Mining for Silicon Gold

Mining for Silicon Gold

In my last post, I asked you to switch the metaphor for abundant free (at the margin) computing from clouds and Cloud Computing to mines and miners. What you find in the mine — the water, oil or computing — is valuable when you use it.  Seems obvious for water and oil.  Computing is valuable too, but takes a little more thought to get a handle on it.

Let’s consider the provider side of cloud computing, and turn to the really big mines. Google, Amazon and Facebook, for example, operate sites that are run by thousands of computers.  Business Week reports estimates that Google probably has in excess of 500,000 servers, Facebook going from 10,000 to 50,000 servers, and so on.  I speculate Amazon employs some number of servers between Facebook’s and Google’s.  These are big numbers, and while servers are cheaper than ever to buy, 100,000 of them represent a significant capital commitment.

Why so many?  So you and I get a great experience.  Take Amazon for example.  Amazon is one of the best experiences on the web, and almost all those pages are assembled just for you on the fly.  All done for the mission of creating a compelling experience in which to buy what Amazon sells.  It takes considerable horsepower to put it all together just for us, and considerable scale to deliver it to thousands, perhaps hundreds of thousands, simultaneously.  The scale has to deliver the good experience on peak shopping days like the day after Thanksgiving, or the days leading up to Christmas.  A poor experience, a slow session, or an unavailable connection directly leads to missed sales and loss of revenue for Amazon.  So Amazon has excellent, quantifiable business reasons to invest capital in scaling its computing resources.

But what of other days, like April 15th when you and I are standing in line at the post office to file our tax returns, not shopping at Amazon?  That pre-Christmas shopping capacity is idling.  The gap, the difference between the computing capacity present and paid for, and the amount actually being used by Amazon at any given time, is the free computing to which I refer.  Invoking our metaphor again, Amazon is sitting on a huge mine.

Let’s review the direct reasons why a mine owner like Amazon, might pursue becoming a cloud computing supplier.  Managers have a duty to increase enterprise market value (EMV).  I use the EMV framework so often used in calculating value of a corporation and its stock, because it is an excellent mechanism for translating seemingly arcane issues into something that executives, employees and stockholders care about.

EMV Lever

Achieved by

Profitable revenue growth Selling unused computing cycles
Reduced operating costs

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Tax minimization Realizing computing costs in high tax domiciles
Fixed capital efficiency Higher utilization of computing assets
Working capital efficiency

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I include a couple of levers which are not applicable for a cloud computing supplier – because I want to keep the framework intact so that we can return to it again in the future.  In any case, see Supercharging Supply Chains by Tyndall, Gopal, Partsch and Kamauff for an excellent, practical overview of EMV.

Profitable revenue growth is straightforward – selling something you have already paid for.   Fixed capital efficiency is likewise easy:  if you have $10 million or a $100 million in servers, it makes good sense to use them for all they’re worth.  If you don’t, you’re better off leaving the server money in a bank earning interest.

Tax minimization is a little more nuanced.  First, taxes take cash out of the free cash flow stream, which is a critical contributor to EMV.  A corporation like Amazon, Google, and so on, will have multiple data centers and operations in multiple locations.  Computing the likes of which we are discussing here, can be shifted reasonably from one data center to another, subject to some limits like latency (which is one of the reasons to have multiple data centers in the first place).  Some operating costs can therefore be shifted.  In a like manner, personnel with their costs to manage the computing resources can be shifted.  All other things being equal or normalized (talent, energy, risks, etc.), a company is usually better off to spend the money – that is to take the costs – in the region with the highest effective tax rates.  Why?  Greater deductible costs result in a lower tax bill, which is cash lost permanently from free cash flow, and hence detrimental to EMV.

As much as I appreciate the classical EMV levers as business drivers, I like the indirect drivers for a credible cloud computing supplier even more.  Selling, or even giving away, computing capacity makes them better!

Think about it.  Glass houses let outsiders see your stuff (silicon dioxide, the substrate for processors, is glass BTW, making ‘glass house’ a rich double entendre as we speak of Google, Amazon and similar).

Opening up one’s servers to the public requires the traditional support processes such as billing, customer service, training, communications, etc.  These are not unique to cloud computing, and a company has a reasonably good chance of being good [or bad] at these processes without regard to computing.

There are a number of processes that are distinctive to computing including design, operations, risk management, testing, performance management, governance, training, communications, help desk and security.  These are critical IT processes that challenge most companies internally.

To expose these processes to customers and the public requires solid grasp of the operations, confidence in the management processes, and commitment to make everything better.  In short, these companies have to do these things so well, that they are confident to enter competition – and that competition will make them better.

I want to stress a point which is even sharper for Cloud Computing.  The internet is largely enabled by open source software and technologies, with the ubiquitous, free and open source LAMP stack as the poster child.  These are wrought by legions of very smart, very talented developers motivated for many reasons.  Mostly volunteers, they are not employed or paid to make the software and the tech of the internet better, which they do regularly with passion.  They care about building and maintaining cool tech, and earning recognition for their personal genius.  They care about reputation and they care about each other.  They do not suffer ‘lame’ software lightly, nor will they accept marketing hype at face value.  They are fiercely independent, not quiet and not passive.  At this early stage of cloud computing, these people are the Consumers and if a company wants to engage them, the company has to ‘have game’ sufficient to earn their participation and respect.

Fortunately, at least three of the largest mines for this kind of computing, Amazon, Google and Microsoft, have the people and skills to engage successfully with the cloud computing consumers to which I refer.  I am sure there are others, I simply haven’t looked.  All are publicly traded companies, which brings an additional driver of excellence – market perception.
Computing is a core competence of these companies.  Embracing cloud computing, with the forces for excellence it brings to their internal processes and systems, makes these companies better.  — db