Last week, in its quarterly earnings report, Amazon.com revealed for the first time how much money its cloud computing operation, Amazon Web Services, takes in. The numbers were impressive. AWS has become an $8 billion business, and its revenues continue to grow swiftly, nearly doubling in the most recent quarter from the same period last year. The unit’s profit margin — a surprisingly robust 21 percent — is vastly wider than that of the company’s retailing operation. Indeed, without AWS, Amazon would have lost a lot of money in the quarter instead of posting a narrow profit.
AWS’s results show how well established “the cloud” has become. Most personal computing these days relies on cloud services — lose your connection, and your computing device becomes pretty much useless — and businesses, too, are looking more and more to the cloud, rather than their own data centers, to fill their information technology needs. It’s easy to forget how quickly this epochal shift in the nature of computing has occurred. Just ten years ago, the term “cloud computing” was unknown, and the idea that computing would become a centrally managed utility service was considered laughable by many big IT companies and their customers. Back then, in 2005, I wrote an article for MIT’s Sloan Management Review titled “The End of Corporate Computing” in which I argued that computing was fated to become a utility, with big, central data centers feeding services to customers over the internet’s grid. (The article inspired my 2008 book The Big Switch.) I got plenty of things wrong in the article, but I think the ensuing ten years have shown that the piece was fundamentally on target in predicting the rise of what we now call the cloud. So here, to mark the tenth birthday of the article, is the full text of “The End of Corporate Computing.”
Something happened in the first years of the 20th century that would have seemed unthinkable just a few decades earlier: Manufacturers began to shut down and dismantle their waterwheels, steam engines and electric generators. Since the beginning of the Industrial Age, mills and factories had had no choice but to maintain private power plants to run their machinery — power generation was a seemingly intrinsic part of doing business — but as the new century dawned, an alternative was emerging. Dozens of fledgling electricity producers were erecting central generating stations and using a network of wires to distribute their power to distant customers. Manufacturers no longer had to run their own dynamos; they could simply buy the electricity they needed, as they required it, from the new suppliers. Power generation was being transformed from a corporate function into a utility.
Now, almost exactly a century later, history is repeating itself. The most important commercial development of the last 50 years — information technology — is undergoing a similar transformation. It, too, is beginning an inexorable shift from being an asset that companies own — in the form of computers, software and myriad related components —to being a service that they purchase from utility providers. Few in the business world have contemplated the full magnitude of this change or its far-reaching consequences. To date, popular discussions of utility computing have rarely progressed beyond a recitation of IT vendors’ marketing slogans, laden with opaque terms like “autonomic systems,” “server virtualization” and “service-oriented architecture” . Rather than illuminate the future, such gobbledygook has only obscured it.
The prevailing rhetoric is, moreover, too conservative. It assumes that the existing model of IT supply and use — and the corporate data center that lies at its core — will endure. But that view is perilously short-sighted. The traditional model’s economic foundation is already crumbling, and it is unlikely to survive in the long run. As the earlier transformation of electricity supply suggests, IT’s shift from a fragmented capital asset to a centralized utility service will be a momentous one. It will overturn strategic and operating assumptions, alter industrial economics, upset markets, and pose daunting challenges to every user and vendor. The history of the commercial application of information technology has been characterized by astounding leaps, but nothing that has come before — not even the introduction of the personal computer or the opening of the Internet — will match the upheaval that lies just over the horizon. Continue reading