Wednesday, March 10, 2010

SDM thesis explores disruptive technology in cloud computing - SDM Pulse Spring 2010

By Alex Krikos, SDM ’09

Editor’s note: In this article, Alex Krikos summarizes the research he conducted for his SDM master’s thesis, "Disruptive Technology Business Models in Cloud Computing"

The term "cloud computing" is just now gaining traction in the marketplace, but the idea of creating a scalable and flexible shared computing solution via the Internet has been around for more than a decade. Today, cloud computing is steadily replacing more rigid software and services licensing models, thanks both to an improvement in technological capabilities and to changes in marketplace demands.

As I contemplated investigating cloud computing as a research topic for MIT’s System Design and Management Program, I considered how on-demand and utility-based computing resources have been used in the past. Over 10 years ago, Hewlett-Packard used its expertise in workstations and servers to host applications in a network-based and time-shared environment. What was lacking was a sophisticated, three-tiered framework of building blocks to manage data centers, develop applications and platforms, and deploy applications and services. These building blocks have become the foundation of cloud computing.

Today, cloud computing has all the markings of a disruptive technology—those that change the game as it’s currently played both by traditional software licensing businesses as well as by private, on-premises data centers. Cloud computing offers greater scalability, utility-based pricing, and ubiquity among applications, consumers, and potentially among cloud computing vendors. The drawbacks in the socalled public cloud include security, compliance, and enterprise information technology (IT) control.

To analyze whether cloud computing could be considered a disruptive technology, I tested three criteria as developed by Harvard Business School Professor Clayton Christensen in "The Rules of Innovation." The first two focus on the markets that cloud computing impacts, and the third centers on the ecosystems that support its success.
  1. Cloud computing as an innovation must enable less skilled and/or less-wealthy individuals to receive the same utility as was previously available only to more skilled and/or more-wealthy customers.
  1. Cloud computing must target customers at the low end of a market with modest demands on performance. However, it must do this with a performance trajectory capable of exceeding those demands and thus take over markets tier by tier. As a corollary to this second criterion, the cloud computing business model needs to allow the disruptive innovator to achieve attractive returns at prices that are unattractive to the incumbents.
  1. Cloud computing must be supported by an ecosystem structured as either a fully integrated single entity or a set of modular, niche entities.
As shown in Figure 1, cloud computing emerges as a disruptive technology when the evolution in traditional software licensing and premises-based technologies outstrips the market’s ability to absorb it. While there is no single, composite performance metric for the software and services domain, the constituent elements include security, cost, application management, ease-of-use, scalability, and enterprise IT control. Figure 1 diagrams the strengths, weaknesses, opportunities, and threats (SWOT) that define the incumbent software licensing and premises-based data center landscape along with disruptive cloud-based solutions.

Figure 1. In this graph, the yellow band represents
the range of customer demands, which rises
over time. The current state of technology,
represented by a dot, is at the high end
now—but does not hold the promise of cloud
computing. Indicated by the dotted line, cloud
computing is shown as likely to exceed rising
customer demands over time—making it a disruptive
technology. The strengths, weaknesses, opportunities,
and threats of the different scenarios are also labeled.
Based on my research and my 20 years of experience in the computer industry, I placed the competitive landscape and SWOT for the incumbent license/premises-based data center at the high end of customer demands where performance is sufficiently high to outstrip market demand. This is where the incumbent technologies are most vulnerable to disruptive technologies.

The incumbents’ strengths include high levels of security, compliance, and enterprise control. However, the traditional license/premises-based data center is vulnerable to highly scalable, low-cost cloud computing providers. The emergent cloud computing disruptive technology has strengths in scalability, virtualization, and low-cost, utility pricing. While it has drawbacks in the realms of security, enterprise control, and open standards, cloud computing is a disruptive technology because it not only offers low-cost solutions at lower initial performance levels, but also has a performance trajectory capable of meeting and exceeding market demands over time. Analysts including Forrester and Frost & Sullivan assert that end-to-end cloud computing providers such as Amazon, IBM, HP, and Savvis are committed to continuous performance improvement.

In the future, cloud computing is likely to make significant gains in security and compliance-rich applications, which are essential requirements of an enterprise-grade cloud.

However, enterprise control will likely remain a significant weakness as the cloud engenders third-party control. Analysts suggest that progress in open standards and private/public hybrid clouds may take as many as five years to gain traction. It is also likely that the cloud computing landscape will be fraught with competition between single end-to-end solution providers and the individual modular firms that make up its ecosystem.

The performance trajectories of cloud computing and the market’s ability to absorb them, while notional, are expected to increase over time as modular firms such as 3Tera and Citrix push the performance envelope for open standards and virtualization. However, even as cloud computing takes hold as the dominant computing paradigm, it can be expected that this technology will once again outstrip the market’s capability to absorb it— leading to new disruptive technologies. For example, as applications in the public cloud come under increasing scrutiny in the security and compliance arenas, hybrid clouds will likely emerge as a new disruptive technology.

Cloud computing satisfies the three market and ecosystem criteria outlined above for disruptive technologies. First, the inception of the public cloud and its next-generation advances in hybrid cloud technologies allow those with modest means to secure the same computing services that only those with greater means could formerly obtain. Second, the public cloud and its evolutionary improvements target the low end of the market, at an initial reduction in performance, but with a performance trajectory capable of meeting and exceeding market demands.

In addition, the emergent disruptive technology firms in cloud computing are able to make attractive returns, at prices unattractive to incumbents, as a consequence of the cloud’s value proposition of shared environments, which defray costs among a large subscriber base. Third, cloud computing has an ecosystem emblematic of a true disruptive technology. Leaders in cloud computing have been represented by fully integrated, end-to-end solution providers and by collections of niche, modular firms.

In conclusion, the future of cloud computing is moving toward more ubiquity, as greater demands from customers and greater capabilities from providers unfold. There are a number of market drivers that are orthogonal to the more well-known advantages of cloud computing. Most of these market drivers focus on the increasing presence of entrepreneurship. In the next decade, the number of baby boomers will vastly increase where entrepreneurial opportunities are more feasible than corporate ones. In addition, the immigrant workforce will play a vital role in the adoption of cloud computing. My research indicates that first-generation immigrant Americans are 70 percent more likely to choose entrepreneurial professions than are native-born Americans. Cloud computing will be a catalyst to entrepreneurship—lowering prohibitive cost and time barriers to entering a host of businesses ranging from financial services to health care.

However, cloud computing providers shouldn’t rest on their laurels of scalable, virtualized, and utility-based solutions. It would behoove the astute cloud computing provider to incubate separate business units that address disruptive technologies in the areas of security, compliance, enterprise IT control, and open standards, which had formerly excluded low-end markets.

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