1124RA AWS’ New Exchange Model Accelerates IT Commoditization, Buying Uncertainties

What is Happening?  A lightly-reported announcement from Amazon Web Services (AWS) last week signaled one of the most significant changes in the IT market and business model yet seen. It wasn’t something entirely new, nor was it unexpected. But its ramifications to IT buying and selling, and therefore IT-related business models, are and will be substantial, and are likely to provide another series of significant IT buying and budgeting disruptions.

What AWS announced was its Reserved Instance Marketplace. In simplest terms, this marketplace is a secondary market for trading/selling/buying reserved instances of AWS’ Cloud-based IT services.

It is not the first such marketplace. Two years ago, Saugatuck began including firms like Enomaly’s SpotCloud.com in our regular research on changing IT markets, business models, services, and more. SpotCloud is not the same as AWS’ Reserved Instance Marketplace, in that SpotCloud acts more as a market for enterprise IT data centers and MSP/IaaS providers looking to sell/resell their own excess capacities.

By contrast, AWS has established a market for its customers to resell services that AWS has already sold to those customers – in effect, getting a second bite of the same apple. A good comparison for AWS’ approach would be a sports team that sells tickets, and then provides a fee-based/commission-based marketplace for ticket holders to resell those tickets. The team profits twice, by selling the tickets in the first place, and again by providing a fee-based service for customers to resell tickets. In fact, team – or Amazon – can profit multiple times from a single initial sale, as customers often decide they can’t use what they bought when they thought they would, and re-post it for resale.

At the bottom line, exchanges in general reduce IT-as-a-service to a simple commodity to be traded as would any other, subject to not only demand but also to speculation and therefore varying pricing over time. This introduces an initially small but potentially high-volume element of uncertainty in IT buying and usage, one that could quickly and easily grow to be more disruptive to IT organizations (and providers) than Cloud itself has been to date.

Why is it Happening?  If you can buy and reserve network-delivered services, you usually can resell them. Telcos have done this for more than a century. Even before the Ma Bell breakup in the 1980s, AT&T was selling reserved network capacities and services to local and specialized carriers, which then bundled or simply re-sold them to customers or other carriers.

IT-as-a-service trading and reselling on commodity exchanges is a natural, evolutionary result of basic IT buying and use practices that began in the earliest days of mainframe time-sharing, fell into disfavor with enterprises in the days of desktop and client-server computing, then regained practicality and popularity with the rise of Cloud IT. And the concept fits exactly into what we began calling “utility computing” as far back as 2006 (243RA, Utility Computing: Key Considerations, 17May2006).

Obviously, enterprise users are ready for such services. There’s no market without demand. AWS is stepping up to forestall potentially competitive marketplaces, protect its own flanks, and derive more revenue from what it has already sold.

Finally, anyone connected with IT as a concept has been foretelling the eventual evolution of most forms of IT into commodities for decades. Today’s greater scales of production and delivery lead to lower individual cycle costs, which lead to commoditization in all its forms. They also lead to larger and more energy-hungry data centers, a topic to be explored in upcoming Saugatuck research.

Market Impact:  This early, beginning shift toward exchange-traded (and resold) IT-as-a-service accelerates the Cloud-driven disruption in IT usage and business models, and accelerates especially the perception and reality of IT as a commodity – further changing the roles and responsibilities of IT organizations and providers (1080CLS, Change, and Change Again: The Shape of IT Orgs to Come, 08June2012).

Future Saugatuck guidance for our CRS research clients will include in-depth assessments of the range of such market business models, how IT buying and usage will be affected, what IT leaders need to do to effectively manage it, and how IT providers – from core hardware to BPaaS providers – will be affected, and need to adapt their business models. Our initial, “highlight” view of market impacts for this Research Alert includes the following:

1. By YE 2013, multiple types of Cloud IT services will be commoditized and re-sold in this manner, including IaaS, SaaS and BPaaS. Cloud providers’ business models will adapt and include such variables, or the providers will lose customers, revenues, and market position.
2. Because of the commoditization pressures from such exchanges, IT providers will need quickly to find more and better ways to add value and differentiate their offerings and business models – as well as figure out in which secondary markets they will participate, how, and when.
3. Uncertainties and risks in buying ungoverned volumes of variably-priced IT over time will drive a need for better risk assessment and IT buying disciplines and management skills within all sizes and types of user organizations (1089RA, New Saugatuck Report on Managing Risk / Reward in the Boundary-free Enterprise™, 28June2012).
4. Some enterprises with specialized IT integrated with their business processes (e.g. efficient, internal pharma BPaaS) will explore not just reselling that as a service to third parties, but developing secondary markets where such services are resold alone or bundled, on demand or by reserve instance.
5. VARs and MSPs, especially those serving smaller firms, will become de facto “small investor” trading firms, adding commodity-buying/aggregating capabilities to enable smaller firms to have trading advantages similar to the larger enterprises in such markets.

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