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Financial Risk in the Cloud

July 27th, 2009

After seeing our entire financial industry fall apart at the seams, and the demise of the auto industry, one has to wonder what industry is going to be hit when the next major downturn comes.

Cloud computing seems to be a redistribution of risk. Companies that had to pony up for a fixed infrastructure investment can now scale up and down, thereby pushing the risk out to their service providers.

These service providers in turn are pushing their infrastructure capital costs onto cloud computing providers who are assuming all the aggregated capital risk. The likes of Amazon, Google, Microsoft and Rackspace are all vying for large market share.

This works well if these providers have diversified risk. At present, cloud infrastructure is a minor part of their product portfolio. But what happens when we get a few large providers with all the capital investment, and this becomes their main revenue stream? What happens when there is a “run at the bank” – a big downturn and everyone’s needs shrink, or a security scare that sends those who can running, and the company can’t sustain itself?

Will these providers be “too big to fail”? What happens to all their customers who don’t have the ability to switch quickly to another provider? Sure, this may be a worst case scenario. When capacity requirements go down you can just shut off the power and reduce a lot of your costs. We’ll have clear operability standards and you will be able to just switch seamlessly to another provider (OK, maybe not). But it does make you think…

There’s a lot of hype around Cloud Computing, but it is going to lead to some major business model changes, we’re just trying to peer into our crystal balls and work out what they are, and what the long term consequences will be.

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