Cloud chronicles | The Economist – The Economist

August 26, 2016 Facebook Twitter LinkedIn Google+ Uncategorized

AS BOSSES go, Linus Torvalds and Andy Jassy couldn’t be more different. Mr Torvalds works, often in his bathrobe, out of his home in Portland, Oregon. He leads an army of volunteer developers whose software can be had for nothing. The office of Mr Jassy, who usually sports business casual, is in a tower in Seattle. His employees operate dozens of huge data centres around the world and work to create new online services that his firm can charge for.

Yet their organisations share an anniversary and an intertwined history. On August 25th 1991 Mr Torvalds asked other developers to comment on a computer operating system he had written, which became known as Linux. It has since become the world’s most-used piece of software of this type. On the same day in 2006 Mr Jassy’s team made available a beta version of “Elastic Compute Cloud” (EC2), the central offering of Amazon Web Services (AWS), the cloud-computing arm of Amazon, an e-commerce giant. Over the past 12 months the division racked up sales of $11 billion.   

These two organisations have been central to the rise of cloud computing, the provision of all kinds of number-crunching services over the internet. Global networks of huge data centres, of the sort run by AWS, have become one of the world’s most important infrastructures. Without open-source programs like Linux, however, cloud computing would have been stillborn. Old-style “proprietary” software was too expensive and hard to adapt. In writing his program, Mr Torvalds was just scratching his own itch: he simply needed what later became Linux for his own PC. Now about 1,500 developers contribute to each new version of Linux. As for AWS, rapid growth had left its parent company with “jumbled IT systems”, says Mr Jassy, and it needed to integrate them into a single platform, or set of reusable services, which later emerged as AWS.

Being first to succeed on a large scale allowed both Linux and AWS to take advantage of network effects, which make popular products even more entrenched. Linux also took off because Microsoft’s rivals, in particular IBM and Oracle, wanted to rein in Windows and threw their weight behind the open-source alternative. AWS’s timing, just before smartphones emerged in 2007 and ushered in the app economy, was especially good. It became the go-to service for startups because it charged only for the capacity they used rather than a fixed fee. AWS is still a haven for young firms: nearly two-thirds of its more than 1m customers are startups, although it increasingly also serves big companies such as General Electric and Netflix.

Both open-source software and cloud computing have been disastrous for the old giants of IT. New firms almost always opt for an open-source database in the cloud rather than a pricey proprietary version from Oracle, the biggest vendor of such software. The more firms use the cloud, the less they buy equipment from Dell, Hewlett-Packard and other hardware makers. Cloud-computing providers, for their part, have little time for traditional vendors of computing gear and instead buy from contract manufacturers in China. The incumbents have seen sales in their core business stagnate or drop in recent years. IBM’s revenues, for instance, have fallen for 17 consecutive quarters.

But if their pasts share resemblances, the futures of Linux and AWS will diverge. Linux will probably just “happily plod along”, in the words of Mr Torvalds, as will open-source software in general. Meanwhile, AWS shows no sign of slowing its progress towards full dominance of cloud computing’s wide skies (see chart). It has ten times as much computing capacity as the next 14 cloud providers combined, according to Gartner, a consulting firm. AWS’s sales in the past quarter were about three times the size of its closest competitor, Microsoft’s Azure. This business is the reason why its parent company was able to report its third consecutive record quarterly profit in July, after years of patchy results.

It is much more profitable than anyone expected, too, even after many rounds of price reductions designed to seize market share. One reason is that as well as offering basic storage and number-crunching, it sells hundreds of other computing services and features, from analytics and e-mail to search and workflow; the marginal cost for providing these add-on services is close to zero because the necessary software is already written.

Others are struggling to keep up. Hewlett-Packard has thrown in the towel. IBM had to buy SoftLayer, a startup, in 2013; it has since become the core of Big Blue’s cloud but IBM is still lagging behind. Google is also struggling. Last year it hired Diane Greene, a renowned IT executive, to give its computing utility a boost. Only Microsoft’s Azure is currently able even to “touch” AWS, says Paul Miller of Forrester, a consultancy.

Get off of my cloud

The “cloud-computing wars”, as some call them, are not yet over. The prize is too great. Gartner estimates that about $205 billion, or 6% of the world’s IT budget of $3.4 trillion, will be spent on cloud computing in 2016—a number it expects to grow to $240 billion next year. The latest battleground is data. Cloud providers are hoovering up digital information left and right so they can mine it and use the insights to offer new services or improve existing ones. Earlier this year, for example, IBM bought Truven Health Analytics, which has data on 215m patients.

Yet again, however, AWS has stolen a march on its rivals. Its latest database offerings, Aurora and Redshift, have been in especially high demand. Last year it began to offer a service called Snowball, a suitcase-sized box packed with 50 terabytes of digital memory, which firms can use to transfer mountains of data into AWS’s cloud.

AWS may eventually discover some limits to its growth, as users seek to keep alternative providers in business. Many customers fret about getting “locked in” to it. Startups often use the service in ways that deliberately allow them to switch providers. In Europe some two-fifths of firms use more than one cloud, according to Forrester. This will help other players to catch up.

But AWS’s momentum is immense. Even, a big provider of online business applications that operates data centres of its own, recently announced that it will start using AWS, notes George Gilbert of Wikibon, a group of IT consultants. At some point, Mr Gilbert reckons, even IBM may have to take the same step.

AWS could end up dominating the IT industry just as IBM’s System/360, a family of mainframe computers, did until the 1980s. If that happens, the antitrust authorities may eventually have to step in, as they did with IBM. Back in the early days, when Messrs Torvalds or Jassy tinkered with their creations, that outcome would have seemed inconceivable.