Cloud Capacity as Exchange-Traded Commodity
Oct 16, 2015
The verdict is in: The cloud is a commodity. So says the venerable CME Group (formerly known as the Chicago Mercantile Exchange) and Universal Compute Xchange (UCX), which are defining cloud infrastructure capacity as a new asset class, able to be traded in an exchange marketplace.
Last year, CME Group reached an agreement with UCX to license the CME trading platform to facilitate transactions between buyers and sellers of cloud capacity. As part of the agreement, CME has also licensed the rights to create, list, trade, settle, and clear derivative products, such as futures and options, for the cloud asset category.
UCX’s founders, who hail from the financial world, believe the time is right for a marketplace that offers market-wide visibility into rates, expressed in standardized cloud units, thus allowing organizations to measure and forecast cloud-based IT infrastructure costs, and hedge against price swings. They expect demand for the exchange to be fueled by businesses that utilize massive amounts of cloud capacity and that are looking for capital and market efficiencies. Supply will come from leading cloud service providers seeking to hedge and maximize utilization of their cloud infrastructure.
Turning the cloud into a commodity starts with developing a common “unit” for compute capacity. UCX has licensed 6fusion’s patented Workload Allocation CubeTM (WAC) algorithm, which provides a standard measure for IT infrastructure utilization. Cloud capacity will be offered on the cloud exchange as WAC Financial Products, expressed in standardized WAC units.
For its part, CME is banking on UCX developing a viable market in buying and selling cloud capacity, from which it will create a secondary market in derivatives (cloud options and futures). The derivatives market will allow investors to speculate on the direction and pace of changes to market rates.
In the meantime, success of the UCX exchange depends on UCX’s ability to attract sellers—a process the company is currently engaging in. To do so, UCX must convince sellers that an exchange is a more advantageous method of reaching the market than forging custom bilateral agreements with buyers—something that might become more difficult as capacity is consolidated among a handful of technology giants. Success also depends on convincing buyers that the cloud service providers are essentially all alike; or, at least, that it is most cost-effective to purchase basic capacity separately from add-on, software-based functionality. Furthermore, success assumes a pool of buyers so price-sensitive that it is worth the effort of migrating workloads among providers to chase the lowest rate. Such buyers are likely to utilize extremely high volumes of cloud capacity; for example, large enterprises, research organizations, and, most notably, other cloud service providers.
UCX may be a few years premature in its launch of the exchange, as several cloud service providers suggested to Stratecast. Nonetheless, the market trends point to a future in which basic cloud capacity can be delivered as a low-cost commodity. Service providers should take note, and consider their own future as a buyer or seller (or both) on an exchange.
For more information on this topic, see the Stratecast analysis, Cloud as Exchange-Traded Commodity, http://www.frost.com/q293396798.
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