Some Things Change Everything: Amazon's Cloud Computing

Carlota Perez is one of my heroes. Her fantastic articulation (in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages) of how technological revolutions mark turning points in long economic cycles, building on the work of Schumpeter and Hayek, is in my opinion is an incredible lens through which to understand long term economic growth and its effect on financial markets. Her approach is a key foundational pillar for our investment thesis, and is why we feel confident that it is possible to generate excess returns by catching the long term secular economic waves that ultimately govern capital markets. (Think of it as the polar opposite of day trading.)

In her thesis, each successive long wave of the economic cycle is initially catalyzed by a technological revolution, usually only visible in hindsight:

click to enlarge

My suspicion is that we are living through a “phase change” now (be careful, “now” in this context means a period of a few years, not “today” or “this quarter”…) - and so I’ve been wondering what will come to be seen as the foundational technological revolution of the sixth paradigm. The previous five, as defined by Perez, are below:

There are many possibilities, but I’m starting to think that the transition to cloud computing (enhanced by ubiquitous wireless connectivity) just might be it. And for the sake of taking a punt on what might be a good symbolic starting point for this revolution, how about the launch of Amazon’s (AMZN) S3 and EC2 in 2006?

And it just keeps getting better (via GigaOm):

Amazon today said it would bring web-scale computing power for use in workloads such as web indexing and data mining to just about anyone. The bookseller now offers MapReduce (a programming model created by Google (GOOG) to help deal with incredibly large data sets) using Hadoop on Amazon’s Elastic Compute Cloud and Simple Storage Service. This allows AWS (Amazon Web Services) customers to access the power of a Google- or Yahoo (YHOO)-style server and programming infrastructure to model business decisions and analyze huge sets of customer or corporate data without having to invest in thousands of servers (as well as dozens of programmers). Dana Gardner over at ZDNet says one could think of it as having access to a personal supercomputer.

Just as Intel’s 4004 microprocessor was the catalyst for a wave of creative destruction in the 70s and 80s, will AWS prove the same for the 00s and 10s? Probably. We’re seeing it already. And it’s going to disrupt the hell out of the mastodons of industry across most sectors of the economy. Why? Because their cultures and leaders are entirely ill-equipped to face such a fundamental paradigm shift. They know how to play by the old rules. The strategic competitive advantages they built up over decades risk suddenly - poof! - to become obsolete. (from Dan Gardner:)

Think of it as having your own tuned supercomputer that you can plug gigantic data sets into and ask questions that will determine the course of your businesses for the next decade. Oh, and you can pay for the pleasure on a credit card.

This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises. But there are plenty of people, researchers, government agencies, academics, small to medium enterprises, venture capitalists and the like that would hugely benefit from sussing out important trends and findings from the growing reams of raw data generated by modern businesses and societies. Talk about metadata on steroids!

“This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises.” Not anymore… Think about that for a moment.

Size used to be an advantage in almost any industry…now? Not so much. New rules, new winners.

Thought experiment: Let’s take, oh say…banking. Which would you rather run (if say your life depended on success, which I know these days is a bit far-fetched but humor me…)?

• A greenfield start-from-scratch-bank (assuming you had access to sufficient capital to get started, say $100 million or so)? Or,
• [insert favorite megabank here] (assuming you had access to sufficient capital to not be immediately insolvent, say $100 billion or so)?

Well unless you are a sociopath as per Hugh and see the key metric of success being how many people report to you and whether or not global political leaders will take your call, I think the answer is pretty bloody obvious.

So what does all this mean? Well, for us it means investing in companies that are positioned to ride this wave (not build a levee against it, hoping it won’t break.) Some - like cohesiveFT - are right in the heart of the technology facilitating this new paradigm. Others, like our most recent investments Zoopla and FX Capital Group, are building new business models adapted to the new technological landscape that will allow them to disrupt and extend existing markets. But it also means remembering that you can be right (about the future) but still not come out on top:

The network is the computer. - Sun Microsystems (1982-2009)

These really are incredibly exciting times.

Disclosure: None

Comments

[User 388171:]

Netbooks are creating some of the push to cloud computing. Or perhaps people discovered with so many web applications (gmail, netsuite, salesforce.com, business specific web applications) and applications such as Citrix, that a high power laptop or desktop is not needed.

However, I wouldn't over-reach for what "cloud computing" will do to the tech industry. As Larry Ellison said: "The interesting thing about cloud computing is that we've redefined cloud computing to include everything that we already do... The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish... When is this idiocy going to stop?"

