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.

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

Cloud Computing is a whimsical term our tech culture adopted, and we could have done better.  I understand why we landed on the cloud label, as I contributed.  You see, we all put fluffy cloud images on our slides in place of the tedium and scale of the networked computer architecture, hardware and software that is the internet.  It was all too easy to answer “It happens in the cloud,” in response to too many questions.  Our fault.

Now money is flowing into Cloud Computing and expert marketing people are busy recycling a bunch of old stuff with a Cloud Computing label.  Pity, because the predictable after-the-hype hangover will disenfranchise too many people from the merit in cloud computing.  And we desperately need their creativity to mine this untapped resource.

Obscured by the Cloud label, is an incredibly important point.  We are awash with more free but unused compute capacity than we can imagine.  I am sure that the current unused capacity far exceeds the total computing capacity, used plus unused, that existed on earth during many periods in my lifetime.

Free computing.

Our computers include servers which are the workhorses of the enterprise and the internet.  Millions of servers.   Netcraft has a survey of websites that would loosely correlate with the number of web servers (remember that many small websites like this one may be hosted on a single server, while big websites may employ thousands of web servers).  There are many hundreds of millions of personal computers and workstations, networked to the servers and each other. Forrester says there will be over a billion personal computers in operation by the end of 2008.

Stay with me.  Think about a running computer.  You bought it, powered it, cooled it and tended to it.  You spent your money.  Now that computer computes whatever you load, and in so doing is consumed some amount – say, 90% or 50% or 10%.  Then you add some additional compute load such as 1%, so the total becomes 91% or 51% or 11%.  That incremental amount doesn’t cost any more than you already spent.  At the margin, it’s free.

Now the sticklers will say, “You’re wrong, it will use a little more power and a/c.”  Technically, they’re right but it doesn’t matter.  Still free.  And the reason they are negligibly right is slightly perverse:  we are so rich with computing abundance that designers add capability to throttle back computers when not fully loaded.  Can you imagine explaining to Galileo (1564 – 1642)  or Copernicus (1473 – 1543)  that modern man is so rich with marvelous computing machines that he devises clever ways not to use them?

Calling it a Cloud does not help us think about the opportunity to use our abundant, free resource.

Let’s try another metaphor:  think about your house with a big yard, and a deep hole you dig into the ground.  You spent good money on the house, land and shovel.  At the bottom of the hole, you find water, oil or free computing.  Whether you use the water, oil or computing doesn’t change what you already spent on the house, yard and shovel. You found Computing Resources.  Mine and miner illustrate much better what’s going on with Cloud Computing, than clouds, in terms of finding and exploiting computing resources. (I realize holes where water and oil are found are wells, but ‘mines’ works too for purposes here.)

Mining for Computing Gold

(Illustration was created using Powerpoint.  Noncommercial reuse with attribution permitted.)

How big are our global computing reserves?

Before I make the calculation, you must understand this estimate is prototypical and for the purposes of illustrating the abundance.

If my numbers were to hold (i.e., not pulled out of thin air), we would have Global Computing Reserves in excess of 5 million servers and 500 million PCs.

I expect to get vigorous advice about the numbers being wrong.  And just as with global petroleum reserves, the ability to estimate the reserves does not translate into the ability to produce them all.  Unlike global petroleum reserves, we are briskly creating additional global computing reserves. By the way, I did not include mobile telephone handsets, an increasingly important and powerful set of networked computing resources.  Nor did I include the graphics cards in PCs, which are powerful computers barely used except when gaming or viewing Youtube.

So my numbers may be wrong.  Bring better numbers and your own method of making the estimate.  Even if I am over by 2 orders of magnitude, the net available computers may be between 1 and 10 million.

Hey entrepreneurs (miners), free computing!

Let’s use it.  Here is where the creativity I longed for far above is so desparately needed. – db