The New Asset Class December 14, 2009
Posted by James Webster in : finance, virtualization, development , trackbackI touched on this idea briefly before in Commodity Markets for the 21st Century and it looks like the idea is evolving further…
In Hedging Your Options for the Cloud Joe Weinman discusses how as cloud computing turns computing power into utility, its pricing and risk management strategies around volatility of prices will begin to reflect those of other commodity markets (electricity in particular).
As if in response to the previous article, Werner Vogels of Amazon announces ‘Spot Pricing’ for EC2; customers requiring EC2 compute time at some point in the future without hard deadlines can nominate a maximum price they are prepared to pay. When the spot price (defined in financial markets, particularly commodities and FX, as the price for immediate delivery of an asset or commodity) drops below this level the customer’s EC2 instances will spin up and start computing. When the spot price climbs above the customer’s specified level the EC2 instances will automatically shutdown. The latter will require the workloads to be resilient to abrupt termination but this should be fine for robust batch jobs.
So I wonder if futures/forwards/options markets may grow around this new commodity one day. Probably not at the moment as there is no mechanism for selling short. Also unlike deregulated and competitive electricity markets there is only one ‘generator’, Amazon. However the EC2 APIs are published and in fact the Eucalyptus project is building an open-source implementation of the EC2 APIs. Eucalyptus has already been integrated into Ubuntu and RightScale’s toolsest for virtualization. So it might seem that the barriers to entry for a potential Amazon competitor are quite low, however Amazon have already achieved significant economies of scale (which will increase further with their planned entry into the Asian market).
It would seem natural for Microsoft or Google to challenge Amazon directly by providing their own implementation of Amazon’s EC2 APIs, however their own cloud computing offerings require developers to code to more proprietary frameworks (although there are open-source efforts to implement the Google App Engine on EC2; AppScale being seemingly the most advanced) rather than EC2’s approach of just providing access to a virtual machine. Maybe they have already run the math and decided that competing directly with a low-cost provider like Amazon is like wrestling with a pig… you both get dirty and the pig likes it 
It would be great for competition and innovation if cloud computing was more transparently portable between providers, and the resulting fungibility would benefit consumers of cloud resources in being able to manage their operational expenditures.
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Another open-source option for cloud computing is Nimbus. Nimbus allows to turn a cluster of machines into an IaaS cloud, and its EC2-compliant (not all features though). Although it’s targeted for science, it can be as well used for other needs. Check it out: www.nimbusproject.org