Some of these web applications, hosted storage applications (box.net), and outsourced hardware solutions have been around for several years...they just now have the label of "cloud computing".

I don't know how fast organizations will jump onto having their databases hosted by other companies, due to privacy and security breaches we've already seen with many companies and financial institutions. Not to mention the performance of a database in the cloud...

Apr 03 10:22 AM

[Stustanton:]

To me, cloud computing is whatever it takes for the whole of the world coming together and sharing. Consider this: If someone can build a computer program that leads even ME through doing my taxes competently, then we can put ANYTHING on a computer and have it lead me competently through it; and it follows that, clearly, the genius of every person on the planet can be made multiplexed and available to every other person on the planet. THAT'S cloud computing. Everyone has their genius. Everyone. No exceptions. Multiplex THAT. I'm not talking about just telling-me-about-their... but leading-me-through-doi... Every individual on the planet has access to every human capability on the planet, past and present, instantly, just in time to meet the need. The word encyclopedia then has new meaning. Cloud computing of that kind is a species-changing event. Talk about social networks. Talk about social movements.

Apr 03 01:10 PM

[raytayzmd:]

..."Some of these web applications, hosted storage applications (box.net), and outsourced hardware solutions have been around for several years...they just now have the label of "cloud computing"."....EXACTL... "now" it has achieved an identity and that tells you that it has achieved that golden moment of "economy of scale"...straight out of Adam Smith -- division of labor and specialization to achieve a larger return on production...now watch as everybody wants to get on board.


03 10:22 AM User 388171 wrote:

> Netbooks are creating some of the push to cloud computing. Or perhaps
> people discovered with so many web applications (gmail, netsuite,
> salesforce.com, business specific web applications) and applications
> such as Citrix, that a high power laptop or desktop is not needed.
>
>
> However, I wouldn't over-reach for what "cloud computing" will do
> to the tech industry. As Larry Ellison said: "The interesting thing
> about cloud computing is that we've redefined cloud computing to
> include everything that we already do... The computer industry is
> the only industry that is more fashion-driven than women's fashion.
> Maybe I'm an idiot, but I have no idea what anyone is talking about.
> What is it? It's complete gibberish... When is this idiocy going
> to stop?"
>
> Some of these web applications, hosted storage applications (box.net),
> and outsourced hardware solutions have been around for several years...they
> just now have the label of "cloud computing".
>
> I don't know how fast organizations will jump onto having their databases
> hosted by other companies, due to privacy and security breaches we've
> already seen with many companies and financial institutions. Not
> to mention the performance of a database in the cloud...

Apr 03 02:20 PM

[raytayzmd:]

...from Nick Carr's blog Nick Carr:

"In a talk yesterday, reports the Financial Times' Richard Waters, the head of Microsoft Research, Rick Rashid, said that about 20 percent of all the server computers being sold in the world "are now being bought by a small handful of internet companies," including Microsoft, Google, Yahoo and Amazon....What we're seeing is the first stage of a rapid centralization of data-processing power - on a scale unimaginable before."

...the rest of it is worth reading as well:

www.roughtype.com/arch...

Apr 03 02:43 PM

[Alain Yap, ...:]

Guess, cloud computing's all coming together and things falling into place because the tools (whether it's been around for quite some time already)have become ubiquitous and AWS came in and indeed became some sort of catalyst.

Not a concern that people will all be on board since it's like the gold rush; it doesn't guarantee success however. Again, only the innovative, cash-backed or lucky will be anointed.

No use being smart about clouds, nothing beats hindsight to be able to comprehend how it all pulled together.

Apr 03 06:29 PM

[PeterB:]

I am intrigued by the ideas about technological revolutions, but I think there is another between the 4th and 5th, the explosion of semiconductor technology (especially the IC) between 1960 and perhaps 1985, now in a near-mature stage, perhaps topping out in the next decade. This also fits in with several lincages in the revolutions, so that the steam engine and the railways depended on the results of the first industrial revolution, and leading to heavy machinery and electricity, thence the automobile. The IC made possible the information technology age, and low-cost telecommunications (yes, the earliest computers ran on vacuum tubes and magnetic cores, I know, I used some of them).
As to the main point of the article, in some ways cloud computing is like my early computer usage, where one fed in one's deck of punched cards (or a paper tape) to a central machine, and got back the results later as a printout, but with vastly improved input and output channels.
I wonder if Amazon has the book...

Apr 05 04:14 AM

[modelos:]

Primeira vez que visito o blog.
Gostei.

Jun 30 09:23 PM