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Differentiated Commodities? | Gaining Altitude in the Cloud

In stark contrast to the emerging differentiation among service providers’ strategic intent that Peter Bendor-Samuel recently blogged about, the marketplace still often perceives providers’ offerings to be very similar, except for price. Unfortunately, this commodity-like feel at the point of buying may be hiding meaningful differentiation that is emerging across most sectors, i.e., surprisingly diverse products and pricing beneath the broad commodity characterization.

To give this idea some context, we all consider crude oil a commodity, right? But a quick search reveals over 30 “grades” of this commodity from a wide variety of locations, with prices ranging from US$92/bbl to over US$120/bbl in early April. A price range of over 25 percent doesn’t sound very commodity-like to me. The effort to get oil out of the ground, process it into usable end products, and distribute them to market clearly drive very different value equations for the different grades and locations.

Crude Oil Prices

Back to the global services industry, the emerging cloud IT infrastructure services are the latest service to receive the commodity label. Certainly an hour of computing or storage capability is a commodity, right? Truth is, while these services are often being painted with the same brush as crude oil, this “commodity” market is developing with deceptive complexity, variety, and value richness. For example, just looking at the product portfolio that Amazon is offering for its Elastic Compute Cloud (EC2) suggests that its underlying, unyielding standard offering actually supports a wide variety of services that provide customers different value – illustrated, of course, by a range of prices.†

Amazon Web Services EC2 On-Demand Instances

There are indeed meaningful differences in this commodity as users determine which specific offering fits their needs. Amazon Web Services (AWS) continues to expand its portfolio of “commodities” to meet even more use cases with reserved capacity, dedicated capacity, virtual private cloud capabilities, etc. Amazon even has a robust spot market (that surely sounds like a commodity):

Spot Instance Pricing History

Source: AWS for Asia (Singapore) for a representative week.

Despite a perception of undifferentiated offerings, IT services (and global services in general) are anything but commodities. Service providers need to recognize that standard offerings do NOT mean undifferentiated, and they need to do a much better job of communicating their offerings’ real differences. And service recipients and buyers need to either ensure that the offering they are consuming fits their needs, or, if choices don’t exist to fit those needs, realize that adapting to adopt requires careful thought and active management to avoid disappointment. Just like today’s offshoring for application development and maintenance – while the offering “looks” the same, different pricing and widely different outcomes drive satisfaction and value in a distinctly differentiated way.

† Including free. Amazon Web Services (AWS) offers new AWS customers with a bundle of services free each month of their first year:

  • 750 hours of ECS running Linux/Unix Micro instance usage
  • 750 hours of Elastic Load Balancing plus 15 GM data processing
  • 10 GB of Amazon Elastic Block Storage (EBS) plus 1 million IOs, 1GB snapshot storage, 10,000 snapshot Get Requests and 1,000 snapshot Put Requests
  • 15 GB of bandwidth in and 15 GB of bandwidth out aggregated across all AWS services

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