Will cloud services be traded just like stocks and bonds one day?
- 09 October, 2013 21:44
Today, cloud computing resources are bought and sold in a fairly straightforward process: A company needs extra compute capacity, for example, so they contract with a provider who spins up virtual machines for a certain amount of time.
But what will that process look like in, say, 2020? If efforts by a handful of companies come to fruition, there could be a lot more wheeling and dealing that goes on behind the scenes.
An idea is being floated by several companies to package cloud computing resources into blocks that can be bought and sold on a commodity futures trading market. It would be similar to how financial instruments like stocks, bonds and agricultural products like corn and wheat are traded on exchanges by investors.
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Could this actually happen? "It's got some challenges," says Jeffery Harris, the former chief economist at the U.S. Commodity Futures Trading Commission, which oversees futures trading. Regulators would have to go through a long-check list to ensure there is no room for manipulation in such a market before allowing it, predicts Harris, who now is a professor of finance at Syracuse University's School of Management. There could be technical challenges too, both in terms of how such an exchange would be operated and how the resources sold on the exchange would actually be consumed by end users. Overall though, Harris says the idea is viable, yet still in the early days.
Recently, the idea has gained some credibility because one of the companies that proposed the exchange named 6Fusion has signed a letter of intent to explore the idea with the largest futures exchange market in the country, the CME Group.
There are a handful of other companies pursuing this idea too though. Generally, the process would work the same: Blocks of cloud computing resources - for example a month's worth of virtual machines, or a year's worth of cloud storage - would be packaged by service providers and sold on a market. In the exchange, investors and traders could buy up these blocks and resell them to end users, or other investors, potentially turning a profit if the value of the resource increases.
The market for these resources would ebb and flow, just like with any other commodity, based on supply and demand. Perhaps around the holiday shopping season, or directly after a natural disaster, these blocks of cloud resources would be more valuable, for example. As concerns about government peering increase, highly-secure resources could be in higher demand than more vanilla offerings.
The benefit, backers say, are multi-fold. For cloud computing providers, it would create a whole new marketplace where their services are sold. Introducing these new trading mechanisms in a future's exchange would allow providers to sell out a year's worth of use for their data center before ever even laying a brick.
For end users, there can be benefits as well. Namely, when providers compete in a marketplace, prices could come down. It would be a central location for end users to compare and contrast options from multiple vendors. Almost like a farmer's market for cloud computing resources, says Rob Bissett, senior vice president of product for 6Fusion, the North Carolina company pushing the idea that recently signed with the CME Group.
Perhaps the real winners are the investors though. Turning cloud resources into a commodity exchange introduces a whole new set of actors, such as investors and traders into the mix. To them, the cloud is just one more commodity for them to trade like a stock, bond or grain.
Backers of the proposition at 6Fusion say that a couple of dominoes need to fall before their plan can really take off. One key, Bissett says, is to have a common trading metric a way to compare resources from multiple providers in an apples-to-apple fashion to ensure one commodity is equal to another. To that end, 6Fusion has created the Workload Allocation Cube, or WAC, which takes into account CPU, storage and input/output speeds to create a common metric that is applicable across multiple providers. By having a common trading unit, buyers and sellers can be on the same page. 6Fusion already allows customers to use the WAC to measure their consumption of cloud resources across multiple providers. Eventually, 6Fusion wants to trade those WACs on the CME's futures exchange market.
6Fusion isn't alone in pursuing this idea. European company Deutsche Borse, which operates the Frankfurt Stock Exchange, has proposed an exchange that is based on software from a company named Zimory, which would manage some of the technical hurdles this idea faces. Zimory has a connector that produces a secure pipeline between end users and various cloud providers' services that are traded on the exchange. It would allow end users to get cloud resources from one provider on an exchange, then potentially switch to another provider based on price, performance or other metrics.
The 6Fusion folks say they're just buying and selling their WACs, they're not in the business of actually delivering the resources to end users; third party consultants and systems integrators can do that.
Cloud provider Virtustream purchased the company SpotCloud in 2010, which was set up by Reuven Cohen who now works for Citrix on its cloud operations as a marketplace where users could compare offerings from multiple providers. Virtustream is still developing that product. Cohen says the cloud is a natural fit for being traded on an exchange though. "The cloud market is one with a lot of fluctuations," Cohen says. "There's unused, excess capacity, and a dynamic market, which are key characteristics for an exchange."
Harris, the economist, agrees that a volatile industry makes for a good commodity exchange, but he's unsure if cloud quite fits the bill.
While prices have been falling in the cloud computing market for the past few years, they have not been going back up. It's more of a trajectory down compared to volatility. Technology advancements like Moore's Law could render old resources not as valuable as new ones too, which could be another hurdle for trading the cloud in a future's market.
And then there is the collusion part, which Harris says is perhaps the biggest hurdle. Before allowing cloud resources to be traded on the CME, regulators would likely want to see some sort of guarantees to ensure there is no way a company could manipulate the market to their advantage. The day before a block of cloud storage hits the market another competing provider could announce that it has built a new data center and added a large amount of new supply to the market.
End users could grapple with a new buying model too. "Organizations will need to reorganize their entire businesses to take advantage of cloud markets, and will need to effectively design processes, manage risk, set financial controls, and allocate budget responsibility through new policies," wrote William Fellows, an analyst with the 451 Research Group in a report last year on the idea. "Are consumers ready for such a dramatic change to their supply chains?"
Harris says those who would benefit most are likely the market-makers that buy and trade these commodities. Eventually cost savings that the market creates could trickle down to the end users, but investors will be buying and selling, looking to make a profit in between.6Fusion hopes to explore the idea with CME Group in the coming months and hopes to make its own exchange market generally available within the next half-year. That could be the first real iteration of a platform that could be much more dominant in the future.