The four horsemen of the digital apocalypse are cpu, storage, communication, and content, aka Moore’s law and his friends mean that costs are always falling, capablities are always increase, and displacement opportunities are always popping up. These are the drivers that keep pulling the rug out from under any industry that’s built on them. The telecom industry, the entertainment industry, the content based industries.
Muzac didn’t stand a chance, but how did it manage to last for decades? It was originally a high tech company, repurposing the latest military electronics for consumer markets. In that way it is a classic example of firm based on an opportunity created by Moore and his friends. But it’s long survival comes on the other side of the equation; the difficulty of displacement – or something like that. It appears that a lot firms bridge a gap between what falling commodity cost of these things and their customer’s inablity to move that fast. The installed base moves in fits and spurts. The firms struggle to manage that. There is a tension, if they can get the gap larger they capture more revenue. But large gap creates a tension where competors can step into.
To take an example the Telecom industry didn’t lower prices for decades. Their network effects made routing around them very hard. But finally the largest customers started to route around them. Much later the industry suffered a vicious restructuring.
Which brings me to today’s question? We have numbers, i.e. communications capacity doubles ever 9 months. So what’s the number for cloud computing and why do EC2’s price trends appear to be unconnected the price trends of their cost of goods?
>why do EC2â€™s prices appear to be unconnected the numbers?
Hypothesis: most EC2 users are not paying for compute performance, but instead to have their time freed up from feeding and watering a farm of computers; so much of the charge is in lieu of personal or corporate opportunity cost, which is not closely related to Moore’s law – at least in a world where you are running an application where “fast enough” is adequate performance.
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Alec no doubt knows I replied over on his site saying:
“I love the suggestion that running a data center is like being in the 4H.
Yes people are buying the value of having somebody else keep those stables clean. Yes they would be willing to pay something close to what it would cost them to run a small family farm. But AMZN is running a factory farm, and itâ€™s costs should be a fraction of mine.
The degree of pricing power AMZN has is revealed in the difference between the price they charge and their COGs. If they already lack effective competition, and thatâ€™s really what Iâ€™m suggestion, then your right they can charge for value. That has side effects.”
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