization is low, and raising prices when utilization is high,” Weinman writes.

Reuven Cohen, founder and chief technologist for Toronto-based enterprise cloud platform provider Enomaly, writes in his Elastic Vapor blog that cloud computing could be traded as a commodity. He writes: “[T]he concept of distributed batch processing and compute elasticity have become critical parts of modern business IT strategies. These kind of flexible and elastic compute usage models are ideally suited to that of a spot market for commodity compute capacity (provided via a method that is quoted for immediate (spot) settlement for both payment and delivery.” He adds that Amazon’s Spot Instances has helped to legitimize this concept.

Useful for Demand Spikes
Cohen compares the opportunity for trading of excess cloud resources to the energy market because they are commodities. “The concept of selling excess capacity in cloud centric data centers may also make sense in that cloud providers must have significant additional capacity on hand just in case of demand spikes,” he writes.

Such an exchange would have to be managed by a trusted independent agency, believes Tom Lounibos, CEO of Soasta, which provides cloud-based load and performance testing of Web applications, and who has been in informal discussions with Weinman and Cohen about this subject.

Sabre As Potential Model?
“The best example that I see of a viable model would be the Sabre System that emerged in 1960s for the airline industry which allowed passengers to search for seat availability and pricing from several airlines, Lounibos writes in an e-mail interview. “This system was originally developed by American Airlines and IBM and was developed as a separate division until it was sold by AA in 2000. So the possibility of a thought leader in cloud computing (like Amazon) could duplicate American Airlines effort of the 1960s.” However, the Sabre story is fraught with controversy over AA’s ownership and control, he adds.

Lounibos says customers that consume a massive amount of compute power would benefit from such an exchange because they would have “access to an amazing amount of capacity at the lowest available cost (think Best Buy). Suppliers would benefit as well by the lowering their cost of operations (specifically in sales and marketing) if the field was leveled.”

For such an exchange to work, partners would need to be open with each other regarding their systems availability and pricing, Lounibos writes. The quality of service may vary between vendors.

Commoditization in a Differentiated Environment?

The latter issue was also raised by Andi Mann, VP of industry research firm Enterprise Management Associates. “If we think of this as codesharing for IT, where airlines may hand off a portion of your flight to another carrier, who knows whose cloud plan you will end up on,” Mann says. “If you have an agreement with a supplier who is SAS 70-compliant, would the other carrier also be SAS 70-compliant?”

Mann also questioned the commoditization of a nascent market in which vendors are keen to build differentiation, such as offering desktop as a service. “Customers may end up not buying the same model as another vendor,” Mann says. He also questioned whether customers would be willing or have the resources to constantly monitor the exchange to get a good deal.

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4 Comments

  1. I blogged about this very topic yesterday in response to Ruven and Hoff's articles on the performance issues. What Amazon has proven in the last few weeks is that they can sell all their compute if their prices are low enough but at the expense of their existing customers... What they should become IMHO is a marketplace or exchange for compute as they are for books. That will give them scalability and profitability without having to provision all the underlying resources. Full post here- Is Cloud Computing doomed or did EC2 “over optimise”? http://bit.ly/81T0KB Justin http://justinpirie.com

  2. I'm happy to announce that we've just launched SpotCloud (http://www.spotcloud.com) The first Cloud Computing Clearinghouse and Spot Market for service providers / data center operators.